1 Global Office MarketView Uncertainty Abounds, Market Improves Global Research and Consulting Quick Stats CBRE Global Office Rent Index Q-o-Q % Change Y-o-Y % Change Global 0.9% 5.1% Americas 0.4% 1.5% Asia Pacific 2.2% 12.9% 0.1% 1.8% Hot Topics Rental growth in Asia Pacific boosted the CBRE Global Office Rent Index, which moderated in. Vacancy-rate improvements in the and were dampened by prevailing economic headwinds. The flight to quality for prime assets persisted across a full spectrum of global markets. The Q3 CBRE Global Office Rent Cycle saw the same 15 of 18 prime markets positioned past their respective troughs as in Q2. Tokyo, Madrid and Los Angeles were the only markets still experiencing declining rents on the CBRE Global Office Rental Cycle. OVERVIEW In response to the myriad economic obstacles presented in, global economic growth moderated during the quarter. Still, despite these hurdles and heightened downside risks, global office fundamentals improved. Net absorption moderated across all regions, and hesitance to make large-space commitments extended approval processes. Global vacancy fell 10 basis points (bps), while vacancy in the was unchanged and s declined 10 bps. Asia sustained a moresubstantial 40-bps drop, but even that was less than previous quarters: The vacancy rate dropped an average of 60 bps from Q through Q The CBRE Global Office Rent Index s increase of 0.9% in Q3 was the lowest quarterly rise since Q2 2010, when the index first emerged from the downturn. The CBRE Asia Pacific Office Rent Index helped to boost the CBRE Global Office Rent Index, growing by 2.2%. Meanwhile, rental growth in and the Americas remained muted as economic conditions strained office fundamentals across these Figure 1: CBRE Global Office Rent Index Quarter-over-Quarter % Change 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Q201 Q202 Data extends through. regions. The CBRE Americas Office Rent Index increased just 0.4% in Q3, representing its lowest positive quarterly increase since its recovery. Despite having emerged from the downturn first and undergoing the smallest peak-to-trough rental decline (12%), the CBRE Office Rent Index experienced a weak 0.07% quarterly increase. Q203 Q204 Q205 Q206 Q207 Q208 Q209 Global Americas Asia Pacific Q210 Q211 In the Q3 CBRE Global Office Rent Cycle, 15 of the 18 markets tracked were positioned past their respective troughs. This was the same outcome as Q2. However, Hong Kong and Singapore are seeing slower rental growth as a result of reduced take-up by companies that are growing more cautious about expansion and rising costs. The markets that experienced rent declines in Q3 were the same markets as those in Q2: Tokyo, Los Angeles and Madrid.
2 GLOBAL ECONOMIC BACKDROP The global economy was wrought with uncertainty in. Growth prospects for the remainder of 2011 and 2012 have been lowered as business and consumer confidence across much of Europe and the remains closely associated with the sovereign debt crises. As a result, there are now significantly heightened downside risks and uncertainties relating to a potential further weakening in economic indicators, especially in the advanced economies. Not surprisingly, in both Europe and the, unemployment is at record highs, as businesses maintain a cautious and lean approach in the face of restrained consumer spending and confidence. Meanwhile, though positive, economic growth in Asia Pacific is moderating, given that markets such as Hong Kong and Singapore are still quite externally oriented and vulnerable to reduced exports to the European and economies. Still, Asia Pacific s employment rate, consumer confidence and economic growth in Q3 remained strong. GLOBAL RENTS The CBRE Global Office Rent Index As occupiers displayed more caution in their demand for space in, the CBRE Global Office Rent Index saw only modest improvement of 0.9%. Nevertheless, this marked the sixth consecutive quarterly gain since Q1 2010, and the CBRE Global Office Rent Index s 5.1% year-over-year increase demonstrates that the global office recovery continued to progress. Notably, however, the 0.9% gain is the lowest recorded since the first quarter of recovery, and is 32 bps below the 1.2% average quarterly gain recorded since the trough. Asia Pacific once again boosted the CBRE Global Office Rent Index, positing a year-over-year increase of 12.9% in. However, the region recorded a modest 2.2% rise for, indicating that, even in the region with the strongest growth, rent increases have slowed. The CBRE Americas Office Rent Index rose 1.5% year over year and 0.4% quarter over quarter. Although the CBRE Americas Office Rent Index reached its trough in Q2 2010, this marks only the third consecutive quarter of rental growth, reflecting lingering economic strains. The CBRE Office Rent Index had the smallest quarterly