Global Office Rent Cycle MarketView

Transcription

1 Global Office Rent Cycle MarketView CRE Global Research and Consulting A DIPARATE WORLD The performance of CRE s Global Office Rent Cycle during reflected a disparate world. Overall, the majority of the 19 markets remained on the upside of the Global Cycle, with only four at the nadir. even of the 19 markets moved positions during. However, unlike previous quarters, most movements were not improvements from the viewpoint of property owners. In the Americas, rental decline accelerated in ão Paulo as additional new supply additions placed downward pressure on rents. Washington, D.C., which was thought to be at the nadir of the cycle in Q3 2013, saw some further deterioration during the final three months of the year as a result of continued cutbacks by the U.. government. Meanwhile, rents in Toronto plateaued in anticipation of new supply additions. Among the European markets, Madrid s office market stopped seeing rental declines and reached its cyclical trough. On the other end of the spectrum, the two London submarkets London City and London West End saw stronger upward momentum in rents amid a surge in take-up activity. In Asia, rental growth accelerated in ingapore as stronger occupier demand led to the market s first quarter of rent growth since Q Meanwhile, rents in Auckland inched down slightly, although local market sentiment remained positive amid an increase in leasing inquiries. AMERICA Chicago During, the Chicago central business district (CD) experienced a slight decrease in the number of large leases, with three transactions greater than 100,000 sq. ft. completed during the quarter, compared to five during Q There were no new construction completions during, but, as of the end of the quarter, 1.6 million sq. ft. of office space was under construction. Net absorption reached 428,284 sq. ft. during, an improvement from 266,481 sq. ft. in Q The overall vacancy rate also declined during, from 14.7% to 14.4%, while the sublease vacancy rate was unchanged at 1.0%. The full-spectrum CD gross weighted asking rate increased to U$33.45 per sq. ft. per annum in Q from U$33.26 per sq. ft. per annum in Q Landlords remained less flexible regarding rents and instead offered higher abatements. The Chicago metropolitan area unemployment statistics reported a November preliminary Figure 1: Global Office Market Rent Cycle, Rental Decline Accelerating Rental Decline lowing Rental Growth Accelerating Rental Growth lowing ão Paulo hanghai ydney Mexico City M New York - Midtown N Toronto T London City L London West End L Paris P W Washington D.C. H Hong Kong A F Los Angeles - Downtown L Madrid M Auckland Frankfurt C Chicago L Los Angeles - Century City T Tokyo ingapore ource: CRE Research,.

2 Figure 2: Americas Office Market Rent Cycle, C P V Rental Decline Accelerating Rental Decline lowing Rental Growth Accelerating Rental Growth lowing Calgary Austin A Montreal Atlanta A Panama City Lima L Rio de Janiero C uenos Aires Chicago Mexico City M Vancouver Toronto Dallas Preston Center D New York Midtown N Denver D an Francisco Los Angeles Century City L antiago ão Paulo Miami M oston eattle Orange County O D Dallas Uptown/Turtle Creek Philadelphia P H Houston Phoenix P Washington D.C. W an Diego ource: CRE Research,. Los Angeles Downtown Northern New Jersey unemployment rate of 8.1%, a decrease of 110 basis points (bps) since August. L N Grand Tower broke ground. The project is Downtown Los Angeles first Class A office development in 22 years. M R T Global Office Rent Cycle MarketView During, seven Class A and office buildings, totaling an estimated U$1.8 billion, were sold. Overall, 20 buildings sold during 2013, collectively valued at approximately U$3.3 billion. Los Angeles Downtown and Century City As a whole, the Greater Los Angeles office market continued to experience strengthening market fundamentals during. Increased job growth, particularly in the office sector, remained on an upward trend. The market also continued to witness steady positive net absorption and occupancy