Global Office. March 2011

Transcription

1 Global Office March 211 Quick Stats Vacancy Rates 21 Change from Last Year Americas 16.% Asia Pacific 1.2% EMEA 9.3% Annual % Change CBRE Office Rent Index 4Q 21 Americas -2.8% Asia Pacific 8.1% EMEA 2.7% Change from Last Year 4Q *For the Americas, the CBRE Office Rent Index Annual % Change was -9.% for 4Q 29, hence the upward direction arrow. Overview for all Regions Overall Global Economy Although commercial real estate and the global economy are recovering from the global financial crisis, both are doing so at a disjointed pace, with some regions and property types healing faster than others. For some sub-markets, the wounds will continue to remain fresh, and the first signs of recovery are just beginning to surface, if at all, in their office development, absorption and leasing markets. The global economy, healing from a metaphorical severely sprained ankle, is facing an especially guarded recovery because the ground beneath it is still vulnerable and recuperating from past and present shocks created by regional, political 1, financial and weather-related quakes. Global Economic Recoveries and Commercial Real Estate The challenges of regional economic recoveries (discussed in the following sections) bring about recoveries of varying speeds in the global commercial real estate markets. For the office market in particular, although property demand might have already reached bottom, the elevated vacancy rates still pose good reason to be cautiously optimistic about the near-term market performance of metrics such as rents and occupancy levels. Furthermore, employment the strongest external driver of demand in the office market has a long path toward recovering previous healthy levels for the U.S. and European markets in particular, and will continue to restrain the global office market from completely recovering. Overall Regional Recovery Disparity Global economic sentiment is upbeat, due in part to subsiding worry of a double-dip recession and ongoing news of strengthened growth in many of the world s emerging markets including Latin America and Asia Pacific as well as in certain strong maturing markets like Canada, Australia and Germany. And, while the gains in growth in these markets might decelerate, such declines will be compensated with improving growth in the Middle East, North Africa, Sub-Saharan Africa and the United States. Despite the fact that the global economy is generally recovering, there continues to be great polarization between regional economic recoveries as a result of pervading structural economic weaknesses existing among the various regions of the world. Regional Economic Summaries Europe Overall Economy Europe s economic rebound is erratic in light of the continued challenges posed by the Sovereign Debt Crisis. Fiscal austerity programs aimed to decrease public deficits coupled with high unemployment rates in many countries continue to cause instability in 1. This report is presently being written as political unrest continues in North Africa and the Middle East.

2 this region. Time will be on this region s side as austerity measures and restructuring help to bring about a new sense of prolonged resolution and calm. The polarized theme of multi-speed economic recoveries applies to this region, with Germany and other core northern Eurozone markets ahead of the pack, while the consumers and businesses of economies such as Greece, Spain, Portugal and Ireland will be more seriously affected by the tightened fiscal restraints and restructuring. U.S. Overall Economy Despite the fact that U.S. exports have picked up and imports are stabilizing thanks to a relatively weak dollar, the United States economic recovery remains fragile due to the still very high levels of unemployment, high levels of federal budget deficits, the need to deleverage and still very low inflation rates. With the policy stimulus of the Federal Reserve s Quantitative Easing diminishing, growth in the U.S. will largely be powered by consumer spending and business investment. The extension of the Bush tax cuts as well as the employee payroll tax cut helped to pacify uncertainty at least in the short term and induce another round of small stimulus into the economy. Latin America Overall Economy Latin America s economy expanded rapidly in 21 and this momentum is expected to continue in 211. Factors that might contribute to deceleration in this region most significantly involve the influence of other external uncertainties such as the Eurozone sovereign debt crisis or a slowdown in China in response to its financial system issues. Additionally, structural issues within the region include intensification of violence in Mexico, the pervasive levels of poverty in some areas, and the distinct disparities in income distribution. Latin America s economy is strongly reliant on its agricultural and oil exports, and fluctuations in these commodities prices will greatly affect its growth as well. Asia Pacific Overall Economy The regional economy of Asia Pacific ended 21 on a strong note, albeit with growth easing slightly throughout the final quarter. The performance of some of the major emerging Asian economies over the year has had reciprocal effects throughout the region. Indeed, most areas including the Pacific were in better economic health than the rest of the world by year-end. It appears, however, that domestic risks caused by such a strong economic expansion, rather than international risks, may result in an easing of growth in 211. Rising inflation pressures and resultant interest rate hikes as well as the short-term economic effects of World United States Asia Pacific the Australian floods will all have a dampening effect Figure 1: Asia Pacific Leads, Europe Lags Western Europe on local economic growth rates moving into 211. Real GDP (Annual % Change) However, at such a high benchmark, growth levels will 1 Forecast continue to remain well above the global average. 