Global Office Markets Show Further Deterioration
Despite signs the global economic downturn is beginning to subside, office markets around the world again posted decidedly weaker results at mid-year compared with six months prior. All regions of the world continue to experience below trend growth and as a result demand for office space is sub-par relative to the recent past. In particular, the United States, Japan and much of central and eastern Europe are key sources of weakness. A year ago only major financial centers were reporting sluggish leasing activity, however, over the past twelve months weakness has spread to all continents and almost all countries. All regions again reported higher vacancies and most reported falling rents. A handful of cities in particular saw vacancies surge and rents plunge. In parallel with sluggish leasing conditions, office investment sales activity was very limited with most regions reporting first half 2009 transaction activity well down from first half 2008 levels. The outlook for the balance of 2009 is for a further weakening in fundamentals and little prospect of recovery until early in 2010. All eyes will be on the debt markets which remain a key ingredient before any type of recovery can begin.
Europe, Middle East & Africa (EMEA)
Amidst continuing economic troubles throughout the region and weak office demand, the EMEA average vacancy rate rose to 11.4% at mid-year 2009. This marks an increase of over two and a half percentage points during the first six months of the year and brings the EMEA vacancy to its highest level since 2004. The rise in vacancy was felt across the region, but was most dramatic in the Baltic States, Russia, Ireland, Romania, Turkey, Ukraine, the United Arab Emirates and the United Kingdom. Eight EMEA cities are now registering vacancy rates of 20% or higher; six months ago, the highest vacancy rates in the region were near the 15% mark. With vacancy increasing, Class A rents decreased by a further 4.5% in the first half of 2009, following a 6% drop in the second half of 2008. Eastern Europe and the Middle East saw the largest declines, as recent construction booms took their toll in Abu Dhabi and Dubai as well as Moscow, Saint Petersburg and Kiev. With a few exceptions, markets in Western Europe fared somewhat better in the first half of the year, as rents in Belgium, France, Germany, The Netherlands, Switzerland, the United Kingdom and the Nordic countries decreased only marginally. Owing to severe rental declines in Dubai and Moscow (and the strengthened Pound Sterling),
London regained its position as the most expensive office market in the region, with current average Class A asking rents in the West End sub-market at USD 126/sf/year (though generous tenant incentives are keeping headline rents artificially high). Beyond London; Moscow, Paris, Dubai and Dublin rounded out the top five cities.
The amount of office space under construction is down 8% from year-end 2008 and 23% from one year ago, evidence that development pipelines have slowed dramatically. Nevertheless, vacancy will continue to increase over the second half of 2009, and further rental declines are expected in 50% of the markets included in this survey. Current market conditions have spurred many tenants either to renegotiate more favorable lease terms or to move into markets and/or properties previously considered too expensive. Tenant incentives have also increased dramatically, with long rent-free periods (in some cases up to several years on long contracts), low or no service charges, and free fitouts are increasingly common.
The Asia Pacific region posted weak results during the first half of the year with the regional vacancy rate increasing by 278 basis points to register 11.4%. This increase comes on top of a rise in vacancy recorded in latter half of 2008 and brings the region’s vacancy rate back to levels experienced in 2005. The jump in vacancies during the first half of the year was recorded in every city across the region. Noticeably large increases were recorded in Shanghai, Perth and Brisbane with vacancy rates up by over 750 basis points since the beginning of the year. Guangzhou posted the highest vacancy rate in the region at 24.4% followed by Chennai and Beijing at 22.5% and 19.2% respectively. Seoul recorded the region’s lowest vacancy rate at just 3.1%. Office rents declined broadly across the region with only just a few cities spared. For the first six months of the yearrents fell 11.8% on average. Sizeable declines were witnessed in all the Indian markets as well as Singapore, Hong Kong, Beijing, Taipei, Tokyo and most Australian cities. The Asia Pacific region remains characterized by high levels of office construction with Beijing, Guangzhou, Shanghai and Singapore all with at least 10 million square feet of construction currently underway. Construction in these four cities totals 86.3 million square feet. On the demand side, the region is split with China, India and Indonesia in particular continuing to register positive growth rates, while Hong Kong, Japan, New Zealand, Malaysia, South Korea, Singapore and Taiwan are all expected to see their respective economies contract in 2009. In a ranking of highest occupancy costs (average Class A gross rents) Hong Kong took the top spot, both within the region and the world at $138.00 USD per square foot with Tokyo second in the region (3rd spotworldwide) at $102.00 USD per square foot.
United States / Canada
The U.S. office market turned decidedly more bearish in the first half of 2009 as companies gave back space and economic conditions worsened. Combined with additional new construction the overall vacancy rate increased almost one and half percentage points to average 15.5%. Rents continued to reflect weakness in the general economy with downtown lease rates down 10.3% while suburban lease rates fell a more modest 2.6%. Looking forward, office space fundamentals are sure to continue weakening as new construction comes online and demand is expected to remain subdued through until the end of 2009 and into next year. Job losses remain elevated with businesses still looking to dispose of excess space leaving leasing conditions exceptionally weak. With the exception of education, health care and government services all sectors of the economy remain sources of weakness. However, with a few signs of recovery in a number of areas including finance, the office market may show signs of stabilizing by early/mid 2010 but considerable risks still exist. Canadian markets also weakened in the first half of the year, albeit by modest standards compared to the United States. Combined with construction coming online, vacancies moved higher while rents were more mixed. Against a very weak global economy the Canadian office market continues to demonstrate surprising strength, however, like the U.S., job losses are still prevalent but there are increasing signs the domestic economy may be past the worst. Midtown Manhattan continued to hold the top spot for North American office occupancy costs with average Class A rents at $70.00 USD per square foot although this represents a 15.2% decline from year-end.
For the second consecutive six month period the Latin America region registered higher vacancies across most markets. After a five year period of declining vacancy rates the regional office vacancy rate increased by 116 basis points during the latter half of 2008 and a further 176 basis points in the first half of 2009. The region’s vacancy rate, however, averaged a very low 4.5% with both Rio de Janeiro and Lima boasting vacancies below 3.0%. Rents were more mixed with both Santiago and Bogotá registering increases while the rest were flat or down. Office construction remained concentrated in Bogotá, Mexico City and Sao Paulo with 26.4 million square feet currently underway. For these three cities this represents a 6.7% decrease from construction underway at the end of 2008. Rio de Janeiro took top spot as the most expensive office market in the region with average Class A gross rents of $80.00 USD per square foot (7th spot worldwide).