levels, while rents increased modestly. The overall vacancy rate in Los Angeles County declined slightly to 16.5 % at the end of, a result of positive net absorption in most submarkets. The market experienced steady activity from mid- to large-sized tenants. Media, entertainment and healthcare companies accounted for half of the quarter s top 10 transactions. Despite the overall growth in the Greater Los Angeles office market, the Downtown submarket continued to experience weak fundamentals. Total net absorption for the quarter remained relatively stagnant, registering at just over negative 66,000 sq. ft., the bulk of which was in Class A properties, pushing the full-year net absorption tally to negative 94,000 sq. ft. The Downtown Los Angeles overall vacancy ticked up 20 bps during the quarter to end 2013 at 19.2%, the second highest rate of the Los Angeles submarkets. The weighted average asking lease rate for office space in Downtown Los Angeles increased slightly in, ending the quarter at U$34.72 per sq. ft. per annum, up from U$34.58 per sq. ft. per annum in Q During the quarter, the 390,510-sq.-ft. office portion of the 1.3 million-sq.-ft. mixed-use Wilshire The performance of Los Angeles s suburban office market continued to be divided during the recovery stage. ubmarkets with a higher concentration of technology, media and entertainment companies, sectors that have continued to drive new space demand, experienced the strongest market fundamentals. Typically, these types of companies favor creative buildings, which has resulted in less tenant demand in markets with concentrations of traditional, high-rise office space. During, the West Los Angeles submarket saw 48,000 sq. ft. of negative net absorption. However, West Los Angeles posted 881,000 sq. ft. of positive net absorption for the year. The overall West Los Angeles vacancy rate ticked up 10 bps during the quarter to 14.8%. The Century City submarket saw roughly 65,000 sq. ft. of negative net absorption in, although the fullyear net absorption mark was positive 79,000 sq. ft. At year s end, the overall Century City vacancy rate stood at 13.9%. During the quarter, Century City s average asking lease rate increased 0.5% to end 2013 at U$47.88 per sq. ft. per annum. New York Midtown The unemployment rate in New York City decreased 70 bps quarter-over-quarter to 8.0%, and was still above the national average of 6.7%. Midtown leasing activity for Q totaled 4.0 million sq. ft., up from 3.6 million sq. ft. of activity in Q Midtown full-spectrum average asking rent saw a healthy increase of 4.0% to U$72.85 per sq. ft. per annum during the quarter, up from U$70.19 per sq. ft. per annum in Q

3 3Global Office Rent Cycle MarketView Midtown s vacancy rate decreased 10 bps quarterover-quarter to 8.4%. Midtown s availability rate, which is vacant space plus available space ready for tenant occupancy within 12 months, decreased 60 bps quarterover-quarter to 11.7%. Net absorption for Midtown (based on available sq. ft.) was positive 1.3 million sq. ft. in, up from the positive 590,000 sq. ft. logged during Q Construction continued on two projects, totaling 2.2 million sq. ft., and two other projects delivered during. Washington, D.C. A 16-day federal government shutdown thwarted local employment growth during. Although total employment for the Washington, D.C. metro increased by 24,100 payrolls over the past year (November 2013 vs. November 2012), office-using employment decreased by 4,400 jobs, mostly due to downsizing by the federal government and its contractors. In the District of Columbia, numerous renewals and limited growth among smaller firms (under 20,000 sq. ft.) resulted in 373,000 sq. ft. of net absorption for New office deliveries were at historical lows, helping to keep the vacancy rate in check, at 10.8% as of. Although two speculative buildings were delivered fully vacant in the NoMa submarket during 2013, new class A space that came on line in the core markets of the CD and East End delivered 88% preleased. With reduced leasing activity, asking rents