Office rent growth driven by service sector employment expansion

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1 MARKETVIEW Global Office Rent Cycle, Q Office rent growth driven by service sector employment expansion Global Office Rent Index +0.6% Americas Office Rent Index +0.4% EMEA Office Rent Index +0.8% Asia Pacific Office Rent Index +0.4% Arrows indicate change from previous quarter. Figure 1: Global Office Market Rent Cycle, Q Singapore Toronto Auckland Chicago London City London West End Century City Tokyo Frankfurt Hong Kong Mexico City New York Midtown Shanghai São Paulo Paris Washington, D.C. Downtown Madrid Sydney Rent Decline Accelerating Rent Decline Slowing Rent Growth Accelerating Rent Growth Slowing The global economy emerged from a turbulent start to the year to record a period of steady growth in Q Oxford Economics estimates that the global economy will expand by 2.2% this year. The Global PMI Business Service Activity Index stood at 51.5 as of March A reading over 50 indicates expansion in the sector and signals future employment growth. All regions recorded rent growth in Q and remained in the upswing of the Global Office Rent Cycle. Q CBRE Research 2016 CBRE, Inc. 1

2 ECONOMY GLOBAL ECONOMY SHRUGS OFF SHAKY START TO 2016 The global economy emerged from a turbulent start to the year to record a period of steady growth in Q1 2016, thanks mainly to stronger growth in the Eurozone, which continued to see a recovery in business investment, robust consumer spending and encouraging growth in formerly problematic markets. Oxford Economics estimates that the global economy will expand by 2.2% this year. Real GDP growth in the U.S. decelerated to an annual rate of just 0.8% in Q1 2016, according to the U.S. government s second estimate. However, during the current cycle, the first quarter has registered the weakest growth of the year in four of the past six years. Negative contributions this quarter came from non-residential domestic private investment, impacted by the weak energy industry, and net exports, negatively affected by the strong U.S. dollar. GDP growth in Canada was robust in the first month of 2016, but is expected to taper off, with GDP growth for this year projected to equal that for 2015, at 1.2%. In Latin America, economic performance in most countries remained weak in Q1 2016, especially in South America, where low oil and commodities prices has depressed growth. The Eurozone registered 1.5% GDP (annualized) growth in Q The zone s more resilient labor market is expected to underpin growth in wages and consumer spending, but indications for external trade and exports are less clear cut. Inflation remains low, and is negative in some places, which is supporting growth of real incomes. European Union GDP is expected to grow by a little under 2.0% in 2016, with the Eurozone alone closer to 1.5%. Stronger economies will include Ireland, Sweden, Spain and Poland, while Italy will be notably weaker and France slightly below average. Asia Pacific GDP growth was revised downward, from 4.4% to 4.1%, as of the end of Q However, following multiple rounds of interest rate and other stimulus, China finally showed signs of recovery, posting 11.5% year-over-year export growth in March and 6.7% year-over-year GDP growth for the quarter. Japan implemented a negative interest rate policy in February and GDP growth of 1.7% annualized surprised on the upside in Q SERVICE SECTOR EXPANSION CONTINUES The Global PMI Business Service Activity Index stood at 51.5 as of March 2016 (Figure 1). A reading over 50 indicates expansion in the sector and is correlated with future employment growth. There was a slight slowdown in all regions between Q and Q1 2016, with the exception of China, but the readings still indicate positive levels for global employment growth and hiring. All regions recorded rent growth in Q and remained in the upswing of the Global Office Rent Cycle. The Global Office Rent Index registered growth of 0.6% quarter-over-quarter, driven by stronger growth in EMEA, but Asia Pacific and Americas struggled to pick up momentum. Figure 2: PMI Business Service Activity Index Note: A reading over 50 indicates expansion. Source: Markit, Macrobond, April Q Q Q Global Eurozone China U.S. Q CBRE Research 2016 CBRE, Inc. 2

