Annual rental growth in key global cities expected to slow during 2017

Annual rental growth for prime offices in major global markets increase to 2.5% in the first quarter of 2017, but is expected to slow to around 2% this year, the latest index shows.

Overall, rental volatility is exceptionally low by historical standards, and aggregate rental growth is expected to maintain a steady pace through 2017, according to the report from international real estate firm JLL.

Growth was led by Sydney with annual rental growth of 28.9%, followed by Chicago up 10.4%, Dallas up 10.2%, Hong Kong up 9.1% and Toronto up 8.4%, out of the 125 markets covered by the index.

Istanbul has seen office rents fall by 17.8% and they were down by 11.7% in Jakarta, followed by London with a drop of 8.3%, Singapore down by 7.7% and Moscow down by 6.3%.

On a regional basis the index was up 1% in Asia Pacific quarter on quarter and 2.9% year on year. The report says that leasing activity has been relatively stable, but with a varied performance depending on location.

The European office index rose by 0.5% quarter on quarter and 2.1% year on year which means that it outpaced the 10 year annual average of 0.7%. Excluding the UK, prime rental growth in the region now stands at 3.4%, a clear indication that large parts of Europe are becoming more landlord favourable, the report says.

It also points out that slower activity was seen in Central and Eastern Europe with a drop of 43% and London was 30% where it suggests occupier activity is being held back by uncertainty surrounding Brexit.

In the Americas the index was up 0.9% quarter on quarter and 3% year on year which was the 27th consecutive quarter of growth in the region for a cumulative increase of nearly 24%. The region’s index currently stands 8% higher than the previous cyclical peak reached in 2008.

The report explains that rime office rental rates were boosted during the first quarter as a raft of new office deliveries entered the market with premium asking rates. This is being felt principally in cities across the United States but also selectively elsewhere in the region, and nearly two thirds of the regional index’s constituent cities experienced growth in prime rents during the first quarter.

Rents were unchanged quarter on quarter in the Middle East and North Africa and the report points out that demand in the region continues to be subdued.

Global office leasing volumes for the full year 2017 are predicted to broadly match the levels recorded in 2016. The report says that with office completions expected to be 25% higher than last year, 2017 is likely to mark the peak of the development cycle and the global office vacancy rate is projected to trend slowly upwards during the remainder of the year to reach 12.1%.

Sydney and Melbourne are forecast to outperform in Asia Pacific but despite an increased volume of supply projected for Asia Pacific in 2017, economic and political uncertainty are expected to weigh on leasing levels, which are predicted to be lower by up to 5% than in 2016. Shanghai, Beijing and Seoul are projected to join Singapore in negative rental territory.

The report predicts growth of 1.5% to 2% in Europe and leasing volumes are forecast to be up to 5% lower than last year at 11.7 million square metres, although this remains above the 10 year average. ‘We expect completions to rise steadily throughout the year, with full year 2017 office deliveries forecast to be 25% ahead of the five year average,’ the report adds.

In the United States leasing momentum is expected to continue but at a more modest pace with a slight increase in gross leasing volumes projected for the full year. The report suggests that many secondary cities will continue to perform well and increasingly drive overall prime rental growth.

However, by 2018, increasing vacancy rates should begin to drag on rental growth with landlords likely to find themselves fending off increased competition and, in many cases, needing to backfill newly vacated blocks of space as tenants relocate to new product. In neighbouring Canada, its major office markets outside of Alberta may see somewhat stronger prime rental growth as tenant demand exceeds new supply.

Primary cities in Latin America present a mixed picture moving forward, the report adds and suggests that as Brazil’s economy turns the corner later this year its major office markets will return to more positive conditions by early 2018. Annual growth for the Americas Office Index is projected to be in the 2.5% to 3.5% range for year while a slowdown is likely beginning in 2018.

Subdued demand will weaken rents across MENA over the rest of 2017 and the report says that this will impose downward pressure on prime rents in most markets in the region, although high quality buildings in central locations are likely to maintain steady office rental performance over the year.