Global Office Real Estate Review 2H 2010

April 21, 2011 - PRLog -- 22 April 2011, Bangkok – According to the Global Office Real Estate Review, year end 2010 (2H 2010), Hong Kong has yet again closed the year as the world’s most costly destination in terms of office occupancy costs at US$191.97 per square foot for Grade A space. This is followed by London – West End and Tokyo. As of December 2010, Paris overtook London –City in the fourth spot at US$102.15 per square foot per year for Grade A space as compared to US$83.19 per square foot per year during end-2009.

The report indicates that most regions showed further signs that the worst of the global financial crisis had passed, and tenants were back in the market with leasing activity up from the prior six-month period and was also an improvement from a year ago. In terms of growth, many parts of Asia Pacific, Latin America, Canada and major markets in the United States and Europe all posted healthy rates in the second half of 2010. On the flip side, parts of the United States and much of Europe, chalked up another six-month period of tepid demand.

Office construction remains active in rapidly growing Asia Pacific with year-end data showing 165.6 million square feet, or 42 percent of global construction underway. By comparison, five years ago just 91.1 million square feet was under construction in Asia Pacific. In Bangkok around 135,000 sq m of office space is undergoing construction with 100,000 sq m due to be completed in 2011, all within the CBD. Over the next three years new supply is expected to account for only a 2% addition to current office space.

In terms of global office investment, brisk sales activity in the second half of 2010 suggests investors are getting more comfortable with pricing and the prospect of firming market fundamentals in the near- and medium-term. Sales at second half 2010 totalled US$88.7 billion which represents an increase of 52 percent from the first six months of the year and a 32 percent increase from the same period a year ago. EMEA took the lead with office sales volume of US$33.7 billion, followed by the Americas at US$32.8 billion, and Asia Pacific at US$22.2 billion. All 3 core regions recorded an increase in the sales volume with the Americas, observing the biggest increase, more than doubling to rise 134 percent relative to the first six months of the year.

Office prices by region were more mixed in second half of the year in contrast to the first half where prices were up across all three regions. Despite this, the general trend in cap rates/yields remains down as a more robust global economy combined with improved financial markets is clearly boosting both transaction volume and also pricing.

Cross-border investment, however, is still relatively subdued compared to 2007, but a trend of rising foreign investment is slowly regaining momentum. The EMEA region is expected to see the most cross-border investment in 2011 followed by the United States which is also expected to witness a significant increase as the market recovers.

With improving market conditions, robust economy and hungry investors, office real estate in almost all regions of the world continues to its upward trek and towards a more balanced market with supply and demand more evenly matched. Long regarded as a place to store wealth, the real estate market will undoubtedly experience increase in demand. Although this may also mean higher prices, the move back into office real estate is almost certain to gain strength as 2011 unfolds.

Asia Pacific
In Asia Pacific, office rents moved higher at a prudent pace, at an increased average of 4.6 percent in the latter six-month. Cities recording significant increases during the second half of 2010 included Beijing, Guangzhou, Ho Chi Minh City, Hong Kong, Seoul, Shanghai, and Singapore while declines were only limited to Perth and Wellington, where rents fell 7.4 percent and 8.7 percent respectively. Rental rates remained more or less stable in H2 2010 for Bangkok on the back of limited new supply and sluggish demand.

In terms of office vacancy, the region posted modestly weaker results during the latter half of 2010 with the regional vacancy rate up 44 basis points to 12.36 percent. Average vacancy across the region held steady relative to mid year, with the exception of Chengdu which posted the highest vacancy rate in the region at 25.1 percent, followed by Chennai, Delhi, Guangzhou, Bangkok, Bangalore and Canberra all with vacancy rates at or above 15 percent. Hong Kong recorded the region’s lowest vacancy rate at just 3.1 percent.

New office construction continues to be a significant part of the Asia Pacific region with Beijing, Chennai, Delhi, Guangzhou, Ho Chi Minh City, Jakarta, Shanghai, Singapore and Tokyo all with at least five million square feet of construction underway. Construction in these nine cities totalled 140.2
million square feet at year-end.

Demand continues to back the regions on-going lead in the global economic expansion with the spotlight on China, India, Philippines and Indonesia. At press time, we cannot gauge the effects of the March 11 earthquake and tsunami on Japan’s economy in 2011. However, its growth had previously been forecast at 1.5 percent, the lowest in the region.

All in all, the world is still looking East who although is  expected to have economic expansion below 2010 levels in 2011, growth in the region is still anticipated to be well ahead of that seen in either the United States or Europe. Leasing markets are expected to remain relatively robust and although the continued office supply will act as a drag on rental growth, a trend towards higher occupancy costs is expected to hold for most cities in the region.

United States/Canada
Aided by modest expansion in the economy and a further improvement in business conditions, office leasing activity was reasonably robust and ending the year on a reasonably high note. However, despite better leasing markets, both Canadian and United States’ office vacancies only managed a slight drop during the last six months of the year. The overall United States office vacancy rate dropped by 30 basis points to finish at 16.1 percent. Although increased leasing activity has somewhat stabilised rent, upward movement in rent is still some time away as companies continue to be cautious on taking additional office real estate. In Canada, construction continues to wind down in Toronto and Calgary, bringing lower vacancy levels. However, as opposed to United States, Canada stands to benefit from significant job growth and an economy powered by commodities including oil.

Across the continent, Midtown Manhattan continued to hold top spot for office occupancy costs with average Grade A rents of US$65 per square foot per year, followed by Washington at US$54 and Vancouver at CAD$53.

Europe, Middle East, Africa (EMEA)
With improving economic conditions across most parts of Europe, the Middle East and Africa, the EMEA average vacancy rate dropped slightly to 12.27 percent at year end. This was a decrease of 11 basis points since mid-year, but an increase of 26 basis points over the past 12 months. The drop was particularly acute in Birmingham, Bratislava, Glasgow, Johannesburg, Kyiv, Moscow, Riga, Stockholm and Tallinn, all of which saw their respective vacancy rates decrease by two percentage points or more in the second half of 2010.

Grade A rents increased by 0.4 percent in the second half of 2010 and London once again retained top spot as the most expensive office market in the region, with current average asking rents in the West End sub-market at US$133 per square feet per year. Following closely are Paris, London City, London Southbank and Geneva which rounded out the top five most expensive office rental markets in the region.

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