8 Figure 1 plots GDP growth rates for the major regions of 6 the world. Assuming no major financial, global security 4 or weather-related event shocks to the global economy, 2 GDP growth for the U.S. and the Asia Pacific regions is expected to continue its upward path. As discussed -2 above, Western Europe s recovery is contingent upon -4 many monetary, fiscal and political factors that have -6 yet to stabilize. Thus, the forecast for Western Europe growth remains moderate and the Eurozone s story is far from written. 1Q1 1Q2 1Q3 1Q4 1Q5 1Q6 1Q7 1Q8 Source: IHS Global Insight as of February 211 1Q9 1Q1 1Q11 1Q12 1Q13 Page 2

3 Global Office Drivers Leasing The final quarter of 21 quite strongly demonstrated that the commercial real estate industry is the economy in a box, as the overall positive performance encountered in the CRE industry in 21 was a function of the recovery of the global economy as a whole. Figure 2 shows the CB Richard Ellis Global Office Rent Index growth rates on a year-over-year basis from 22 to 21. The recent global financial crisis particularly affected the services sector and office-using jobs and, as a result, the deterioration of jobs impacted office space demand, thus increasing vacancy rates and reducing rents. However, 21 brought about continued, longawaited recovery for many regions that are at least experiencing stabilizing, if not slowly increasing, rents for the first time since the beginning of 29. Figure 2 demonstrates that rents in the Asia Pacific and EMEA regions have undergone the most robust recovery in rents, while the Americas rent growth remains moderate, but stable. Although vacancy rates have reached or are declining from previous peaks, the still very high levels indicate that rents, which are a function of vacant space, have a longer road to recovery. In response to the past several quarters of economic downturn, office markets continue to experience a flight to quality by which tenants are taking advantage of low rents for prime office space and many occupants are seizing the opportunity to upgrade or expand their office space into newer, higher-quality space. For example, the CB Richard Ellis Office Rent Index for the EU-15 2 region rose.7% in the fourth quarter, which was a year-overyear increase of 2.7%. However, this is not the case in all markets. Demand for suburban and semi-decentralized locations is higher for markets such as Madrid because their tenants have instead opted for secondary space in an effort to reduce costs. Global Office Development As discussed above, much of the strongest economic growth and recovery has been captured by the world s Figure 2: CB Richard Ellis Global Office Rent Index Annual % Change 4 emerging markets. Meanwhile, advanced economies such as the U.S. and Europe are still struggling to maintain stability and regain a stronghold of growth in the aftermath of the recent global financial crisis. Many multi-national companies have reacted to this trend with an increased desire to locate their global operations strategically, in locations where strong growth and promising economic markets exist. In doing so, a trend in global office development has arisen. Not surprisingly, the strongest office development in 21 and in 211 and 212 forecasts are in regions experiencing the most robust economic growth. Thus, much of the recent office development activity is occurring not in the world s advanced economies, but instead in emerging markets where strong economic growth persists. In 21, CB Richard Ellis Global Research and Consulting team found that 43 million sq. ft. of newly developed office space introduced into the market was in Asia; this was 46% of the global total. In 211, CB Richard Ellis Global Research and Consulting team forecasts that nearly 55 million sq. ft. of new office developments will take place in Asia, 62% of the global total. Figure 3 shows global office completions as a percentage of 29 stock and demonstrates the asymmetric imbalance in regional office developments. Asia far 2. The cities included in the EU-15 are Amsterdam, Barcelona, Berlin, Brussels, Copenhagen, Dublin, Frankfurt, London City, London West End, Madrid, Munich, Paris, Prague, Vienna, Warsaw and Zurich Q1 2Q2 4Q2 2Q3 4Q3 2Q4 4Q4 2Q5 4Q5 2Q6 4Q6 2Q7 4Q7 2Q8 4Q8 2Q9 Global Americas Asia Pacific EMEA 4Q9 2Q1 4Q1 Page 3

