Newly-released figures from Knight Frank show that London’s West End overtook Tokyo as the most expensive location in the world in which to rent office space during 2010.
The figures are revealed by Knight Frank’s Global Real Estate Markets Annual Review & Outlook 2011, which reviews current conditions in commercial property markets across the globe and surveys office rental levels in 105 international markets. The West End had dropped to second place in the rental rankings in the 2009 and 2010 surveys, as a result of falling rents in the aftermath of the Lehman Brothers collapse, but this year’s report sees it regain top position on the back of a revival in occupier demand which has fuelled strong rental growth.
Prime office rents in the West End of London reached £85 per sq ft per annum at the close of 2010, a 31% jump from the start of the year. Since the end of last year, West End office rents have risen further, to £90 per sq ft due to a further reduction in supply and growing interest from Media firms, such as NBC, Google and Apple. In contrast, Tokyo has seen office rents fall as a result of rising vacancy rates and a relatively weak economic outlook, even prior to the recent earthquake.
The Hong Kong market has risen to third place in the rankings, having seen a rapid recovery in rental values, triggered by increased competition among occupiers for a limited amount of available Grade A space. The top ten is completed by Moscow, Paris, Singapore, London (City), Sydney, Mumbai and Lagos; a mixture of established global financial centres and emerging office markets.
Around half of the markets included in the survey are expected to see rental growth in 2011, while rents should be broadly flat in a further third. This reflects the continued stabilisation and recovery of office market conditions across most global markets, as demand for space gradually improves and rental growth spreads to an increasing number of cities. This trend has been accelerated by a squeezing of new supply levels, as development activity has slowed sharply, particularly in Europe and North America.
“Globally, commercial property markets are in the midst of a multi-speed recovery, which has been led by major financial centres such as London, Hong Kong, Singapore and New York,” said Matthew Colbourne, senior international research analyst.
“The improvement of the world economy in 2010 helped to boost demand for office space in these markets, which, combined with a slowing of development activity, caused rents to rise and vacancy rates to fall. However, rents remain under downward pressure in a smaller group of markets, where the economic outlook remains uncertain or availability is high, including Madrid, Seoul, Dubai and Los Angeles.”
Prime office rents have either stabilised or started to rise in the majority of European markets. Rental growth has been led by London and Paris, the continent’s two premier markets, and has increasingly spread to cities in countries experiencing strong economic growth, including Moscow, Stockholm and Warsaw. However, rents may continue to fall in 2011 in markets in some of the weaker economies of Europe, particularly Spain.
The markets of the Middle East are among the biggest fallers in this year’s office rent rankings. The high levels of development activity in recent years have left many of these locations with an oversupply of office space, forcing landlords to reduce rents in order to attracts tenants. Prime office rents fell by 10-20% during 2010 in Dubai and Abu Dhabi, and are likely to fall further in 2011.
Asia has been leading the global economic recovery, boosting occupier demand in the rapidly growing markets of China and India. Prime office rents have grown most strongly in Hong Kong and Singapore, but remain under downward pressure in Tokyo. A number of other markets, including Seoul and Kuala Lumpur, are experiencing high levels of development activity, which may suppress rental growth in 2011.
There remains a shortage of high quality office space in many African cities. In a small number of markets, where the lack of supply is most acute and strong demand comes from occupiers in the oil and gas industries, this causes very high rents. Luanda, Angola, and Lagos, Nigeria, are among the most expensive cities in the world in which to rent office space.
Demand for office space in the major US markets improved healthily in 2010. In New York, office leasing activity reached higher levels than were recorded in the years immediately prior to the economic downturn. The Manhattan market has seen strong rises in office rents, but this pattern has not been repeated across the whole of the US. Los Angeles, in particular, has lagged the market recovery and, with vacancy rates remaining high, the city may see further falls in rents in 2011.