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Office leasing volumes healthy but trending downwards

Global Market Perspective, November 2019

Global leasing activity remained healthy in the third quarter of 2019 but volumes slowed to 10.4 million square metres (across 96 markets). Year-to-date leasing volumes are now running 3% below last year, predominantly driven by a slowdown in Asia Pacific. This trend is forecast to continue with global volumes expected to end the year around 5% lower than 2018, with a further slowing of around 10% anticipated in 2020.

Occupier demand resilient despite signs of slowing

Robust occupier demand pushed European office take-up to the highest Q3 levels on record during the quarter, and a 7% increase on the same period in 2018. In line with last quarter, Central and Eastern Europe outperformed Western Europe with a 30% rise in activity. Despite supply shortages continuing to restrict occupier activity across Europe, healthy levels of expansionary demand remain, with European net absorption outperforming the 10-year average by more than 140% in Q3.

Office fundamentals remained solid in the U.S. during the third quarter, but some early signs of slowing emerged. Leasing activity totalled 5.3 million square metres, the lowest level since Q1 2017. Full-year volumes are expected to be around 4% lower than last year’s level. Meanwhile, U.S. net absorption remained robust with demand focused on class A assets. Net absorption remains the strongest in technology-oriented and mid-sized metro areas such as Silicon Valley, the San Francisco Peninsula, Austin, and Charlotte.

Gross leasing volumes were down around 20% year-on-year in Asia Pacific in during the third quarter as economic uncertainty and limited vacancy impacted new letting activity. Leasing activity in some markets was largely driven by renewals. Financial, professional services and tech firms were key drivers of demand while demand from flexible space providers was patchy.

Global office vacancy rate edges lower

The global office vacancy rate edged down to 10.6% in Q3, which is expected to be the low point of this cycle. New office deliveries are expected to reach 17.5 million square metres in 2019 and peak in 2020 at close to 18.8 million square metres. The peak of the cycle varies by region, and is expected to be 2019 in the U.S., 2020 in Asia Pacific and 2021 in Europe. Given the pick-up in completions, the global office vacancy rate is expected to start to move up, to 11.2% in 2019 and 11.7% by the end of 2020.

Annual prime rental growth slowing but remains positive

Prime office rental growth slowed slightly during the third quarter to an annual rate of 3.7% across 30 major global markets. Aggregate rental growth is expected to remain positive for the remainder of 2019, ending the year around 3%. As supply options increase in 2020 growth is expected to moderate further to around 1.5%. Boston, Singapore and New York are on track to be the top rental performers in 2019.