4 Figure 3: Global Office Development Growth Rates North America 1.2 EMEA Pacific Asia Global Office Development Completions as % of year-end 29 Stock Office Development as % of year-end 29 Stock outpaces the Pacific, EMEA and North America. This figure also demonstrates that global office completions are expected to continue at high levels in the next couple of years. Furthermore, the supply-side circumstances of record-breaking low levels of office development in Europe and the Americas will impact these markets leasing fundamentals. For example, in markets such as London, pre-leasing activity has grown more prevalent as supply has become increasingly less abundant. For Europe as a whole, completions in 211 are expected to be 3% lower than in 21, with further contraction expected in 212. This lack of new office development, as well as tighter access to credit, will continue to affect the supply-sides of other markets in Europe and the Americas as well. Global Rental Cycle and Performance Summary The Americas have historically had the highest vacancy rate; however, a positive trend is emerging in that its vacancy rate is leveling off in light of the positive, but slow economic recovery that ensued in 21. EMEA leads the way with the lowest vacancy rate, while the Asia Pacific region continues to bounce around, albeit with a lower rate than the Americas. The Asia Pacific region distinguished itself from other regions as it experienced quite substantial declines in its vacancy rate over the 29 to 21 period, amounting to a 162 bps decrease from 11.8% in 29. However, the recovery in vacancy rates 29.4 Figure 4: Global Office Performance Comparison: Vacancy Rates Vacancy Rate, % Source: CBRE Econometric Advisors 26 Asia Pacific Americas EMEA Forecast in the Americas and EMEA regions continues to linger along a more flat path, with rates expected to decline in the coming quarters and next several years. As shown in Figure 5, net absorption rates for the Asia Pacific region have historically maintained the lead while the Americas and EMEA regions have generally progressed along a very similar, lower path. All regions have observed improved net absorption conditions over the course of 21, and this trend is expected to continue across these regions in the next couple of years. In 21, Asia Pacific experienced the strongest increase in its net absorption rate, totaling an increase of 37 bps from 1.9% in 29 to 5.6% on 21. Meanwhile, 27 Figure 5: Global Office Performance Comparison: Net Absorption Rates Net Absorption as % of Stock Source: CBRE Econometric Advisors Asia Pacific Americas EMEA Forecast 212 Page 4

5 Figure 6: Global Office Performance Comparison: Completions Rates Completions as % of Stock Source: CBRE Econometric Advisors 26 Asia Pacific Americas EMEA Forecast EMEA and the Americas have also experienced modest increases in their rates of 12 bps and 15 bps, respectively, of.9% and.4%, respectively. A similar story to net absorption rates exists for completions rates for the three regions, as demonstrated in Figure 6. The Asia Pacific region maintains the historical lead on completions rates, and EMEA and the Americas follow a similar, but lower path. In 21, Asia Pacific s regional completions rate declined 73 bps to 4.6%, the Americas completions rate also declined 8 bps to.6%, and the EMEA completions rate remained flat at 1.5% Figure 7: Global Office Market Rent Cycles, 4Q 21 Rental Decline Accelerating Los Angeles Chicago Rental Decline Slowing Rental Growth Accelerating London City Shanghai Paris Auckland Madrid London West End Hong Kong Singapore Tokyo Sydney Mexico City New York Toronto Washington, DC Frankfurt 211 Rental Growth Slowing Markets do not necessarily move along the curve in the same direction or at the same speed. The rental cycle is intended to display the trend in net effective rents. 212 As shown in Figure 7, almost as many markets are experiencing accelerating growth as those experiencing slowing rental declines. Thus, it is evident that the global office market is recovering in an imbalanced manner. The markets that are seeing accelerated improvements to rents, such as New York, Washington, DC, Sydney, London s West End, Singapore, Paris and Hong Kong are not surprisingly areas that have also experienced strong job and economic recoveries. On the other hand, economies such as Los Angeles, Chicago, Auckland, Mexico City and Madrid, which have most recently experienced slowing declines at least, in their rents also happened to be markets that experienced more substantial levels of unemployment and harsh effects from the global financial crisis. Americas Regional Office Summary The Americas, and the U.S. in particular, just endured one of the most severe recessions in its post-world War II history. The office market was not immune to the economic outcomes of the global financial crisis. Even though office development has been at an all-time low during the past several years, vacancy levels could not fight against the severe losses in office-using employment, and thus the past couple of years have had elevated vacancy rates not seen since the dot-com crisis back in These weakened market fundamentals filtered through to landlords who could not maintain their prices in the face of tumbling office demand. Within the past year, job growth and net absorption have resumed, albeit slowly. These positive signs have gradually begun to permeate the office leasing market as tenants are beginning to look toward future expansion. However, as shown in Figure 8 on the following page, net absorption has remained negligible and vacancy rates are high, but at least stable. Ultimately, a vigorous recovery in office demand for the Americas will require a more substantial recovery of the jobs market. The vacancy rate in 4Q 21 dropped 2 bps to 16.4%. Interestingly, the suburban markets outstripped the downtown markets by 1 3. The office vacancy rate in the U.S. is not as high as it was back in the early 199s, when an office building boom drove rates to over 19%. Page 5

