Momentum slows as restrictions hamper activity

Global Real Estate Perspective, February 2021

Uncertainty pervaded the office market at the end of 2020 as tenants and owners alike navigated rapidly changing conditions, further COVID outbreaks and concerns about new variants. The fourth quarter marked a third consecutive quarter of limited activity with delayed decision-making, ongoing renewals and rising vacancy. Global leasing volumes were 43% lower in Q4 from a year earlier as momentum in the market slowed on the back of new outbreaks combined with heavier restrictions. Asia Pacific and the Americas recorded lower transactions over the quarter whereas Europe stood out as the exception with a stronger Q4 (+31% quarter-on-quarter). However, this still marks the lowest Q4 volumes in Europe since 2002.

Market conditions remain tenant-friendly as incentive packages continue to increase and headline rents come under downward pressure. Global vacancy jumped 80bps to 12.9% in the fourth quarter – the highest level since 2014. Tenants continue to have slow decision-making processes and remain cost conscious in this uncertain environment.

The expectation at the start of 2020 was that it would be the peak year for development completions as the supply cycle ramped up. Construction delays due to restrictions and supply chain disruptions caused slippages to development timelines and some projects were moved into 2021. Completions in 2021 are now projected to be 41% higher than in 2020 which in turn will put further pressure on the vacancy rate, especially when combined with improving but still below-average leasing demand.

Office Rental Growth: 10 Leading Global Cities
Future trends: Employee health and wellbeing now a top priority
  • Short-term: This year is expected to be one of two halves, with very cautious optimism that the second half of 2021 should lead to the release of some pent-up demand as vaccination rollouts result in reduced restrictions. The focus on cost management and renewals is likely to continue, while the short-term nature of many leases signed in 2020 is anticipated to further prolong the leasing market’s recovery, albeit only moderately.
  • Long-term: Many owners and investors are now placing health, safety and wellbeing top of mind for future requirements which is likely to lead to an increasing polarization between prime and secondary stock. Lower workplace density and reconfigurations to handle greater logistical flexibility should help to keep overall office utilization and occupancy more stable than previously expected.