3 Figure 3: Americas Office Market Rent Cycle, Q Houston Toronto Calgary Lima Montreal Panama City Rio de Janeiro Santiago São Paulo Vancouver Washington, D.C. Buenos Aires Downtown Orange County Atlanta Chicago Century City Miami Northern NJ Philadelphia Phoenix San Diego Austin Boston Dallas Uptown/Turtle Creek Denver Mexico City New York Midtown Dallas Preston Center San Francisco Seattle Rent Decline Accelerating Rent Decline Slowing Rent Growth Accelerating Rent Growth Slowing THE AMERICAS STEADY RENT GROWTH DESPITE FINANCIAL MARKET VOLATILITY Despite financial market volatility in early 2016, office-using employment in the U.S. increased by a healthy 112,100 jobs in Q Office-using employment has increased for 26 consecutive quarters, compared with a 17-quarter expansion during the last cycle. Office-using services job growth was strong in Q1 2016, while financial activities job growth slowed for the second straight quarter. Annual office-using employment growth in Q was strongest in the West and the South, led by gains of over 6% in tech-driven San Francisco and San Jose. Low-cost markets in both regions continue to attract tenants from more expensive metropolitan areas, resulting in robust office-using job growth in cities like Tampa, Nashville, Phoenix, Orlando, Raleigh, Dallas and Austin. During Q1 2016, the Americas Office Rent Index rose by 0.4%. We expect U.S. office rents to increase during the next six months due to continued office-using employment growth and limited new supply, especially of large blocks of Class A space, in many markets. We anticipate stronger rent growth in the suburban office market, which has been lagging the downtown market during the current cycle, as cost-conscious businesses seek non-cbd locations. In Canada, manufacturing employment and accommodation and food services employment have not seen significant improvement. On the other hand, warehousing and transportation, as well as professional, scientific and technical services have seen a continued uptick in employment. These trends are expected to continue in Although the opening quarter of 2016 saw rent growth in Toronto and Vancouver, there were also increases in tenant inducements. Net effective rents have therefore been on the decline as landlords compete for tenants in both their existing buildings and in space under construction. In Latin America, asking rents have declined due to economic conditions and the strong position of the U.S. dollar compared to local currencies. Mexico City was an outperformer with strong demand, based on its employment growth. São Paulo and Rio de Janeiro logged negative net absorption during the Q1 2016, while other markets, even sluggish Buenos Aires and Santiago de Chile, reported activity. Average asking rents are likely to Q CBRE Research 2016 CBRE, Inc. 3

4 Figure 4: EMEA Office Market Rent Cycle, Q Oslo Warsaw Moscow Dusseldorf Geneva Istanbul Lisbon Milan Paris Prague Rome Zagreb Zurich Berlin Birmingham Brussels Budapest Copenhagen Luxembourg Madrid Munich Amsterdam Barcelona Dublin Edinburgh Hamburg London City London West End Manchester Stockholm Bucharest Frankfurt Helsinki Vienna Rotterdam Rent Decline Accelerating Rent Decline Slowing Rent Growth Accelerating Rent Growth Slowing remain stable, as absorption of the newer buildings increases at a steady pace. EMEA STRONGER RENT GROWTH, BUT MARKETS CONTINUE TO DIVERGE EMEA enjoyed stronger rent growth in Q1 2016, with the EMEA Office Rent Index registering growth of 0.8% quarter-over-quarter, an increase on the 0.4% quarter-over-quarter growth logged in Q Quarterly rent growth across the region remained uneven, however, with stronger markets in Q including Dublin, Stockholm, Berlin and Barcelona. Parts of the U.K., including Birmingham and Manchester, recorded decent growth, while London enjoyed a high, albeit declining, rate of growth. Rents in Paris, Milan and Zurich were flat, while parts of Central and Eastern Europe continued to be affected by high levels of supply, which is preventing rent growth despite strong demand. The period saw a contraction in take-up on a quarterly basis, a trend viewed as somewhat inevitable given the very strong finish to 2015, but the figure was 12% higher than the same period of We expect European take-up to increase by around 4% to 5% year-over-year in While the aggregate direction is upward, this trend is far from uniform, and there continue to be significant differences both between and within countries. Munich, Berlin, Frankfurt, Paris, Milan, Amsterdam, Madrid, Edinburgh and Glasgow are seeing positive growth in take-up. Occupiers in general are displaying a preference for space in CBDs and in other districts that offer high-quality buildings and amenities. The technology sector remains the key driver of demand. The forthcoming Brexit vote is a major issue on the radar, with widespread indications of lower rent growth in the U.K. in anticipation of a leave vote. The implications for Continental Europe are less obvious, but a leave vote could spur the relocation of some corporates from the U.K. to parts of northern Continental Europe. ASIA PACIFIC THE MAJORITY OF OFFICE MARKETS REMAIN IN THE UPCYCLE Rent growth in Asia Pacific increased marginally in Q1 2016, with the Asia Pacific Office Rent Index rising by 0.4% quarter-over-quarter amid low vacancy and limited new supply. The rate of growth was slightly higher than that recorded in Q Sydney recorded its strongest quarter-over-quarter rent growth since the onset of the Global Financial Crisis Q CBRE Research 2016 CBRE, Inc. 4