6 Figure 8: U.S. Performance Completions Net Absorption Vacancy Rate Net Absorption & Completions, SF x 1, Vacancy Rate, % 15, , 17 5, , 9-1, 7-15, Source: CBRE Econometric Advisors Spring 211 Outlook bps last quarter, with suburban markets falling 3 bps and the downtown markets falling 2 bps. Until greater shares of the millions of jobs lost in the recession are recuperated, the office market is only expected to maintain a moderate recovery. Office development will not gain much momentum until vacancy rates and squarefoot-per-worker levels return to long-term norms. The Canadian economic recession was far more moderate than what was experienced in the U.S. and, as a result, Canada did not lose as many jobs during the past few years. Employment has grown in the financial services sector as well as in the high-tech sector. The national office vacancy rate dropped below 1% to 9.5% at year-end 21. Most of the activity was focused on the downtown market with office vacancy rate levels dropping to 8.4%. Overall office rental rates continue to stabilize and are expected to increase slightly in 211. New office development is slowly burning off, especially in the Calgary and Toronto office markets. The Latin American economy has remained strong Brazil s economy in particular continues to surge with growth between 4% to 7% for the region as a whole. The majority of unemployment rates across Latin America continue to fall as the region benefits from the increase in the global demand for commodities. The Latin America office vacancy rate increased slightly to 7.7% in 21 Figure 9: Americas Office Market Rent Cycles, 4Q 21 Rental Decline Accelerating Santiago Rental Decline Slowing Calgary Chicago Houston Edmonton Atlanta Los Angeles Austin Orange County Panama City San Diego Buenos Aires Ft. Lauderdale Miami Northern New Jersey Phoenix Seattle Rental Growth Accelerating Boston Charlotte Denver Lima Mexico City Orlando Toronto Vancouver Dallas New York San Francisco Washington, DC Rental Growth Slowing São Paulo Rio de Janeiro Markets do not necessarily move along the curve in the same direction or at the same speed. The rental cycle is intended to display the trend in net effective rents. compared to 7.5% in 29. The increase in the vacancy rate was due to new supply entering the market. Americas Market Snapshots 4 The majority of the markets monitored in the Americas, 28 of the 31 in Figure 9, are experiencing optimistic trends in their rental cycle, with either slowing declines or accelerated growth. This is a good sign, as the declines in rents that have been observed for the past several quarters are beginning to slowly level off. Not surprisingly, Brazil s markets, such as Rio de Janeiro and São Paulo, contrastingly experienced measured moderation in their rents as new supply entered and raised vacancy rates. Other markets such as Boston, Charlotte, Denver, Lima, Mexico City, Toronto, Dallas, New York, Washington, DC and Vancouver experienced rental growth acceleration. Chicago Snapshot The Central Business District (CBD) of Chicago weathered the storm of the global financial crisis much better than the nation as a whole, and just this past quarter the Chicago metropolitan area experienced the largest year-over-year decline in unemployment out of 49 metropolitan areas. The vacancy rate decreased 1 bps to 15.% in 4Q 21. And, for the first time historically, two consecutive quarters of positive net absorption were recorded, with 4Q s net absorption amounting to 4. The data contained in the market snapshots in this report are provided by CBRE local research teams. For some markets, CBRE s Econometric Advisors team also produces independent market forecasts and historic data. The figures presented in this report may differ from those produced by CBRE Econometric Advisors. Page 6

7 216, sq. ft. It is anticipated that the vacancy rate will continue to decline slowly throughout 211 as slow employment growth prevents office space demand. Gross asking rents increased slightly in 4Q to $31.69 per sq. ft. per annum, and are expected to continue to fluctuate over the next few quarters. Los Angeles Snapshot The unemployment rate for Los Angeles County was 13.% in November 21, which was higher than both the California and national rates of 12.4% and 9.3%, respectively. Asking rents were down 3.6% on an annual basis, ending the year at $28.56 per sq. ft. per annum. Class A space had the highest average asking lease rate of $3.96 per sq. ft. per annum. Asking rents are expected to stabilize or decrease moderately during the next six to 12 months as the office market continues its path to recovery. Total vacancy increased 145 bps over the past 12 months to 18.%, although this figure remained unchanged over the quarter. The vacancy rate for Class A space was 16.9%, and 16.4% for Class B space both of which increased relative to the previous quarter. Net absorption losses were modest, with more than 312, sq. ft. of negative activity for the quarter, but the pace of decline continues to decelerate compared to 29. Mexico City Snapshot The average rental asking rent rose $.33 over last quarter to $23.6 per sq. m. per month. The rental price for available sublease space increased from $26.41 to $26.85 per sq. m. per month, with the availability rate falling considerably from the previous quarter. New buildings added nearly 269, sq. m. to inventory during 4Q, and the vacancy rate increased to 1.