Global office property markets resilient despite economic and political uncertainty
The fundamentals of the global office market are resilient with leasing volumes at their highest level for 2016 in the final quarter of the year with growth of 6%, the latest analysis shows.
For the full year, leasing volumes were down modestly by only 3% on the robust levels of 2015, according to the report from international real estate firm JLL, which adds that this is a positive outcome in the face of political and economic uncertainty.
Full year 2016 take-up in the region reached 12.1 million square metres, a marginal 2% decrease on 2015, but in line with expectations. ‘We forecast European take-up to be around 11.7 million square metres in 2017, broadly flat on 2016 levels as expansionary drive on the continent keeps demand levels above the 10 year average,’ the report adds.
Asia Pacific finished the year on a strong note with gross leasing activity up by 23% year on year in the fourth quarter of 2016, leaving full year volumes down just 2% on 2015 levels. Financials and tech firms remained the most active sectors although demand trends were mixed across many Asian markets.
With lingering uncertainty surrounding the economic and political backdrop, JLL expects that 2017 gross leasing volumes in Asia Pacific to be relatively in line with 2016 with a modest downside of up to 5%. Although aggregate conditions are likely to be generally stable, the performance will continue to be varied as local market drivers diverge, the report says.
Overall at the end of 2016 the global office vacancy rate fell below 12% to 11.9% for the first time in this cycle, reaching its lowest level since the third quarter of 2008. Vacancies continued their downward trend in the Americas to 14.5%, but we also saw surprise falls in Europe, down 20 to 8.1%, and in Asia Pacific down to 10.9%.
Nonetheless, the report says that global office vacancies are set to trend slowly upwards during 2017 to reach 12.3% by the end of the year as new deliveries accelerate. Office completions are expected to be 37% higher in 2017 than in 2016, with this year marking the peak in the development cycle. About one third of completions slated for 2017 have already been pre-leased and new development completions are projected to tail off during 2018 and 2019.
Annual rental growth for prime offices across 26 major markets slowed to 2.5% in the final quarter, with a further softening anticipated in 2017 to about 2% on average. Leasing conditions are expected to become more balanced in 2017 as many markets seek to absorb a greater volume of new deliveries and occupiers keep an eye on costs.
Even so, the bulk of major office markets are projected to remain in positive territory in 2017, with only Shanghai, Beijing, London, Mexico City, Sao Paulo and Singapore likely to see a correction in prime rents over the next 12 months. Sydney is predicted to be the top performer, with growth of 10% to 15% this year on top of the 22.5% seen in 2016.
Asia Pacific and Europe had their strongest quarter of 2016, and leasing volumes in both regions finished the year just 2% below the levels of 2015. Meanwhile, the United States saw a disappointing final quarter due to the lack of ‘mega leasing’ deals and its full year volumes were down by 5% year on year.
Looking ahead JLL forecasts global leasing volumes in 2017 will be broadly stable on 2016 levels and the US offers the greatest upside potential of up to 5%. But due to lingering economic and political uncertainty, it also predicts gross leasing volumes in Europe and Asia Pacific to be generally in line with 2016, with a modest downside risk of up to 5% in Asia Pacific
A combination of a 7% fall in leasing volumes in the United States and a lower number of mega leasing deals in the fourth quarter of 2016 resulted in the lowest level of occupancy growth in the US office market in two years.
The report explains that near full employment and a shortage of skilled talent has restricted expansion activity in several major technology hubs, while political uncertainty associated with the November Presidential election caused some tenants to adopt a wait and see mentality.
Looking to the year ahead in the US it says that a shift in public policy that favours deregulation and lower taxation may serve as a catalyst for growth in select industries that have faced increased regulatory pressures over the past eight years and for the US financial markets in general.
It concludes that in the US although a rising interest rate environment will create both challenges and opportunities, overall macro-economic conditions support solid growth in 2017.
Strong occupier demand continued across most of Europe during the fourth quarter, with take-up reaching 3.4 million square metres and while this was down 9% on the fourth quarter of 2015, JLL says that annual comparisons with that particularly robust quarter which was the strongest the end of 2006 were always going to be unflattering.