increase among the three regions, with 0.07%. This is most likely reflective of continued stress caused by the sovereign debt crisis and policy debates. The CBRE Global Office Rent Cycle Though rental growth slowed in, 15 of the CBRE Global Office Rent Cycle s 18 prime markets passed their troughs, and only three markets experienced rental declines. Notably, in Q3, five of the markets were positioned with rents still rising but decelerating, compared to four markets in Q2. Figure 2: CBRE Global Office Rent Cycle, Rental Decline Accelerating Rental Decline Slowing Rental Growth Accelerating Rental Growth Slowing Markets do not necessarily move along the curve in the same direction or at the same speed. The rental cycle is intended to display the trend in net effective rents. Tokyo Madrid Los Angeles São Paulo Shanghai Hong Kong Singapore New York Paris Mexico City London West End Sydney Toronto Washington, DC Chicago Frankfurt Auckland London City The Greater China markets were the primary catalysts for rental growth in Asia Pacific and in the CBRE Global Office Rent Cycle. Still, Hong Kong and Singapore are considered to be near their respective peaks on the Q3 Rent Cycle, largely because cost-reduction initiatives among occupiers caused rental growth in these markets to soften. Specifically, reduced take-up by businesses in the financial sector led to an overall drop in leasing Page 2
3 activity. Coupled with the contraction in office-space demand resulting from economic uncertainty and lower occupier confidence, these factors indicate that rental growth for both markets will remain under pressure in the short term. The pace of rental growth has also slowed in New York, which moved up several positions on the CBRE Global Office Market Rent Cyle in Q3 (from an accelerating growth position in Q2). New York rents have increased for six consecutive quarters, though represented the smallest quarterly increase in growth during this time. CBRE Research has noted a recent increase in activity from technology firms seeking space in this market. Mexico City, São Paulo and Paris are all positioned between the categories of Rental Growth Accelerating and Rental Growth Slowing. Mexico City s office market has evolved into an attractive environment for global occupiers due to its relatively affordable rents, in comparison to other Latin American countries such as Brazil; however, its rental growth is expected to slow given that there is over 8.6 million sq. ft. (800,000 sq. m.) of class A+/A space under construction, nearly 30% of which will be delivered within the next six months. It is anticipated that lease rates will continue to increase, albeit at a slower place, over the next few quarters due to the new inventory that will be delivered to the market. Mixed-use development in Mexico City has gained traction, and local developers continue to focus on building integrated properties with recreational, commercial, office, residential and cultural space. Paris position in the CBRE Global Office Rent Cycle remained unchanged in Q3. Prospective occupiers in this market have a limited choice of prime, centrally located buildings, but a significantly greater selection of secondary space. Prime rents were unchanged at $ per sq. ft. per annum ( 830 per sq. m. per annum), and incentives remain high, with cost-containment still a strong motivation for occupiers. Frankfurt is positioned at the bottom of its cycle, even while Germany remains one of Europe s strongest economies. Little or no rental growth is expected over the next six months. Three markets on the CBRE Global Office Rent Cycle continued to suffer rental declines in Q3: Madrid, Tokyo and Los Angeles. Both Madrid and Los Angeles have been burdened by economic and employment challenges. The Madrid market continues to be affected by the fragility of the Spanish economy. In Los Angeles, unemployment is 40 bps above the state average, at 12.5%, and overall job growth during the past year has been flat. Following declines, rents in the Greater Los Angeles office market have flattened over the past three quarters and appear to be nearing the bottom of the cycle. Although the latest 12-month rent growth is negative, the rate of decline has been slowing. Tokyo s office market gradually improved in Q3 as a result of growing demand and the absorption of office space in both newly completed and existing buildings. Tenants were still looking to upgrade their space following the March 2011 earthquake, and strong demand prevailed for buildings with advanced energy supply and power-saving systems. With the influx of new supply, however, rental rates will remain on the decline before bottoming out at the end of next year. GLOBAL SUPPLY AND DEMAND Figure 3 depicts the global supply-and-demand conditions since Q While conditions have steadily improved, as indicated by gradually declining vacancy rates, the global vacancy rate was still 298 bps above its pre-recession low and only 61 bps below its cyclic high reached in Q This is underscored by the fact that global average quarterly net absorption for 2011 (positive 21 million sq. ft.) is still below the average quarterly rate recorded from 2003 to 2007 (positive 31 million sq. ft.). Fortunately for property owners, the average quarterly completions (16 million sq. ft.) for 2011 Page 3