% up only 4 bps compared to the previous quarter. Construction activity for 21 saw an impressive 912, sq. m. delivered during the year. New York Snapshot The average asking rent ticked up 1.2% quarter-overquarter to $48.32 per sq. ft. per annum, and average rents are beginning to increase in select buildings. Leasing activity rose in 4Q to 6.9 million sq. ft. from 5.6 million sq. ft. in 3Q 21. Vacancy rates decreased quarter-over-quarter by 4 basis points to 8.6%. Toronto Snapshot While vacancy and rents in the suburban markets continue to struggle and are largely stagnant, the CBD experienced rental growth in some pockets coupled with stable vacancy. Notably, the net effective rents in premier Class A towers have almost returned to prerecession levels, up nearly $1. per sq. ft. on the year. There are a few large blocks of space coming to market in the next 12 months, which will temper rental growth and raise vacancy rates in the CBD to match the overall conditions present in the Greater Toronto Area. Washington, DC Snapshot The Washington, DC market is showing continued signs of improvement, and its recovery will continue in 211 partially as a result of the fact that Washington, DC has one of the best employment markets in the country. Net absorption reached an all-time high of 4.3 million sq. ft. for full-year 21, with 78.% of the new demand from the government sector, while private sector leasing accounted for the remaining 22% of leasing activity for the year. Several large transactions were pending at year-end that will start 211 off with new growth. Vacancy came down 2.3 percentage points from its peak during the recession to end the year at 9.7%. Private sector demand has emerged again in the CBD and East End submarkets. The outlying submarkets of NOMA, Capitol Riverfront and Southwest have also experienced increased public demand due to increased federal budget and government requirements. It is expected that the overall vacancy rate will continue its decline in 211 and stabilize in 212 due to speculative developments brought to the market in the next six to 12 months. Developers are beginning to discuss new speculative construction in light of the lowering vacancy. Page 7

8 Figure 1: EMEA Performance Completions Net Absorption Vacancy Rate Net Absorption & Completions, SF x 1, Vacancy Rate, % 8, 7, 6, 5, 4, 3, 2, 1, -1, EMEA Regional Office Summary Aggregate take-up in Europe 5 rose by 2% last year compared with 29, reflecting an improvement in almost all office markets in Europe. However, this compares activity with the weakest point in the demand cycle and few markets are yet back to operating at, or above, trend levels. Activity in London showed an impressive rebound, with one of the strongest years on record. Vacancy saw a slight increase in the fourth quarter to an average of 1.5% across EMEA, but the pattern of change across individual cities remains very uneven. Where supply is still rising, the scale of increase being recorded is now mostly negligible, and a number of key markets including London and Paris are seeing declines in vacancy due to the fact that these markets responded to the credit crisis with an abrupt tightening in development activity. It is increasingly evident that a lack of new development over the next two years will cause supply to tighten more widely across many European markets. Aggregate completions in 211 are expected to be around 3% lower than in 21 and little more than half of this year s pipeline is speculative with further contraction likely in 212. Moreover, with the exception of London, there has been very little increase in development starts, and it may be that completions remain subdued well into Prime rents in Europe increased by 2.7% over the course of the year, according to the CB Richard Ellis EU-27 Rent Index. Growth continues to be driven by a handful of markets including London, Paris and Moscow although several other cities are also starting to show the first signs of rental recovery. While the majority of markets are stable at present, some still face the prospect of further falls in 211 in light of economic risks or oversupply. Figure 11: EMEA Office Market Rent Cycles, 4Q 21 Rental Decline Accelerating Athens Rental Decline Slowing Rome Budapest Copenhagen Amsterdam Hamburg Munich Frankfurt Edinburgh Madrid London TV Barcelona Geneva Rotterdam Prague Dublin Milan Bucharest Lisbon Rental Growth Accelerating Warsaw Rental Growth Slowing Dusseldorf Helsinki Brussels Berlin Moscow Vienna London City Zurich Paris Manchester Birmingham Oslo London West End Stockholm Markets do not necessarily move along the curve in the same direction or at the same speed. The rental cycle is intended to display the trend in net effective rents. EMEA Market Snapshots For EMEA, 18 of the 34 markets included in Figure 11, including Rome, Budapest, Copenhagen, Amsterdam, Dublin and Edinburgh, have encouraging rental cycle conditions as the rental declines seen in previous quarters are beginning to slowly level off. More promising are the other 15 markets, such as London City, London West End, Paris, Berlin, Manchester and Zurich, where rental trends are beginning to accelerate positively. Frankfurt Snapshot Germany has experienced one of the strongest economic recoveries in Europe, and demand for office space has also recovered. Annual take-up reached 473, sq. m., which was 32% higher than in 29 and was characterized by a relatively high share of owner-occupied space. It was also significantly impacted by two large 5. Cities included in Figure 1: Amsterdam, Barcelona, Berlin, Brussels, Copenhagen, Dublin, Frankfurt, London City, London West End, Madrid, Munich, Paris, Prague, Vienna, Warsaw and Zurich. Page 8

9 lettings of more than 25, sq. m. A large volume of office space was delivered to the market in 21; although only 12% of this was speculative, the vacancy rate increased to 17.7% at the end of 4Q 21. Reflecting the large amount of vacant space, prime rents have remained stable at 38 per sq. m. per month since 4Q 28, despite the improvement in the market. Demand for well-priced, high-quality office space in the best central locations will continue into 211, and rents are therefore expected to remain stable for the short- to medium-term. London West End Snapshot The amount of space on offer in London s West End remained fairly consistent throughout the year at 1. million sq. ft., which is above trend. Encouragingly, this includes more than 3% of new or early marketed space. This countered expectations of a cooling in the market by the end of the year. Strong take-up in 4Q brought the 21 leasing total to 4.7 million sq. ft. Although the amount of available space ended the year at 5.5 million sq. ft., 21% lower than it had been at year-end 29, this figure was still above the long-term average. After six months of stability, prime rents increased 3% this quarter to 87.5 per sq. ft. per annum. This was far weaker growth than earlier in the year and brings the annual growth rate to 9.4%. London City Snapshot After a remarkably strong year of office demand, takeup reached 6.4 million sq. ft. for the year, which is the second-highest annual figure on record. This activity was spread fairly evenly throughout the year, with three of the four quarters in 21 above trend. Over the year as a whole, there was a clear trend toward larger deals compared with previous years. This seemed to reflect a recovery in confidence as occupiers satisfied requirements deferred because of the credit crunch. The vacancy rate increased marginally to 6.8% at the end of 21, but is expected to decrease next year as there will be far fewer development schemes completing in 211. Strong rental momentum was maintained in the City market this quarter, with a 5% increase taking the prime rent to 55 per sq. ft. per annum an increase of 31% since the market low in 3Q 29. The typical free-rent concessionary period remain unchanged at 24 months. Madrid Snapshot At present, the market remains weak for landlords in Madrid, while occupiers have strong bargaining power to negotiate on deals. Take-up in 4Q was roughly half the 4Q average for the past five years, at 9, sq. m. This was expected and accurately reflects how the market has moved. Annual take-up was 25% above the 29 figure, which was the low point of the market. The vacancy rate increased to 12.1% this quarter and is expected to peak this year as pipeline supply tails off. This will reduce downward pressure on rents, although rents fell again this quarter to 324 per sq. m. per annum, a 1.8% drop. Further rental falls are expected in 211, although any further declines are likely to be small. When the recovery eventually takes hold, it will be slow. Paris Snapshot The amount of space sought by occupiers in Paris increased by 15% in 21 compared with 29, and demand appears to be stabilizing. Take-up for 4Q was on par with 3Q, which was somewhat disappointing as the large deals that are traditionally signed at year-end did not materialize. The vacancy rate was steady at 6.8% for the whole of 21, and remained stable in terms of both the size and quality of space on offer. However, the marked deterioration in the quality of definite future supply and the low amount of development taking place confirms fears for a real scarcity of quality supply going forward. Prime rents increased 3.9% this quarter to 8 per sq. m. per annum due to the scarcity of high-quality space; however, large incentives are still being provided. There continues to be a large gap in rents between traditional business districts and peripheral locations. Page 9

10 Figure 12: Asia Pacific Performance Completions Net Absorption Vacancy Rate Net Absorption & Completions, SF x 1, Vacancy Rate, % 7, 14 6, 5, 4, 3, 2, 1, Note: Includes 16 cities in Asia and 9 cities in the Pacific. Asia Pacific Regional Office Summary Multinational and trans-national companies continue to fuel the Asia Pacific office market, as the region witnessed a return to levels of demand not seen since prior to the global financial crisis. During the course of 21, more than 42 million sq. ft. of prime net office space was absorbed across the region, a level which is more than double the amount recorded in 29. Although the rising cost of moving and occupying office space may start to slow business expansion, the demand for property is likely to result in equally high absorption levels in 211. Just under half of the 25 Asia Pacific markets 6 monitored witnessed a contraction in prime office availability over the year, as activity surpassed the level of completions brought to most markets. Vacancy rates in Shanghai, Beijing and Mumbai contracted the most over the year, as the availability of property lagged the levels of occupier demand. Indeed, the vacancy rate for the AP-25 markets declined by 15 bps