decreased slightly and concessions remained high to retain tenants and stimulate demand. Average asking rents for trophy buildings downtown decreased 2.9% over the year to U$71.16 per sq. ft. per annum, full service, and average rents for Class A buildings declined 1.3% year-over-year to end 2013 at U$53.00 per sq. ft. per annum, full service. Toronto Averages asking rental rates in Toronto reached a plateau and are expected to remain unchanged or begin decreasing in the coming quarters. The Downtown Class A average asking net rental rate edged up U$0.19 (CA$1.06) during to U$25.50 per sq. ft. per annum (CA$27.09 per sq. ft. per annum). Although rental rates in the very tight Financial Core market have outperformed the market as a whole, during the Financial Core experienced a quarter-over-quarter rental rate decrease of U$0.59 per sq. ft. per annum (increase of CA$0.40 per sq. ft. per annum). (The quarterly decrease reported in U.. currency was primarily the result of exchange rate fluctuations.) With vacancy levels in the Greater Toronto Area (GTA) and the Financial Core on the rise, landlords have begun putting the brakes on asking rental rate increases. The amount of new construction in the GTA continued to increase, standing at 6.6 million sq. ft. as of Q4 2013, 5.1 million sq. ft. of which is in the Downtown, where the supply pipeline is at highs unseen since the construction boom of the late 1980s and early 1990s. ublease vacancy was also on the rise in the GTA, putting pricing pressure on landlords that compete with highly discounted sublease rents. Demand has slowed as many tenants completed deals in recent quarters. As a result, net rents are believed to have plateaued and are not expected to increase in the coming quarters. Furthermore, as the beginning of the new supply wave in late 2014 and beyond comes closer, there is the potential for further slight decreases in net asking rents as landlords look to attract tenants. Mexico City Mexico City s office market the largest in Latin America is under transformation. marked the eighth consecutive quarter in which Mexico City had a construction pipeline of at least 1.0 million sq. m. (nearly 11 million sq. ft.). Almost 390,000 sq. m. (4.2 million sq. ft.) was added to the inventory in 2012 and an additional 700,000 sq. m. (almost 7.5 million sq. ft.) will be delivered during The bulk, or 74%, of projects under construction are concentrated in the Polanco, Reforma, and Insurgentes submarkets. The Lomas-Palmas submarket continued to command the highest rents in the market and has experienced steady rental growth, with the average Class A asking rate increasing at an annual rate of 2.5% in. However, rent growth is expected to moderate in the coming quarters due to the market s large construction pipeline. During, Mexico City s vacancy rate increased from 10.2% to 11.5% and saw a healthy 18,611 sq. m. (over 200,000 sq. ft.) of positive net absorption. ão Paulo Nearly 90,000 sq. m. (more than 968,000 sq. ft.) of high-quality office space delivered during, leading to a 7.6% increase in ão Paulo s inventory during The influx of new supply put downward pressure on asking rates, though tenant demand has remained steady. Although rents are believed to have plateaued and are expected to remain stable in the short term, there is an expectation that there will be downward pressure over the longer term due to four main factors: Despite healthy positive net absorption of 71,000 sq. m. (nearly 764,000 sq. ft.), the overall vacancy rate rose 20 bps quarter-over-quarter to 14.5% during. More supply deliveries are expected in the

