Global Office Rent Cycle MarketView

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1 Global Office Rent ycle arketview RE Global Research and onsulting Greater ivergence cross Global Rent andscape ot opics he mericas recovery fared best among the three regions. hicago witnessed strong demand over the last year, and construction began on the first speculative downtown office property since angkok, anila, aipei and okyo were of the few sia acific markets that witnessed moderate rental expansions during Q okyo s position shifted to accelerating rent growth due to a positive shift in occupier sentiment. In ublin, rents increased during for the first time since the financial crisis. he Global Office Rent ycle pointed to growing regional divergence in. Rents for markets in the mericas continued towards gradual recovery, while the majority of EE markets paused, awaiting more tangible improvements in economic conditions and occupier demand. eanwhile, sia acific markets remained dispersed across the full cycle. he RE Global Office Rent ycle positions office rents by market relative to their own unique rent cycle. he Global ycle tracks 18 key global markets, as presented in Figure 1, which broadly fell into two main stages of the cycle in. he first stage was the market trough. In, rents in Frankfurt, os ngeles owntown, uckland, ingapore and Washington.., reached or stayed at their bottom levels. eanwhile, modest growth manifested for hicago, os ngeles entury ity and okyo. os ngeles owntown and Washington.., were still hovering along their bottom levels as they were strained by weak economic recoveries. okyo improved positions in joining hicago and os ngeles entury ity in the moderately accelerating growth phase due to improvements in occupier sentiment brought on by renewed confidence in a potential turnaround for the Japanese economy. he second group of markets consisted of those near a cyclic high or, perhaps, a plateau. hese markets, including ondon and aris, were confronted with weak occupier demand. In some cases, such as in ondon, this prompted landlords to increase leasing incentives to counteract occupier reluctance. Other markets in this same group, including exico ity and ao aulo, saw an influx in new supply, serving to ease pressure on rents. few markets on the Global Office Rent ycle were positioned along the downward phase of the cycle. hanghai and ong Kong, which have previously experienced measurable improvements in rents, faced dampening headwinds such as slowing occupier demand and a arkets which previously underwent impressive growth on the back of technology-driven demand saw growth temper in Q Figure 1: Global Office arket Rent ycle, Rental ecline ccelerating Rental ecline lowing Rental Growth ccelerating Rental Growth lowing ondon ity hanghai ondon West End ydney New York - idtown N exico ity aris ão aulo oronto ong Kong adrid F os ngeles - owntown ingapore Washington.. W uckland Frankfurt hicago os ngeles - entury ity okyo ource: RE Research,.

2 decentralization trend. ingapore has seen rental declines over the past several quarters. owever office demand strengthened in and its position shifted closer towards reaching a bottom point as the rate of decline in rents for Grade buildings slowed. mericas Regionally, divergence distinguishes this quarter s results. he mericas recovery fared best among the three regions due to moderate occupancy improvements brought on by gradual gains in employment growth, limited supply and an improving housing sector in the U.. he mericas Office Rent ycle, shown in Figure 2, demonstrated broad improvement. hicago, hiladelphia, eattle, os ngeles entury ity, allas, enver, an iego and hoenix all moved up in their respective rental cycles. hicago witnessed strong demand over the last year, and construction began on the first speculative downtown office property since hortly after the ground-breaking ceremony, news surfaced that cermott, Will & Emery signed a letter of intent to lease 225,000 sq. ft. at this new development. any other properties in hicago are being converted from industrial and showroom space into office space in order to capitalize on the demand for loft office space. ositive performance throughout the U.. continued to be linked to technology- and energy-driven markets, which were the first to ascend into recovery. his included allas, which has demonstrated strong economic prospects and healthy tenant demand from not only the energy sector but also the legal, financial services, insurance and healthcare sectors. eanwhile, markets which previously underwent impressive growth on the back of technology-driven demand saw, not surprisingly, growth temper in. For example, an Francisco s rate of growth slowed from the sharp rises recorded over the last two years as a result of high asking rents and limited supply. Nevertheless, its growth is still anticipated to remain strong due to ongoing demand from technology tenants. EE EE s regional Office Rent ycle, shown in Figure 3, clearly differed from the mericas, with the majority of its markets still paused at, or near, a cyclic high. he isolated instances of rent growth were restricted to Northern and Eastern European markets. he near-term outlook for both ublin and anchester is positive, with rents in anchester, which have stabilized in recent quarters, rising as the city s strong employment conditions are expected to result in steady rental growth for the remainder of In ublin, rents increased during Global Office Rent ycle arketview Figure 2: mericas Office arket Rent ycle, uenos ires Rental ecline ccelerating Rental ecline lowing Rental Growth ccelerating Rental Growth lowing tlanta hicago allas Uptown/urtle reek enver os ngeles entury ity anama ity hiladelphia hoenix an iego os ngeles owntown eattle iami Northern New Jersey N Orange ounty O Washington.. W ustin oston allas reston enter ima ouston New York idtown Rio de Janiero an Francisco antiago N R algary ontreal exico ity ão aulo oronto Vancouver V ource: RE Research,. Figure 3: EE Office arket Rent ycle, Rental ecline ccelerating Rental ecline lowing Rental Growth ccelerating Rental Growth lowing msterdam erlin usseldorf irmingham Edinburgh E russels amburg openhagen Istanbul I elsinki Geneva Oslo O ondon ity unich thens Vienna V ondon West End arcelona aris ucharest ublin Rotterdam isbon udapest oscow tockholm adrid F Frankfurt anchester Warsaw ilan rague Zurich Rome R G R W Z 2 ource: RE Research,.

3 3Global Office Rent ycle arketview for the first time since the financial crisis. Vacancy in these markets remained high on an overall basis, but availability levels for prime space was limited, which should result in further rental growth during the remainder of the year. he broad theme of stabilization held true for the majority of EE markets featured in Figure 3. ondon West End and ondon ity, both positioned at a cyclic high in Q1 2013, reached their plateau between their respective trough and pre-recession peaks due to exceptionally muted demand conditions. ake-up in the entral ondon market in fell 13% quarter-over-quarter to 2.5 million sq. ft., standing well below the 10-year average of 3.0 million sq. ft. his was despite a major transaction early in the year, when Google signed for a 725,000-sq.- ft. new build-to-suit office campus at King s ross in the idtown submarket. Without this large exceptional transaction, take-up would have fallen to its lowest quarterly level since s such, rents are expected to stabilize for the remainder of the year as occupiers stay on the sidelines until the economic environment improves. imilarly, aris take-up also suffered during, falling to 393,500 sq. m. (4.2 million sq. ft.), representing the lowest level of quarterly take-up since 2009 and the worst first quarter since hese dampened results were due to the absence of large transactions in Q1 2013, with the number of deals for more than 5,000 sq. m. (54,000 sq. ft.) falling to 12, compared to 20 in the previous quarter. s expected, demand from the public sector, which supported take-up levels in 2012 with some exceptionally large deals, fell away completely during the quarter. emand from the private sector continued to be subdued, and companies were reluctant to expose themselves to the capital costs of relocating and the commitment of new leases while the French economy remained in a fragile state. he lack of new developments in both ondon and aris served to hold rents at their respective cyclically high levels. K Figure 3: sia acific Office arket Rent ycle, delaide angalore Kuala umpur hanghai sia acific sia acific markets remained dispersed across the full range of the rental cycle, experiencing muted demand during the quarter against a subdued economic backdrop. Occupiers were reluctant to commit, focusing instead on cost containment and relocations that achieve cost savings. angkok, anila, aipei and okyo were the few markets that witnessed moderate rental expansions during Q okyo s position shifted to accelerating rent growth with improvements in Grade rents and vacancy levels due to a positive shift in occupier sentiment following the election of the iberal emocratic arty. Notably, okyo s rental increase extended beyond just high-specification buildings in good locations. oreover, several sectors which had previously been dormant, including manufacturing and trading companies, became active during the quarter. angkok and aipei also witnessed strengthened leasing demand. aipei recorded the largest quarterly increase across the region, with a gain of 2.7% quarter-overquarter, and Grade rents in angkok s central business district are expected to continue escalating as demand remained strong, supply of available space is limited and no new supply is expected to come online until aipei also experienced a slight increase in rents during. owever, similar to many sia acific markets, leasing was driven by demand for smaller spaces from domestic and regional firms, as demand for larger spaces from multinational corporations remained relatively weak. Elsewhere along the sia acific cycle, an element of convergence has developed along the peak and downward phase of the cycle. easing environments in markets such as hanghai, ydney and umbai were muted amid weak expansionary demand from multinational companies, with occupiers focusing on decentralization in hanghai and on cost containment and renewal strategies in ydney and umbai. Rental ecline ccelerating Rental ecline lowing Rental Growth ccelerating Rental Growth lowing elbourne umbai ydney risbane anoi ong Kong eoul G W uckland anberra Guangzhou ity ingapore Wellington angkok anila aipei okyo J Jakarta eijing erth New elhi henzhen N ource: RE Research,. 2013, RE, Inc.

4 ong Kong has already recovered a significant portion of its pre-crisis peak levels, with rental rates at record levels. owever, ong Kong saw a marginal decline in Grade rents in following two quarters of flat growth. Notably, entral was the only market to record negative net absorption in the region during the quarter. eanwhile, decentralized districts on both ong Kong Island and Kowloon continued to garner stronger occupier interest, but this did not translate into new leasing, as vacancy remained tight in these areas. ong Kong will continue to be a tight market for occupiers, as only seven development projects, totaling approximately 781,000 sq. ft., will come online this year, of which two were already pre-leased en-bloc and some are likely to be sold strata-titled. dditionally, the amount of secondary space coming on the market in 2013 may be far less than expected. Rents are therefore expected to continue on an uptrend in non-core areas where there is high demand for cost-effective space. onclusion Improvements in the Global Office Rent ycle this quarter were divergent, with the most broad-based growth occurring in the U.., particularly in markets with connections to energy, technology and healthcare industries such as ouston, eattle and allas. With slowly improving employment fundamentals and a recovering housing industry, U.. markets are anticipated to continue along a gradual path towards recovery. Elsewhere in the mericas, rental growth in ão aulo and exico ity cooled as a result of supply conditions. emand from local and international occupiers in exico ity remained healthy and the outlook is positive. eanwhile, the outlook is stable for ão aulo. oronto will also remain stable in the near term until a large influx of supply comes to market during 2014, 2015 and onsiderably weak demand was recorded in EE markets such as aris, ondon and Frankfurt, where an absence of large transactions was noted. owever, for many EE markets, such as ondon and aris, the shortage of prime space and low construction levels have served to maintain rents levels while occupiers remain reluctant to commit to the costs of relocation and expansion. he outlook for most European markets is one of stability due to shortages of prime space and occupier reluctance to expand until a more substantial economic recovery takes hold across the region. rime office rental growth across sia acific was relatively flat during the quarter, with only slight increases in markets such as angkok, anila, aipei and okyo. ost occupiers in sia acific, such as those in ong Kong, umbai, ydney and hanghai, remained cautious and focused on renewal, consolidation and cost containment strategies. Global Office Rent ycle arketview ethodology: Office ycles he Global and Regional Rent ycles are determined through a collaborative process with RE researchers and market professionals in local markets. he cycle is intended to illustrate the office rent cycle for (a) core locations that (b) tend to attract the highest rents, which (c) represent the principal concentration of major occupiers in a city. In many cases this will be the, but need not be. here may be more than one of these in a given market (e.g. West End and ity in ondon) which have different characteristics and rent dynamics. Each quarter, the local market teams evaluate the market for prime space and prime rent within the context of the rent cycle s defined positions. ased on exposure to market trends and expertise in identifying local market conditions, a market is positioned on the cycle by each team. In addition, each local market provides thorough, written justification and rationale for its current market position, as well as the change in position from the last report. Regional research leadership then reviews all local market segments, positioning, and written justification and provides their approval. Global leadership serves as the final review phase. Regional and Global leadership focus carefully on ensuring that all market position changes are consistent with the position definitions to ensure that each market can reliably be compared both regionally and cross-regionally against other markets on the global cycle. here are four main segments to the cycle: Growth ccelerating, Growth lowing, ecline ccelerating and ecline lowing. Inflection points are positioned between each broad category. Within each broad category, there is one sub-position. he osition efinitions include qualifying statements referencing not only what occurred in rime Office rents during the previous quarter, but also explanatory statements regarding the direction (growth or decline) and magnitude (accelerating or slowing) rents are anticipated to move in the next quarter. y including both backward and forward-looking statements, the ositions are intended to capture each market s unique stance in its unique rent cycle. 1 he Rent ositions are not aimed at serving as formal forecasts for rime rent, rather forward-looking statements are utilized and included to assist local market researchers in distinguishing various positions he duration and magnitude of rent cycles vary considerably by market. ome may undergo very tight/short cycles with very small peak to trough changes, while others may experience longer cycles with much larger rent variations.

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