Global office rental growths slowed in third quarter of 2016
Annual rental growth on prime office assets across major global markets slowed to 2.9% in the third quarter of 2016 from 3.4% in the previous quarter and overall global leasing volumes are expected to be up to 5% lower than last year.
Office rents increased by 0.5% quarter on quarter, down from 0.8% in the previous quarter in the 110 major markets covered by the JLL Global Office Index which also shows that demand has remained steady in many of the world’s dominant commercial real estate markets in spite of various political and economic headwind.
Overall global leasing volumes during the third quarter were broadly in line with the previous quarter, although they were down 7% on the exceptional levels of 2015 and the index report suggests that as new supply comes through and more markets move into balance, there is increasing evidence that the global office vacancy rate is flattening out, having fallen steadily since the third quarter of 2010.
Volumes are forecast to remain broadly stable at around 40 million square metres in 2017, with robust leasing activity anticipated in the United States and core Europe. But with 2017 expected to see the peak of the current development cycle, JLL forecasts prime rental growth of around 2% to 3% for the full year of 2016, softening further in 2017 to around 2%.
A regional breakdown shows that in Asia Pacific Grade A office rents increased 0.5% quarter on quarter and were up 2.6% year on year, slightly slower than the 0.6% quarterly growth and 2.5% annual growth recorded in the second quarter.
It explains that there was a marked shift in the pattern of rental growth as subdued growth in many Asian markets was offset by robust rent uplifts in key Australian markets. Rents fell by 0.6% in Shanghai and ongoing weakness in the South Korean economy saw Seoul rents fall by 1.5%, erasing gains made in previous quarters but rents increased by 2.2% in Hong Kong.
In Singapore rents fell by 2.1% but the pace of decline has slowed from previous quarters, rents also fell by 2.5% in Jakarta and by 0.9% in Kuala Lumpur. But rents increased by 2% in Manila, by 1.3% in by 5.5% in Sydney and by 5.7% in Melbourne, the top Asia Pacific performer in the third quarter.
The European office index rose by 0.6% quarter on quarter as more buoyant conditions in most markets were hidden by rental falls in London of 4.2% and Moscow 6.3%. Excluding the UK and Moscow, quarterly European office rental growth was 1.8% quarter on quarter and 5.8% year on year, the highest uplift since the second quarter of 2011.
Overall European office leasing volumes dropped 7% year on year, dragged down by lower activity in the UK and Spain. However, JLL says that office market fundamentals remain strong in mainland Europe, with third quarter take up some 9% ahead of the 10 year average.
Stockholm recorded the largest increase in Europe for the second consecutive quarter with a rise of 6.9% and Berlin also witnessed a significant quarterly increase of 3.9%, pushing annual growth to a record 15.2%. There was a fifth consecutive quarter of rental growth in Paris, up 3.4% and in London, prime City office rents were stable while prime West End rents dropped by 4.2%, the first quarterly rental decline since the first quarter of 2009.
JLL expects that net effective rents in Europe will come under pressure over the next 18 months on the back of slower leasing volumes and occupiers seeking greater lease flexibility. However, the downward correction will be mitigated to some extent by low vacancy rates.
In the Americas growth slowed in the third quarter with prime office rents in the region increasing by 0.4% quarter on quarter, half the 0.8% pace of the previous quarter and the report points out that this follows a repeated pattern of alternating periods of faster and slower growth seen throughout the current cycle with one relative burst of rental growth experienced in 2012, and another in 2015.
This rate of growth is expected to increase again in 2017 as rents bottom out in some of the relatively rare hard hit markets in the region, while in stronger US markets an increase in new project deliveries at top of market rents should provide an additional boost.
Year on the Americas office index was up 2.3% compared to 3.1% in the second quarter and the data shows that prime office rents in the Americas have risen a cumulative 22% since the cyclical trough in 2010, while the region’s index level already stands 5.4% above the peak in the previous cycle.
Buenos Aires topped the regional rankings with growth of 4.8% quarter on quarter, followed by Detroit up 4.7%, Baltimore up 4.5%, San Diego up 3.9%, Tampa up 2.6% and Portland up 2.3%.
However, some markets which had witnessed very rapid growth earlier in the current cycle have seen corrections with Silicon Valley seeing a drop of 4.2% quarter-on-quarter, and San Francisco Peninsula down 0.7% while in Mexico City rents fell by 3.3%, were down 1.9% in Denver and down 1.6% in Calgary.
The MENA index was stable over the quarter, with annual growth of 10.3%, down from the 11.3% in the second quarter. Dubai remains the top regional performer on an annual basis with growth of 20% with strong demand for limited Grade A space in central locations and reducing vacancy in the CBD boosting rental values in the Dubai International Financial Centre (DIFC). The performance of the DIFC was not, however, the report says, representative of the wider market, where upcoming supply and limited interest in secondary locations have created a two tier market and constrained rental growth.
The report concludes that global office vacancy rates show signs of flattening out following several years of gradual compression and the peak of the current development cycle in 2017 is expected to limit further falls, with the global vacancy rate projected to keep broadly stable at 12% for the remainder of 2016 and through 2017.