4 remained well below the pre-recession quarterly average of 27 million sq. ft. recorded from 2003 to Thus, global completions abated in 2010 and 2011, helping to drive office demand and slowly absorb some of the vacant space in the market. Figure 3: Global Supply and Demand Net Absorption and Completions (Thousands) 50,000 40,000 30,000 20,000 10, ,000-20,000-30,000-40,000 Q101 Q102 Q103 Q104 Data extends through. The global series is a simple aggregation of the three regional series. Q105 Global Vacancy Comparison Figure 4 demonstrates the divergence in vacancy rates across the global regions: Q106 Q107 Q108 Q109 Completions Net Absorption Vacancy Rate Q110 Vacancy Rate Q111 16% 14% 12% 10% 8% 6% 4% 2% 0% vacancy rate in, falling to its lowest level since mid Additionally, vacancy rates in Tokyo, Hanoi and Seoul remained relatively low, but new supply in the pipeline will likely lead to increases in their respective vacancy rates in the coming quarters. Vacancy in the Pacific region also declined, especially for prime office buildings, which were in short supply. Those due to be completed in 2011 are, for the most part, pre-leased. Weak economic and employment growth continued to weigh on office fundamentals: vacancy remained flat during Q3 and ranked highest among the regions, at 16.2%. This vacancy rate is only 60 bps below its recessionary peak and 380 bps from its prerecession low. The is similar to, in that while conditions continue to improve gradually, a significant amount of progress is needed before the market can reach healthier vacancy rates and undergo more substantial rental improvements. Figure 4: Global Vacancy Perspective 18% 16% Cyclic High Cyclic Low While had the lowest vacancy rate of the major regions during Q3, its rate of 9.2% is only 20 bps lower than the highest rate reached in its cycle following its pre-recession low. Vacancy levels across the region re- 14% 12% 10% mained steady; however, markets such as London and 8% Milan saw marginal increases even despite limited development pipelines due to weakening occupier confidence and take-up. 6% 4% GLOBAL Meanwhile, the story in Asia was quite different. While Asia s vacancy rate of 9.3% was just 10 bps higher than s, it was 400 bps below its recession-peak rate, demonstrating that Asia recovered relatively more quickly than. Asia s spread to its pre-recession low, however, still amounted to roughly 300 bps, indicating that there is room for further recovery. Greater China continued to experience healthy improvement in its The cyclic low is the most recent low prior to the onset of the recession; the cyclic high is the high experienced following the cyclic low. As with other regions, great variation remains across markets in the Americas. Markets with healthy high-tech employment sectors, such as San Diego, Pittsburgh, Austin and San Francisco, as well as gateway markets such as Washington, DC and New York, have Page 4
5 experienced marked improvement. This is in contrast to the cities in the region still struggling with the housingmarket crisis, such as Phoenix, Miami and Jacksonville, which remain weak. In Canada, western markets such as Calgary and Vancouver led the region with strong vacancy declines. Calgary s decrease was driven by fluctuations in its energy sector, and Vancouver experienced increased demand in its downtown markets. Latin America s vacancy rate continued to decrease in Q3, falling to 7.2%. São Paulo and Lima had the lowest vacancy rates in the Latin American region, both below 2.0%, as a result of limited supply and strong demand conditions. Global Net Absorption Composition Net absorption remains well below pre-recession levels, both globally and in the major regions. Asia is the exception, where office demand has been stronger and absorption levels higher than their pre-recession levels. The average annual net absorption rate from 2003 to 2007 amounted to 9.4%, whereas the rates for Q1, Q2 and were 7.6%, 10.4% and 8.7%, respectively, indicating that leasing momentum in the region tempered in Q3. The cause is multifaceted: Occupiers became more cautious toward expansion, rents were high and economic uncertainty and volatility characterized the economic backdrop. In, the average annualized net absorption rate from 2003 to 2007 was 2.2%. During, the annualized rate was just 1.4%, a slight uptick from the Q2 rate