Global office leasing volumes remain elevated

Global Market Perspective, August 2019

At 10.4 million square metres (across 96 markets), gross leasing activity stayed healthy in Q2, although volumes are now running below the record-breaking levels of 2018. Year-to-date leasing volumes are down by 5% on H1 2018, a rate of decline that we predict will play out during the rest of the year as demand begins to soften.

Demand for space still healthy with supply shortages constraining some markets

European office take-up during the first half of the year is broadly in line with the record 2018 result. Despite supply shortages continuing to restrict occupier activity across Europe, there remains healthy levels of expansionary demand, with European net absorption outperforming the 10-year average. Reflecting the late-cyclical occupier rally in Madrid, the Spanish capital saw second quarter take-up volumes jump 41% on a year ago and has witnessed its strongest first six months of the year since 2007.

The U.S. office market produced another robust outcome in Q2, with leasing activity at the high end of the range from recent quarters. Meanwhile, net absorption over the year-to-date now rivals the full-year total from 2018. Large blocks of space in key markets such as New York and San Francisco have driven overall net absorption, but the technology-oriented and mid-size markets continue to see the fastest growth rates. The technology and co-working industries remain the largest demand drivers, with co-working poised to take the top spot for the first time in the coming quarters. The co-working industry now boasts the largest individual tenant status/title<>? in several key markets such as New York and Washington DC.

Gross leasing volumes were down nearly 30% in Asia Pacific in the second quarter compared to a year ago. Limited availability of space has been a factor impacting new lettings in markets such as Bangalore, while in other markets economic uncertainty, trade tensions, and rising occupier costs have impacted sentiment and seen many firms delay decision-making. Financial, professional services and tech firms again buttressed leasing activity, with the Asia Pacific corporate sector making inroads and helping to counter some of the weakness of multinational corporations.

Global office vacancy rate falls to lowest point of the current cycle

Defying forecasts once again, the global office vacancy rate fell further in Q2 to 10.8% - the first time the rate has dropped below 11% since 2009. New office deliveries are anticipated to peak this year at over 18 million square metres, comparable to levels at the height of the last office construction cycle in 2008-2009. With completions likely to be one-third higher than in 2018, the global office vacancy rate is expected to start to edge up during the second half of 2019 to finish the year at around 11.3%.

Annual prime rental growth still trending at 4%

Rental growth for prime office space has remained remarkably consistent over the past two years, trending at an annualised average of 3.5% to 4% across 30 global cities. Boston tops the global ranking with rents rising at an annual rate of more than 20%, with Berlin and Singapore also recording double-digit growth. Aggregate rental growth for prime offices is forecast to stay positive for the rest of 2019, although slowing marginally to around 3% as supply options increase.