during 21 to 1.6% as of 4Q 21. It s worth noting, however, that this regional contraction has been fueled wholly by the Asian markets, as the vacancy rate throughout the Pacific increased by 5 bps over 21 as the peak of the Pacific construction cycle was reached The caution regarding office development which was felt in 28 resulted in a lag in development completions in 21, as only 29 million sq. ft. of space was completed. However, this amount looks set to be surpassed in 211, when more than double the amount of stock is set to be completed. Markets such as Shanghai, Guangzhou and Mumbai in particular are set to expand significantly over the year, contributing to more than 6 million sq. ft. of office space to be completed throughout Asia Pacific in 211. A return to a more modest pipeline appears evident in 212, when only 38 million sq. ft. of stock is forecast to come into the market. However, the CB Richard Ellis Global Research and Consulting team will be monitoring development activity as the economy grows. As demand continued to pick up throughout the region and immediate supply came under pressure, overall prime office rents across the Asia Pacific region rose on average by 3.2% quarter-over-quarter during 4Q 21, and by 8.1% annually. The Chinese and Singapore office markets witnessed the most significant rises in rental levels over the quarter, as rents typically increased by between 2.3% and 12% in these areas. Not all markets shared the same story, however, as prime rents across Japan and in Ho Chi Minh City came under pressure due to an expansion of the supply pipeline, while a number of markets witnessed no movement during the quarter as rental cycles had yet to go into a growth trajectory. Asia Pacific Market Snapshots The Asia Pacific rental trends in Figure 13 show that the market is very balanced in terms of accelerations and declines in rents. Nine of the 18 markets including Manila, Hanoi, Taipei, Tokyo and Seoul are experiencing slowing declines in their rents. Another eight markets including New Delhi, Bangalore, Sydney and Mumbai have positive trends, as their rental growth is accelerating. Sydney CBD, Australia, Snapshot The final quarter of 21 confirmed that the Sydney CBD office market remains in the transition phase of 6. The 25 markets are Beijing, Shanghai, Guangzhou, Hong Kong, Taipei, Tokyo, Osaka, Nagoya, Seoul, Singapore, Bangkok, Manila, HCMC, Bangalore CBD, New Delhi, Mumbai, Brisbane, Sydney, Canberra, Melbourne, Adelaide, Perth, Auckland, Wellington and Christchurch. Page 1

11 Figure 13: Asia Pacific Office Market Rent Cycles, 4Q 21 Rental Decline Accelerating Seoul Rental Decline Slowing HCM City Manila Auckland Bangkok Kuala Lumpur Taipei Tokyo Hanoi Rental Growth Accelerating New Delhi Bangalore Sydney Mumbai Hong Kong Beijing Singapore Rental Growth Slowing Shanghai Guangzhou Markets do not necessarily move along the curve in the same direction or at the same speed. The rental cycle is intended to display the trend in net effective rents. recovery. While key variables such as growth in white collar employment and recovering business confidence suggest a potentially strong occupier market, actual property leasing transactions were slow to be executed in 4Q 21. As the market remained cautious owing to domestic economic risks, prime core net face rents remained stable in 4Q at AUD$79 per sq. m. per annum. This is not reflective of the overall interest and activity throughout the CBD market in 21, however, as net absorption for the year was almost twice the longterm average, at over 1, sq. m. It now appears that the vacancy rate throughout the CBD reached the peak of the current cycle in July 21, as it continued to contract to 8.2% by year-end. The performance in this region is noteworthy in that it experienced positive net absorption and falling vacancy, but no rent growth. The reason for the lack of rent growth is due to the still significantly high vacancy rate level that remains. Thus, further declines in vacancy must occur before rent growth will be stimulated. Tokyo, Japan, Snapshot The Tokyo Grade A office market turned more active in the fourth quarter, as enquiries from tenants and the number of relocations both increased. However, the increased activity in the office market came despite weakening business sentiment. One reason behind the more active office leasing market witnessed in the fourth quarter is that an increasing number of tenants believe rents will fall no further, and that now is the time to secure space. The estimated contracted rent for the quarter under review stood at JPY 31, (per month per tsubo, excluding CAM and taxes), a decline of.8% quarter-over-quarter, with the decline narrowing from the 2.3% drop recorded in the previous quarter. The vacancy rate in the fourth quarter fell 5 bps from 5.4% in the previous quarter to 4.9%. Vacancy in Grade A buildings was gradually filled with tenants upgrading their premises and consolidating their operations in large-floor-plate facilities. However, as the economic recovery in Japan began to lose momentum, expansionary activity became muted. Singapore Snapshot The Singapore Grade A office market enjoyed an upbeat fourth quarter of 21, with prime office rents averaging S$8.3 per sq. ft. per month, reflecting an increase of 12.2% quarter-over-quarter. The rate of growth comfortably outstripped the 7.2% quarter-over-quarter growth recorded in the third quarter. Prime