5 Figure 5: Asia Pacific Office Market Rent Cycle, Q Jakarta Singapore Bangkok Hong Kong Manila Shanghai Taipei Beijing New Delhi Shenzhen Brisbane Hanoi Perth Seoul Wellington Adelaide Canberra Guangzhou Ho Chi Minh City Mumbai Melbourne Sydney Auckland Bangalore Tokyo Rent Decline Accelerating Rent Decline Slowing Rent Growth Accelerating Rent Growth Slowing on the back of growing demand from the service and tech sectors. In Hong Kong, the lack of space in Central, coupled with solid demand from Mainland Chinese companies ensured rents increased by 2.4% quarterover-quarter, although rent growth in the district began to decelerate in February and March. Manila also recorded solid rent gains on the back of continued business processing outsourcing (BPO) sector expansion. Singapore (down 4.8% quarterover-quarter) and Adelaide (down 2.5% quarter-overquarter) both suffered their fourth consecutive quarterly rent declines. Office take-up is expected to improve over the remainder of the year, thanks partly to more new supply and hence a greater number of precommitments, especially in China and India. Overall demand is projected to be stable on a year-over-year basis. Cost saving will continue to be the major theme and multinationals will remain cautious. Efficiency gains on existing premises and lease renegotiations will be the major cost saving initiatives. Tech firms will remain a major driver of office leasing demand, and new setups and smaller deals will account for the majority of leasing transactions. Another major theme will be the emergence of co-working space providers. Grade A rent growth is expected to be flat this year. In India and China, the supply peak is likely to limit rent growth in major cities, whilst Sydney and Melbourne will see steady rent growth as solid leasing demand occurs alongside stock withdrawal. Currently upbeat markets such as Hong Kong and Tokyo will see the emergence of more downside risks, which should prompt landlords to focus on tenant retention. Q CBRE Research 2016 CBRE, Inc. 5

6 METHODOLOGY: OFFICE CYCLES The Global and Regional Rent Cycles are determined through a collaborative process with CBRE researchers and market professionals in local markets. The cycle is intended to illustrate the office rent cycle for core locations that attract the highest rents, which represent the principal concentration of major occupiers in a city. In many cases, this will be the central business district (CBD). There may be more than one business district in a given market (e.g., London West End and London City), which have different characteristics and rent dynamics. Each quarter, the local teams evaluate and determine the position of prime office rents within the market and within 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 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 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 Slowing, Decline Accelerating and Decline Slowing. 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. By 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. Some 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 forwardlooking statements are utilized and included to assist local market researchers in distinguishing various positions. Q CBRE Research 2016 CBRE, Inc. 6

7 To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at FOR MORE INFORMATION REGARDING THIS PUBLICATION, PLEASE CONTACT: Dennis Schoenmaker Global Economist FOR MORE INFORMATION REGARDING CBRE RESEARCH, PLEASE CONTACT: Nick Axford, Ph.D. Head of Research, Global Richard Barkham, Ph.D. Chief Economist, Global Neil Blake, Ph.D. Head of Research, EMEA Follow Neil on Henry Chin, Ph.D. Head of Research, Asia Pacific Follow Henry on Spencer Levy Head of Research, Americas Follow Spencer on Disclaimer: 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 CBRE.