4 coming quarters which, coupled with slowing economic conditions, could lead to a slight decrease in demand, potentially pushing asking rates down further. However, a significant decrease is not likely. Landlords may begin offering more incentives as new buildings continue to become available. AIA PACIFIC Hong Kong Prime rents in Central marginally picked up by 0.7% quarter-over-quarter, ending the year at U$ per sq. ft. per annum (HK$ per sq. ft. per month). Overall Grade A rents continued to fall, declining 1.3% quarter-over-quarter to U$91.87 per sq. ft. per annum (HK$59.36 per sq. ft. per month). Grade A rents in Hong Kong witnessed some corrections on both sides of the harbor, with rents dropping in core areas as well as the midtown and decentralized districts. Occupier demand was subdued on Hong Kong Island and mostly focused on cost-effective space across the various submarkets. Tenants, especially those with large space requirements, opted to renew rather than relocate given ongoing concerns over capital expenditures and the lack of alternative options elsewhere in the market. Leasing activity in Kowloon increased amid some large space requirement from the retail and insurance sectors, but there was not much new demand and most deals involved companies relocating to save costs. The overall net absorption returned to positive territory, at 120,766 sq. ft., compared to negative 335,531 sq. ft. in Q3 2013, which drove the vacancy rate to 3.8%, down 20 bps over the quarter. Tenant retention will be the key objective for landlords in Landlords are expected to become more realistic during the rent negotiation process. As such, overall Grade A rents are likely to stay flat in In Central, despite recent activity in some Grade A1 buildings, downward rental pressure could remain in the CD area given potential future vacant spaces coming up in Occupier demand is expected to remain weak in the first half of 2014, but activity may increase in the second half as companies gear up for business growth in hanghai Prime rents in hanghai held firm for the sixth consecutive quarter, standing at U$ per sq. ft. per annum (RM per sq. m. per month). Meanwhile, the drop in Grade A rents narrowed to 0.01% quarter-over-quarter to U$83.97 per sq. ft. per annum (RM per sq. m. per month). Rents in Pudong and Puxi continued to diverge. Average rents in Pudong rose 0.4% quarter-over-quarter on the back of strong demand from domestic tenants in financial services. Meanwhile, Puxi saw a 0.6% quarter-over-quarter decline as landlords became more flexible on leasing terms in light of upcoming supply pressure, especially those of aged projects along Nanjing West Road and Huaihai Middle Road. Renewals and tenant movements to decentralized areas continued to account for the bulk of market activity during. However, leasing inquires and on-site inspections increased as occupiers evaluated opportunities ahead of the upcoming supply spike in 2015 and Net absorption remained steady at positive 129,750 sq. m. GFA (XX sq. ft.) for third consecutive quarter, while the market s overall market vacancy rate was unchanged at 7.0%. New completions in 2014 are projected to total 1.3 million sq. m. GFA (XX sq. ft.). The majority of new stock will be located in Puxi. Given the low pre-commitment Global Office Rent Cycle MarketView Figure 3: Asia Pacific Office Market Rent Cycle, K Kuala Lumpur Rental Decline Accelerating Rental Decline lowing Rental Growth Accelerating Rental Growth lowing M P Melbourne ydney Perth hanghai C M A Canberra Mumbai Adelaide Hanoi Hong Kong H H risbane eoul G H W Guangzhou HCM City Wellington T A ingapore Tokyo Auckland T M Jakarta angkok Taipei Manila J New Delhi eijing henzhen angalore N 4 ource: CRE Research,.

5 5Global Office Rent Cycle MarketView rate, this submarket will likely continue to witness further downward pressure on rents. Tokyo Tokyo continued to see strong occupier demand and activity from domestic corporate users. Grade A weighted average achievable rental growth in Tokyo (excluding CAM) increased a marginal 0.2% quarter-over-quarter to U$83.43 per sq. ft. per annum ( 26,000per tsubo per month). Tenant activity included expansions, both upon relocation and also for existing spaces. The period saw strong demand from consumer-related sectors such as amusement companies as well as domestic securities, non-bank financials and apparel occupiers. Elsewhere, demand from information technology-related companies such as online gaming and e-commerce remained active in the hibuya/ebisu submarket. Net absorption was up by 39% quarter-over-quarter to 7,000 tsubo (XX sq. ft.). With no new Grade A buildings completed during, the quarter s net absorption helped push down the vacancy rate from 7.7% in Q to 7.1% in. On an annual basis, net absorption for Grade A buildings was 81,000 tsubo (XX sq. ft.), outstripping new supply of 67,000 tsubo (XX sq. ft.). ix new buildings, with a total leasable area of 102,000 tsubo (XX sq. ft.), will come on line during the first half of ome are expected to be completed with full occupancy. Economic growth momentum will continue as long as the ank of Japan maintains its monetary easing policy in Rents are expected to enjoy growth of 5%-7% in 2014 on the back of stronger demand as a result of recovery in corporate earnings and diminishing vacant space. ingapore ingapore s Grade A rents posted its first quarter of growth since Q1 2012, a stronger signal of market recovery, with Grade A rents rising 2.1% quarter-overquarter to U$92.70 per sq. ft. per annum ($9.75per sq. ft. per month). Market activity in decentralized areas has remained fairly strong thanks to high pre-commitment levels at two new office developments: the sq.-ft. Jem project, which was fully-committed to MND, and the 629,600-sq.- ft. Metropolis Tower 2, which was more than 90% pre-let upon opening. More encouraging, there was also a significant uptick in leasing activity in the CD, especially in Grade A properties. This included relocation activity spurred by opportunities to upgrade as well as several very real expansion requirements. In addition, interest strengthened from Asia Pacific financial institutions and, in particular, Japanese banks. Occupier demand from the insurance, energy and commodities, professional services and IT sectors was also evident. Leasing inquiries for requirements from 20,000 to 30,000 sq. ft. significantly increased as well. net absorption totaled a 2013-best 1.27 million sq. ft., up 61.4% quarter-over-quarter. Occupancy level generally improved across all geographic submarkets, with the overall vacancy rate dropping 170 bps quarterover-quarter to 4.8%. New office supply for the next two years remained limited to two major CD projects. As such, office space availability is expected to tighten further in the short to medium term before the next wave of office development comes on line in the second half of Rental growth will likely strengthen in 2014 and 2015, led by the Grade A segment of the market. ydney oft economic conditions and a high unemployment rate continued to impact ydney s office market, placing further downward pressure on net effective rents. Tenants remained cautious and consolidation and contraction in space use has been evident, particularly in the finance and insurance sectors. While prime incentives remained at an elevated 33%, their highest point in over a decade, prime net effective rents declined by 1.6% quarter-overquarter to U$50.96 per sq. ft. per annum (AU$613 per sq. m. per annum). The weaker occupier market in 2013 pushed vacancy levels higher. During Q2 2013, overall vacancy rate in the ydney CD sat at 8.9%; by year s end the vacancy rate was estimated to surpass 10%. Net absorption was estimated to be negative 17,340 sq. m. (XX sq. ft.) for the year, impacted by challenging business conditions and weak employment growth. The office supply pipeline in the ydney CD has been relatively low, helping to balance the soft demand conditions and the effective rents likely to mildly contract by 1%-2% in However, the market is carefully watching for the potential risk of significant backfill space when first tower (T3) at the arangaroo development comes on line in late Auckland Grade A rents stayed flat in Auckland during, declining a marginal 0.3% quarter-over-quarter to U$29.84 per sq. ft. per annum (NZ$ per sq. m. per annum). Market sentiment remained positive as leasing inquiries have been picking up and the overall vacancy rate has declined from 11.6% in Q to 10.3% in. Demand mainly came from companies in the legal, insurance, IT and mining sectors.

6 At year s end, several major office development projects were underway, representing nearly 74,000 sq. m. (XX sq. ft.) of new office supply. This includes the new 27,635-sq.- m. (90, sq.-ft.) Auckland Council office at Albert treet and the new 22,500-sq.-m. (73, sq.-ft.) Fonterra Headquarters at Fanshawe treet. Economic recovery and an improvement in business sentiment have led to stronger hiring intensions in Auckland. Office demand is expected to increase as firms are finally becoming confident enough about the future to make longer-term commitments. Grade A rents in 2014 are expected to follow the uptrend that has been witnessed during the second half of EMEA Frankfurt Demand in Frankfurt was relatively robust in the final quarter of the year, reaching 126,800 sq. m. (XX sq. ft.), representing an 8% increase from the previous quarter, but down 18% from Q As was the case throughout 2013, there continued to be an absence of larger transactions, with just one deal over 10,000 sq. m. signed during, bringing the 2013 total to four, compared to eight in This was predominantly due to a shortage of high-quality, centrally located office space suitable for larger occupiers. As a result, companies in this size band tended to extend their existing leases in 2013, which amounted to a total of 215,000 sq. m. (XX sq. ft.) in renewal activity, nearly double the level of This trend was also due to landlords offering generous incentives to keep key tenants in their buildings. Given the absence of large-scale transactions, the total take-up level in Frankfurt in 2013 was relatively healthy, at 447,800 sq. m. (XX sq. ft.) due to a large volume of transactions by small- and medium-sized occupiers. Despite the steady absorption of available space, the direct vacancy rate in Frankfurt remained relatively high at 14.7%, the same level as Q4 2012, as occupiers have released similar volumes of space back onto the market when they relocate to new buildings. As a result, net absorption was negative 27,200 sq. m. (XX sq. ft.) for the quarter. peculative development has been constrained throughout 2013, with the majority of completions comprised of pre-let space. During, no new speculative developments came on line. During Q1 2014, the Taunusturm, a major new development in the anking District will complete, adding around 60,000 sq. m. (196, sq. ft.) of office space to the market, of which 40,000 sq. m. (131, sq. ft.) was available at year s end. The tower will be the first major speculative scheme to complete in Frankfurt since the downturn. While the Taunusturm will add some much-needed high-quality space to the market, speculative deliveries will remain subdued in Lending conditions for office developments remained tight and dependent upon significant pre-letting in order to commence construction. The absence of major speculative schemes in recent years means there have not been any buildings on the market capable of setting a new benchmark top rent. As a result, prime rents have remained flat at the bottom of the cycle for 20 consecutive quarters at U$53.76 per sq. ft. per annum ( 456 per sq. m. per annum). However, it is possible that rents achieved at the Tanusturm will set a new benchmark rental level for the market in Madrid Take-up in Madrid rose sharply during to 112,455 sq. m. (368, sq. ft.), up 155% from the previous quarter. This was only the second quarter since 2009 in which take-up has exceeded 100,000 sq. m. Global Office Rent Cycle MarketView Figure 4: EMEA Office Market Rent Cycle, Rental Decline Accelerating Rental Decline lowing Rental Growth Accelerating Rental Growth lowing Vienna V Rotterdam Oslo O Zurich Manchester M russels Edinburgh E irmingham Dublin D W Warsaw Amsterdam A tockholm Helsinki H G Geneva Milan M Copenhagen Rome R Madrid M erlin Athens A Moscow M Hamburg Paris P arcelona London City L Dusseldorf Lisbon L Prague P London West End L Istanbul udapest Munich M Frankfurt F ucharest R Z C H D I 6 ource: CRE Research,.

7 7Global Office Rent Cycle MarketView (328, sq. ft.) the other occasion being Q As was the case then, take-up in was boosted by CEPA, which let almost 50,000 sq. m. (164, sq. ft.) in ankia Tower in the Cuatro Torres usiness Area (CTA). Aside from this exceptional deal, demand continued to be relatively subdued. At year s end, there were strong indications that the Madrid market had potentially reached a trough and appeared set for a steady recovery in GDP in Q grew by a faster-than-expected 0.3%, reinforcing hopes that the economic recovery was gaining momentum heading into PMI data for December was encouraging, led by the services sector, which posted its fastest pace of growth in over six years. Encouragingly for the office market, there was some evidence that credit conditions for smaller companies may be improving, which could provide the necessary funding for smaller occupiers to invest in their premises in Madrid. The improved confidence in the outlook for the panish economy has been reflected by a sharp growth in property investment volumes in pain, which reached 2.6 billion in, greater than the entire volume transacted during Other market-specific variables are also indicating the office market in Madrid is on its way to recovery. The pace of vacancy rate growth has slowed significantly, rising by a relatively low 30 bps to 17.2%. Net absorption continued to be negative, although at a relatively low level of negative 8,900 sq. m. (XX sq. ft.). There remained significant geographical disparity in the location of available space. For example, the vacancy rate in the City Centre remained comparatively low at 13%, while the peripheral submarkets posted rates as high as 28.1%. It is expected this disparity will accentuate going forward, as peripheral occupiers relocate to more central locations, taking advantage of low rental rates. The prime rent in Madrid hit a cyclical low of U$34.66 per sq. ft. per annum ( 296 per sq. m. per annum) during. If the recovery continues, rents will likely begin rising steadily in the second half of However, rents in peripheral submarkets will remain under pressure amid high vacancy rates and continuing low levels of demand for non-central office buildings. Paris During, take-up in Paris exceeded 500,000 sq. m. (XX sq. ft.) for the first time in the year. However, at 511,800 sq. m. (XX sq. ft.), the quarter s take-up remained below the market s long-term average and 16% below Q s take-up. This left annual take-up at its lowest level in a decade. Despite improving economic sentiment across Europe, recent economic data for France suggests the French economy may be back in recession. The country is expected to show negligible GDP growth for 2013, and is forecast to grow by just 0.5% in 2014, with significant downside risks. Composite PMI results for December 2013 were the lowest of the five Eurozone markets which published a figure 1 and were consistent with a contraction in GDP in. The main source of downside risk in 2014 relates to investment, which is forecast to be broadly flat, but the ongoing deterioration in France s appeal as a competitive business location could lead firms to cut back further on their investment in the country. Against this backdrop, companies are reluctant to commit to new leases in Paris, and the prominence of renegotiations steadily increased throughout 2013, encouraged by landlords offering generous renewal packages to incumbent tenants, stifling demand for new space. In particular, landlords were particularly active in renewing leases for larger occupiers in their buildings. Reflecting this, there was a 45% year-over-year drop in take-up of larger units greater than 5,000 sq. m. (XX sq. ft.), and not a single transaction of for more than 40,000 sq. m. (XX sq. ft.) was recorded during the year. There were geographical disparities in the distribution of demand, with the more established markets in Paris Centre West and Western Crescent performing comparatively well, and more peripheral submarkets and the La Défense business district struggling to attract users. Occupiers in central markets looking to reduce costs tended to move toward fringe central locations where discounted rents were available, rather than move out to suburban office markets. As with demand, the supply of available office space in Paris was unevenly distributed across the submarkets vacancy in central locations remained relatively low, especially for high-quality space, while vacancy rates in peripheral markets was much higher. The overall vacancy rate has increased significantly over the year, ending 2013 at 7.1%, the highest level recorded in the market since Much of the increase in vacancy was attributable to large-scale developments in La Défense, where around 175,000 sq. m. (574, sq. ft.) of predominantly speculative space was delivered during 2013, and relocations from lower-grade space in peripheral submarkets. With cost-reduction and space optimization continuing to be key drivers of occupier activity, the total occupied stock in the market decreased, resulting in the market s second consecutive quarter of negative net absorption of negative 167,000 sq. m. (XX sq. ft.). In response to falling levels of demand and increased competition from renegotiations, rental levels have been under downward pressure, especially in peripheral locations and lower-quality buildings. The prime rent for the market was flat for the second consecutive quarter, at U$94.32 per sq. ft. per annum ( 800 per sq. m. per 1. PMI Composite Figure produced by France, Italy, pain, Germany and Ireland.

