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Global office demand slows amid uncertainty

Global Market Perspective, February 2020

2018 was the peak for global office leasing volumes, with a slowdown recorded in Asia Pacific and the Americas in 2019. Economic uncertainty created by U.S.-China trade tensions along with political unrest has flowed through to corporate decision-making. Even so, demand remains at solid levels and, in some markets, activity is constrained by a lack of available space. Uncertainty created by economic, geopolitical and sectoral headwinds is likely to endure into 2020, leading to a further gradual slowing of demand across all three regions.

Occupier activity moderates in final quarter of 2019

Net absorption in the U.S. reached a cyclical high in 2019 despite a 6% decline in leasing activity thanks to major office tenants across industries expanding into newly completed space, a consistent preference during this cycle. However, a cooling in demand was recorded in Q4 as the co-working industry hit ‘pause’. Virtually all net absorption in 2019 occurred in class A assets, emblematic of the ongoing flight to quality in the office market. On a geographical basis, technology-oriented and Sun Belt markets continue to drive net absorption. Silicon Valley, Dallas, Phoenix, Austin, Charlotte, San Francisco, Boston and Houston, just 8 markets, accounted for roughly 44% of the occupancy gains in 2019.

The European office market notched up a record year in 2019 with take-up of 14 million square metres, up 2% from 2018. However, a slight slowdown was recorded in the final quarter. Healthy levels of expansionary demand continue across the region, with European net absorption outstripping the 10-year average by around 20% in the final quarter of 2019.

Economic, geopolitical and sectoral headwinds contributed to a softening in new letting activity across Asia Pacific throughout 2019, with volumes down 12% over the year. Only Australia, South Korea and Vietnam recorded an increase on 2018. With uncertainty created by these headwinds likely to endure into 2020, caution is expected to remain a key feature in many markets.

Global office vacancy rate stabilises

The global office vacancy rate stabilised at 10.7% in the final quarter of 2019. This is expected to be the turning point of the cycle as vacancy rates continued to move lower in Europe but started to increase gradually in the U.S. and Asia Pacific. Globally, new office deliveries are projected to reach 19.8 million square metres in 2020, the anticipated peak of the cycle. Given the pick-up in completions, the global office vacancy rate is forecast to edge up to 11.2% in 2020.

Annual prime rental growth slowing but remains positive

Global prime office annual rental growth slowed to 3.2% in Q4 2019. The standout performers with double-digit increases were Boston, San Francisco and Toronto. Aggregate rental growth for prime offices across the 30 global cities is likely to stay positive in 2020 but ease further to around 0.9% as supply options increase.