Demand for Office Space Slowly Returning

by CoyDavidson on October 5, 2010

Colliers Global Office Report (First Half 2010)

By: ROSS J. MOORE Chief Economist | Colliers USA

Office space markets around the world took another step towards returning to normal in the latest six month period. Most regions showed increasing signs that the worst of the global financial crisis had passed. Leasing activity was up significantly from the prior six month period. In particular, Asia Pacific, Latin America and Canada all posted healthy growth rates and showed signs of future expansion. The United States and much of Europe, however, chalked up another six month period of tepid demand. With the exception of Asia Pacific, all regions again reported higher vacancies while rents were more mixed. Midyear is almost certain to mark an inflection point for the global office market. In contrast to lukewarm letting conditions, however, office investment sales activity in the first half of 2010 was up in all regions. This suggests investors see a firming in market fundamentals in the coming months and are prepared to bid up prices. The outlook for the balance of 2010 and into 2011 is for continued signs of growth. The worst appears to be behind us.


Amidst a tepid recovery and marked by uneven economic growth, the EMEA average vacancy rate rose to 12.6 percent at midyear. This was an increase of 0.3 percentage points since year-end and 1.3 percentage points over the past 12 months, and brings the EMEA vacancy rate to nearly double the year-end 2007 level. The rise in vacancy was felt across the region, but was particularly acute in Dubai, Riyadh, Sofia, Bucharest, Athens, Abu Dhabi, Budapest, Johannesburg and Tirana, all of which saw their respective vacancy rates rise by at least four percentage points in the first half of 2010. Eighteen EMEA cities now register vacancy rates of 15 percent or higher and eight markets have vacancy over 20.0 percent. While the trend for the region is still up, vacancy rates in central London, Madrid, Dublin, Moscow, and Tel Aviv all fell during first half of the year. With vacancy showing signs of stabilizing, Class A rents reversed direction and increased by 1.4 percent in the first half of 2010. This was on the heels of a 3.1 percent drop in the second half of last year. Notable cities registering increases in asking rents included London, Paris, Tel Aviv, and Zurich. London again retained 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 $130.00 USD per square foot per year (London City, London Southbank and London Docklands ranked second, fourth and fifth). Beyond London; Paris, Milan, Stockholm and Geneva rounded out the top five cities.

The amount of office space under construction at midyear end was little changed from year-end when 180.2 million square feet was underway. This suggests the slowdown in construction may be hitting bottom. It is unlikely that development will ramp up any time soon which will help to bring vacancies down in the coming months and stabilize rents.


The Asia Pacific region posted improved results during the first half of 2010 with the regional vacancy rate up just 10 basis points to 12.2 percent. The latest result comes after steady increases dating back to year-end 2006 and leaves the region’s vacancy rate at levels experienced in early 2005. At the two extremes, Chinese vacancy rates drifted lower while Australian cities generally recorded increased availability.

Chennai again posted the highest vacancy rate in the region at 22.5 percent, followed by Delhi, Bangalore, Canberra, Guangzhou, Ho Chi Minh City and Bangkok, all with vacancy rates at or above 15 percent. Hong Kong recorded the region’s lowest vacancy rate at just 4.0 percent. After showing signs of hitting bottom in the latter half of 2009, office rents moved modestly higher in the first half of 2010, increasing an average of 4.5 percent. Cities recording significant increases included Hong Kong, Sydney, Delhi, Singapore and Brisbane. Sizeable declines were limited to just two cities; Shanghai and Bangkok. The Asia Pacific region remains characterized by high levels of office construction with Beijing, Guangzhou, Ho Chi Minh City, Jakarta, Shanghai, Seoul, Singapore and Tokyo all with at least five million square feet of construction currently underway. Construction in these eight cities totaled 133.7 million square feet at midyear. On the demand side, the region is expected to continue leading global growth through 2010 and into 2011. China, Singapore, India and Taiwan in particular continue to register very robust growth. Even Japan, which is typically the laggard in the group, is anticipated to grow by 3.2% in 2010. In a ranking of highest occupancy costs (average Class A gross rents) Hong Kong again took the top spot, both within the region and the world at $161.00 USD per square foot per year, with Tokyo second in the region (third spot worldwide) at $101.00 USD per square foot and Perth, Australia third at $64.00 per square foot.

Looking to the end of 2010 and into 2011, Asia Pacific is anticipated to keep leading the global recovery and subsequently is expected to have the best leasing markets of any of the four major regions. The continued delivery of office space will act as a drag on any material growth in rents, however, a certain amount of pent up demand in tandem with rapid growth should push rents materially higher by early 2011.


Although the U.S economy finished the first half of the year on a sluggish note, leasing activity was relatively robust throughout the January-June period. This helped to stabilize market fundamentals after a prolonged period of weakness. Despite this firming in fundamentals, both Canadian and U.S. vacancies rose during the first six months of the year although the latest increases were relatively muted. Occupancies were mixed, with U.S. markets recording only mildly positive absorption while Canadian markets registered more substantial growth.

Combined with new construction, the overall U.S. vacancy rate rose by 12 basis points to finish the first half of the year at 16.3 percent. With leasing activity up, rents began to stabilize, with downtown lease rates little changed for the six month period but down 6.4 percent for the year. Suburban lease rates, however, continued to drift lower falling a further 2.3 percent during the first half of 2010 and 4.1 percent over the year. Canadian markets also began to show signs of strength in the first six months of the year, albeit by modest standards. Combined with construction coming online, however, vacancies moved higher while rents were slightly lower. In contrast to the U.S., however, the Canadian marketplace is set to benefit from significant job growth and a commodity sector that continues to post robust growth. Across the continent, Midtown Manhattan continued to hold the top spot for office occupancy costs with average Class A rents of $63.00 USD per square foot, followed by Washington at $51.26 USD and Toronto $51.07 USD.

The latest results reaffirms our view that the first half of 2010 was a period of transition from dramatically rising vacancies and falling rents to more modest movements in both, and a possible reversal in the near to medium term. Calling into question the idea of a swift recovery, however, is a noticeable downshift in the economy and still stubbornly high unemployment rates. More encouraging, however, is the eight month long gain in private sector employment, suggesting the recent improvement in office leasing activity may be sustainable.


For the fourth consecutive six month period the Latin America region registered higher vacancies across most markets. The regional office vacancy rate increased by 55 basis points during the first half of 2010 and comes on top of a 123 basis point increase in the latter half of 2009. Even with these increases the region’s vacancy rate remains relatively low with average vacancies of just 7.1 percent. With a vacancy rate of less than 1.0 percent Rio de Janeiro again posted the lowest office vacancy rate in the region and indeed the world. The Latin American region continues to register very robust growth rates. Led by Brazil with projected GDP growth of 7.8 percent in 2010 and 4.5 percent in 2011, the rest of the region including Argentina, Peru, Chile and Colombia, the region is home to some of the fastest growing economies in the world. This growth is expected to soon reverse the rise in vacancies and once again push rents higher.

Office construction remained concentrated in Mexico City and São Paulo with 28.6 million square feet currently underway. In third spot was Rio de Janeiro with 4.5 million square feet under construction which should help to relieve extremely tight leasing conditions. Rio de Janeiro captured top spot as the most expensive office market in the region with average Class A gross rents of $88.00 USD per square foot (6th spot worldwide).

Previous post:

Next post: