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Optimism filters through the office market

Global Real Estate Perspective, August 2021

Many office markets around the world showed tentative signs of improving in Q1 2021 and this trend has solidified and continued into Q2. However, the effects of COVID are varied and a multi-speed recovery is emerging dependent on vaccination rates, outbreaks and societal restrictions in place. This has all flowed through to office market activity; that said, the overall trend globally is for improving activity.

Quarterly global leasing volumes are 44% higher than a year ago but remain 36% lower than Q2 2019. Across all three regions leasing volumes are below the levels of two years ago with the U.S. the hardest hit, while Europe and Asia Pacific are closer to a return to more ‘normal’ levels.

Office re-entry rates vary significantly by country and this is adding to uncertainty around long-term space planning for occupiers. Tenant-friendly conditions persist in most markets and global vacancy continued its upward trajectory, adding 60bps over the quarter to 14.3% - the highest level since 2011 and over 350bps higher than at the start of the pandemic.

In 2020, market restrictions and supply chain disruptions caused delays to many construction projects. Most of these issues have now been resolved and construction is picking up sharply. Development completions in 2021 are expected to be 35% up on 2020, with the U.S. and Europe seeing the largest jump in deliveries. Looking forward over the next 12 months, breaking ground on new projects is likely to be constrained to a limited number of markets with low vacancy or significant pre-leasing.

Future Trends: An ongoing flight to quality
  • Remainder of 2021: There is a cautious optimism for leasing activity through H2 as forward-looking indicators in Europe, the U.S. and parts of Asia Pacific signal that leasing activity will continue to pick up. That said, leasing volumes are likely to remain below the long-term average. Additionally, further lockdowns are likely to hamper corporate activity in countries struggling with new outbreaks.
  • Long-term: The need to ensure employees’ health and well-being along with an increasing focus on ESG credentials will further intensify the flight to quality, placing greater upward pressure on second-generation asset vacancy and potential obsolescence. Occupancy and effective rents will rebound faster for premium and prime buildings as well as differentiated and highly amenitized submarkets.