The occupancy cost at US$178 per sq ft represented a year-on-year (YoY) drop of 2.1% from US$181.73 in the Central Business Districts of Hong Kong; but still, Hong Kong moved from the second to the top in the world ranking.
The global report, covering the top 50 cities in the world, states that all regions of the world are now experiencing recession or recessionary like conditions and as a result demand for office space is substantially reduced. All regions reported higher vacancies and most reported falling rents. The outlook for 2009 is for a further weakening in fundamentals and little prospect of recovery until early next year.
Hong Kong
According the Simon Lo, Director of Research & Advisory of Colliers Hong Kong, the market has been undergoing dramatic changes since year-end. "During the first two months of 2009, there was a 16% decline in Grade A office rents in CBD. The vacancy rate increased from 4% to 5.1%. Lease structure has become more common among key occupiers in the financial sector. Given the substantial consolidation of the global economy, the current downward trend will certainly continue throughout the year of 2009."
Asia Pacific
Most Australian, Chinese and New Zealand markets reported higher vacancies compared with that of mid-year, resulting in a rise in the regional vacancy rate to 8.9% as of end-2008. Among most major financial centres, Hong Kong and Shanghai reported vacancies double from that of mid year, Hong Kong from 1.5% to 4% and Shanghai from 4.7% to 10.2%. Seoul posted the region’s lowest vacancy rate of just 0.7%.
Office rents within the region began to taper off in the final quarter. For the six-month period, rents fell 2%.
Despite the economic downturn, there are high levels of construction in the Asia Pacific region. Bangalore, Beijing, Guangzhou, Seoul, Shanghai and Singapore have at least 10 million sq ft of construction underway totaling 105.8 million sq ft.
In the ranking of highest Grade A office gross rents, Hong Kong took the top spot within the region and the world, with Tokyo second (3rd spot worldwide), Singapore third (6th spot worldwide).
North America
In the United States, the office fundamentals are sure to weaken as new supply is anticipated to stay relatively high for the next six to 12 months, while demand is expected to remain subdued at the end of 2009 and into next year. Leasing conditions will continue to be exceptionally weak as businesses are quick to dispose of excess space due to job cut. The office space market is unlikely to show any signs of expansion until well into 2010.
According to the Colliers global office report, the US office market has turned decidedly more bearish in the second half of 2008. Combined with relatively high levels of construction, the overall vacancy rate increased 1 percentage point to an average of 14.2% as of end-2008. There was a sharper decline in downtown leasing rates, registering at 8.5%, whereas suburban leasing rates feel a more modest 2.2%.
In Canada, the real estate market, by comparison, continued to show growth though at a modest level. There are increasing signs the economy is faltering, mainly due to an increase in new supply of office space and accelerating job losses.
Europe, Middle East, Africa (EMEA)
The EMEA average vacancy rate started to rise in the first half of 2008, and the rate jumped again in the second half, rising from 7.7% to 8.9% by year-end. Many developments conceived during the boom were completed; and it was even more pronounced in Eastern Europe and Middle East markets.
In the Western European markets, more modest development pipelines have prevented the same substantial increases. Still cities like Amsterdam, London, Rome, Frankfurt and Dublin are seeing vacancy rates above 10%.
The average Grade A rents in the region dropped by 6% in the second half of 2008, and further rental declines are forecast for 2009. There are exceptions because several major markets including Copenhagen, Frankfurt, Munich, Rome and Abu Dhabi saw increasing rents.
With a substantial decrease in office rents in London, Moscow ranked top in the region, followed by London and Dubai. In line with the global trend, rental declines are expected in the majority of the cities. In this environment, landlords are offering increased incentives and rent free periods in order to protect headline rents, and tenants are seeking ‘move-in-ready’ office space to further cut costs.
Latin America
After a five-year period of declining vacancy rates, the regional office vacancy rate increased during the latter half of 2008 to average 3.7% although Lima and Santiago still boasted vacancies below 1%. Rents were mixed with Rio de Janeiro and Sao Paulo registering a light increase while the rest were flat or down.
Rio de Janeiro took the top spot as the most expensive office market in the region with the average Grade A office gross rents of US$66 per sq ft.
Global Investment Sales
In the last six months of 2008, office investment sales continued to drop. Prices moved lower in all regions of the world. With investors pulling back and lenders tightening underwriting standards, there was de-leveraging across almost all asset classes including real estate.
While the global trend was down, regional differences were noticeable. In 2008, global office transactions fell by 58%, falling from US$1.2 trillion in 2007 to just over US$504 billion in 2008. Australia- New Zealand was the hardest hit, falling 77%, followed by the US declining 75%, UK, 58% and Western Europe, 48%. Middle East was the only region seeing an increase in investment sales, a 72% increase over 2007 level to US$5 billion in transactions.