8 annum). With difficult market conditions expected to persist in the coming quarters, a further marginal reduction in rents is expected as landlords attempt to stimulate leasing demand. Commercial incentives also remained high, on average between months rent free per guaranteed year of lease. In some peripheral markets where the supply and demand imbalance was most pronounced, rent-free periods were even higher. London Demand for office space in Central London experienced a rapid recovery in 2013, culminating in take-up of 3.9 million sq. ft. in, an increase of 9% from the previous quarter and 29% higher than the market s 10- year average. This was the first time since that Central London experienced three consecutive quarters of above-trend take-up, which resulted in annual take-up of million sq. ft., up 39% from In addition to a strong volume of small and medium sized transactions, there were three deals over 100,000 sq. ft. in, the largest of which was chroders pre-let for 300,000 sq. ft. at 1 London Wall Place, the third largest transaction of the year. As in the previous quarter, the majority of take-up was concentrated in the City (1.8 million sq. ft.) and West End (1.2 million sq. ft.). The strong performance of the office market has been supported by a sustained period of positive economic developments and upward growth revisions. Recent business survey results suggest U.K. GDP is likely to have grown by around 0.8% in, and with upward revisions to past quarters, GDP for 2013 was expected to reach 1.9%, compared with a forecast of 1% at the start of the year. The labor market has continued to perform strongly, with unemployment falling to 7.1% in January, and inflation fell to the ank of England target of 2% for the first time since The improvement in economic sentiment in the U.K. was illustrated by an exceptionally high level of investment transactions completing, with total commercial real estate investment turnover during reaching its highest fourth-quarter level since Reflecting the high level of take-up, London registered strong net absorption of 1.1 million sq. ft., and availability fell for the second consecutive quarter to end the year at 15.7 million sq. ft. This represented a quarter-over-quarter fall of 8%, leaving availability 5% below London s long-term average. A wave of new office completions will come to market in 2014, however much of this space has been pre-leased while under construction. With completion levels for 2015 forecast to fall back sharply, there is expected to be strong tenant competition for the best buildings for the foreseeable future. After rising for three consecutive quarters, prime rents in the West End were flat, ending the year at U$ per sq. ft. per annum ( 100 per sq. ft. per annum). The City market recorded prime rental growth during, the first increase since 2010, rising 4.5% to U$90.20 per sq. ft. per annum ( per sq. ft. per annum). In both markets, continuing strong demand and falling availability of high-quality space is expected to result in further prime rental growth in With relatively low volumes of speculative space coming through to the market, the pace of growth may accelerate further if high levels of demand are maintained. Global Office Rent Cycle MarketView 8

9 9Global Office Rent Cycle MarketView METHODOLOGY: OFFICE CYCLE The Global and Regional Rent Cycles are determined through a collaborative process with CRE researchers and market professionals in local markets. The cycle is intended to illustrate the office rent cycle for (a) core locations that (b) attract the highest rents, which (c) represent the principal concentration of major occupiers in a city. In many cases this will be the central business district, but need not be. There may be more than one of these in a given market (e.g. West End and City in London) which have different characteristics and rent dynamics. Each quarter, the local market teams evaluate the market for prime space and determine the position of the prime rents within the market and within the context of the rent cycle s defined positions 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. There are four main segments to the rent cycle: Growth Accelerating, Growth lowing, Decline Accelerating and Decline lowing. Inflection points are positioned between each broad category. Within each broad category, there is one sub-position. The Position Definitions include qualifying statements referencing not only what occurred in Prime 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 Positions are intended to capture each market s unique stance in its unique rent cycle. The 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. The Rent Positions are not aimed at serving as formal forecasts for Prime rent, rather forward-looking statements are utilized and included to assist local market researchers in distinguishing various positions.

10 CONTACT For more information about this Global MarketView, please contact: GLOAL REEARCH Raymond Torto, Ph.D., CRE Global Chairman of Research t: e: Follow Ray on For more information regarding Global Research and Consulting activity, please contact: Randy Anderson, Ph.D., CRE Head of Research, Americas t: e: Follow Randy on Nick Axford, c, Ph.D., Dip, urv Global Head of Research t: e: Follow Nick on Henry Chin, Ph.D. Head of Research, Asia Pacific t: e: Peter Damesick, Ph.D. Chairman of EMEA Research t: e: Follow Peter on Global Office Rent Cycle MarketView Neil lake, Ph.D. Head of Research, UK and EMEA t: e: FOLLOW CRE GLOAL REEARCH AND CONULTING CRE 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. Additional research produced by Global Research and Consulting can be found at DICLAIMER 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 CRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CRE. 10