rents are now up 23.9% from the market trough of S$6.7 per sq. ft. per month recorded in the first quarter of 21, a mere three quarters ago. The availability of Grade A space was particularly tight, with vacancy dipping to 2.7% in the fourth quarter, a notable turnaround from the 6.2% recorded in the fourth quarter of 29. However, additional available space is expected to come onto the market in the coming years, as around 8.2 million sq. ft. of office space is targeted for completion from 211 to 215, 63% of which is classified as Grade A space. Hong Kong Snapshot The fourth quarter saw a slowdown in office absorption in Hong Kong, as availability continued to fall and tenants began to resist accepting the heightened rental values. Hong Kong Island absorption slowed in the fourth quarter to around 33, sq. ft. compared to around 5, sq. ft. of positive net absorption in the third Page 11

12 quarter. Rental growth on Hong Kong Island slowed to 6.7% in the fourth quarter to an average of HK$7.5 per sq. ft., compared to an increase of 9.8% in the third quarter. Central rents increased 5.9% quarter-overquarter to an average of HK$111 per sq. ft. New supply will total around 1.2 million sq. ft. in 211 compared to a historical average of around 2 million sq. ft. per annum from 1995 to 21. Institutional-grade supply will remain limited in 211. Expectations that occupier demand will remain positive during the coming 12 months and continued economic growth should ensure rents continue to find support for further growth. Shanghai Snapshot Buoyant market sentiment and leasing activity witnessed during the fourth quarter of 21 drove Shanghai office rents to register quarter-over-quarter growth of 3.4%, the biggest quarterly rise registered so far in the postcrisis period. The review period nevertheless saw an active leasing market across a wide spectrum of industries including financial and professional services, trading, IT and manufacturing. Thanks to the continued flightto-quality trend and rapid recovery of business growth, high-quality premises in prime locations, particularly recent completions with sufficient available space, have secured a number of large-space agreements. At the other end of the market, quarterly net absorption totaled 2.3 million sq. ft., thanks to the high level of activity. The vacancy rate therefore dropped 26 bps to 9.2%, returning to single-digits for the first time since the second half of 28. Summary Having just resurfaced from the depths of an unprecedented global recession, there is great polarization between regional and geographic recoveries of both the global economy as well as the commercial real estate industry. While Latin America and Asia Pacific s recent growth has catapulted these regions into a more rapid recovery, this pace is expected to moderate in the next year. Other markets in Europe and the U.S. have a longer, more fragile road to recovery. Despite the long-awaited newsflash of optimism, much instability exists within the global financial, monetary and political systems, which gives reason to remain cautious in the perspective for the near-term recoveries of many regions, especially the U.S. and Europe. Ultimately, further revitalization in the job market must proceed before a comprehensive global office market recovery can occur. Once the job market becomes healthier, office demand will increase, followed by increased absorption, falling vacancy rates, increasing new developments and, ultimately, stronger upward rental growth. While this doesn t imply there won t be challenges, barring some Black Swan, the wind is at our backs! Page 12

13 The CB Richard Ellis Global Research and Consulting Team would like to acknowledge Abigail Pitzner, Catherine Bushnell and Suzanne Barrett for their contributions to this report. Global Research and Consulting is a CB Richard Ellis network of preeminent CBRE researchers and consultants who provide real estate market research, econometric forecasting and consulting solutions to our clients worldwide. CBRE Global Research Executive Committee Raymond Torto, Ph.D., CRE, Chair Global Chief Economist and Executive Managing Director, Global Research raymond.torto@cbre.com Nick Axford Head of Research, Asia Pacific Senior Managing Director, Global Research nick.axford@cbre.com.hk Jim Costello Principal and Director of Investment Strategy, Econometric Advisors jim.costello@cbre.com Peter Damesick EMEA Chief Economist peter.damesick@cbre.com Michael Haddock Director, EMEA Research michael.haddock@cbre.com Richard Holberton Director, EMEA Research richard.holberton@cbre.com Neville Moss Head of EMEA Retail Research neville.moss@cbre.com Andrew Ness Executive Director, Asia Pacific Research andrew.ness@cbre.com.hk Jon Southard Principal and Director of Forecasting, Econometric Advisors jon.southard@cbre.com Kevin Stanley Executive Director, Global Research and Consulting, Asia Pacific Research kevin.stanley@cbre.com.au Raymond Wong Executive Director, Americas Research Operations, Americas Research raymond.wong@cbre.com Statistics contained herein may represent a different data set than that used to generate National Vacancy and Availability Index statistics published by CB Richard Ellis Corporate Communications Department or CB Richard Ellis research and Econometric Forecasting unit (formerly Torto Wheaton Research). Information herein has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis. Page 13