of 0.8%, but still below healthier rates reached prior to the recession. For the, the average annualized net absorption rate from 2003 to 2007 was 2.3%. The rate was 0.4%, down from the Q2 rate of 1.1%, signaling that global economic concerns weighed on occupier sentiment. Figure 5 reveals that, following the recession, Asia has retained the majority share (48% for both year-to-date 2011 and full-year 2010) of global net absorption. This is in contrast to the period of 2003 to 2007, when its share was the minority (20%), and the led with the majority. Figure 5: Global Net Absorption Composition 26% 26% 2011 YTD 48% 29% 23% Several other noteworthy trends emerged in In the Pacific, for example, demand has been increasing for office buildings with high earthquake resistance and superior energy efficiency, as a result of the heightened focus on earthquake protection and compliance with new energy-use requirements. This flight to quality persists across a full spectrum of global markets, including Shanghai, Seoul, Hanoi, Ho Chi Minh City, Sydney, Toronto, Washington, DC, and São Paulo. These markets continue to experience a scarcity of prime office space. In contrast to markets in Asia Pacific such as Taipei, Kuala Lumpur, India and Melbourne, where most leasing deals were modest relative to their own market size in Q3, demand in has been driven by large space requirements. In Paris, for example, two major leasing transactions near the periphery of the city accounted for almost 25% of the Q3 leasing activity in that region % Global Completions Comparison 51% % Figure 6: Global Office Completion Rates Rate Rate Q Rate Q % Average Rate Global 7.00% 9.20% 4.70% 8.10% 1.10% 0.60% 1.00% 2.20% Asia 0.30% 0.20% 0.50% 1.40% 1.10% 1.10% 1.00% 2.00% The net completion rate is taken as a percent of total stock. Page 5
6 The commercial real estate market in general and the office market in particular have benefited from the dearth of new construction that has followed the recession. As shown in Figure 3, global construction completions have averaged 16 million sq. ft. per quarter during 2011 and approximately 19 million sq. ft. per quarter during 2010 well below the pre-recession average level of 27 million sq. ft. per quarter recorded from 2003 to While Asia s development pipeline has elevated its completion rates to pre-recession levels, the Pacific region continued to experience low new supply. In Asia, forecasted completions for the end of Q3 signal that some developers have reduced their pace of development. Meanwhile, the Pacific region was poised with high pre-commitment rates, rental growth and vacancy declines, given the market s lean supply. CONCLUSION While there was no shortage of economic hurdles in, global office fundamentals modestly improved due to steady, albeit weakened, occupier transaction activity. Vacancy declines in were minimal, and the decrease in Asia s rate was approximately half the average decline experienced in previous quarters. The vacancy rate remained flat over the quarter. Global net absorption has remained positive, but still subdued. Completion levels across the and remain well below pre-recession levels; consequently, vacancy and rental rates avoided further deterioration, and even maintained their respective levels. The CBRE Global Office Rent Index increased 0.9% in Q3, representing the lowest quarterly rise in the Index since it it reached its trough. The CBRE Asia Pacific Office Rent Index, which grew 2.2% in Q3, the most of the three regions, helped to keep the CBRE Global Office Rent Index rising. The CBRE and Americas Office Rent Indices both experienced only modest growth as result of prevailing broader economic obstacles weighing on their respective office fundamentals. Page 6
7 CBRE Global Research and Consulting is an integrated community of preeminent researchers and consultants who provide real estate market research, econometric forecasting, and corporate and public sector strategies to investors and occupiers around the globe. FOR MORE INFORMATION REGARDING THIS MARKETVIEW, PLEASE CONTACT: Abigail Pitzner Economist, Global Research and Consulting The CBRE Global Research and Consulting team would like to acknowledge Kim Mercado, Suzanne Barrett, Kevin Stanley, Richard Holberton and Michael Haddock for their contributions to this report. FOR MORE INFORMATION REGARDING GLOBAL RESEARCH ACTIVITY, PLEASE CONTACT: Nick Axford, Ph.D. Head of Research, Asia Pacific and Senior Managing Director, Global Research Peter Damesick, Ph.D. Chief Economist and Senior Managing Director, Global Research Asieh Mansour, Ph.D. Head of Research, Americas and Senior Managing Director, Global Research Follow Asieh on Raymond Torto, Ph.D., CRE Global Chief Economist and Executive Managing Director, Global Research Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. Page 7