Despite corporations delaying real estate decisions and facing renewed pressure to drive down costs in the face of economic volatility in Europe and the US prime office rents across 81 global markets increased by a further 1.1 percent during third quarter 2011, according to the inaugural Jones Lang LaSalle Global Office Index.
The firm’s new Index shows this was the seventh consecutive quarter where prime rents risen which reflects an 8.2 percent uplift since the bottom of the market in fourth quarter 2009 and a 5.5 percent increase year-on-year.
“Most major markets are in better shape than they have been since 2008, but investors and corporations are unsettled by current economic uncertainties. Appetite for risk has diminished as investors take refuge in core well-let product and sentiment is starting to impact corporate decision making,” said Arthur de Haast, Head of the International Capital Group at Jones Lang LaSalle.
“Despite the headwinds, global commercial real estate investment volumes, tenant absorption rates, prime rents and capital values are, so far, holding firm and most markets continue to make steady progress through this period of heightened volatility,” Jeremy Kelly, Director in Jones Lang LaSalle’s Global Research team and author of the firm’s Global Market Perspective which has just been released, added.
Asia Pacific office markets had the highest rental growth of 2.5 percent quarter-on-quarter basis. The Americas followed with an increase of 1.1 percent in Q3. However, economic concerns in Europe have weighed down on markets and growth has come to a virtual halt, from 2.1 percent in Q2 to 0 percent in Q3.
Real estate markets are diverging, with emerging markets in the BRIC economies demonstrating strong year-on-year performance, with increases in Beijing (+50.6 percent), Moscow (+41.2 percent), Shanghai (+23.7 percent) and Sao Paulo (+20.4 percent). Other Asia Pacific markets also registered positive growth, including Jakarta (+48 percent), Hong Kong (+20.6 percent) and Manila (+20.9 percent).
The ongoing strength of the global technology sector meant that Silicon Valley, +60 percent, Bangalore, +19.7 percent, and San Francisco, +17.1 percent, also had positive rental performance. Equally, demand from the commodities sector supported strong year-on-year growth in Perth, +26.9 percent.
The largest quarterly falls in rents were experienced in Mexico City, Brussels, Dublin, Vancouver and Canberra, who all experienced drops between two and four percent.
“We continue to expect positive rental growth in major prime office markets during 2012. Most major markets are expected to see at least single-digit growth, with some markets such as Beijing, Tokyo, San Francisco and Toronto having the potential to outperform in 2012. Hong Kong and Singapore, however, may see rents soften over the next few months,” Kelly, said.
“Despite signs of a deceleration in office leasing activity across the major international business hubs, the average global office vacancy rate of 13.8 percent is now the lowest in two years. The prime leasing markets in advanced economies are fairly tight and the supply pipeline remains very low. In this context, we believe that markets are well placed to resume their growth pattern once a degree of confidence resumes.”
*Despite heightened investor concerns over the sovereign debt crisis and the pace of global economic growth, transaction activity has held up remarkably well during the past quarter. Global direct commercial real estate investment volumes totalled $99 billion in Q3 2011, which is only marginally lower than in Q2 and up 36% on the same period in 2010.
With nearly $300 billion transacted in the first nine months of 2011, our original projection for full-year 2011 of $440 billion could still be achieved. However, the market is currently very much sentiment-driven and the mood is cautious, resulting in delays in closing deals. Debt is harder to come by than earlier in the year and the expected growth in interest in secondary product has stalled as investors take refuge in core well-let product in specific markets. In this context, we feel that there is a possible downside of up to 10% against our original projection.
There continues to be a considerable amount of capital waiting to be placed in core real estate, which should help to maintain volumes during 2012. Underlying real estate fundamentals are relatively robust, investors are attracted by property’s ‘safe haven’ status, and the asset class has gained favour compared to the volatility of equities and the low returns of bonds. Property lending, however, is expected to remain difficult for the foreseeable future, which will constrain growth in activity into riskier assets. In this more risk-averse environment, investors may also move their investments closer to home. Strong balance sheet parties (such as REITs), who have access to cash and other lines of credit, will try to take advantage and strengthen their position in countries where they aspire to have a presence.
*Regardless of economic uncertainties, third quarter data shows that many major leasing markets have continued to tighten. However, a ‘wait and see’ attitude is pervading the leasing markets as corporate occupiers become more cautious and delay real estate decision-making until there is greater certainty over the direction of the global economy. Corporates are becoming even more cost conscious, and there are some early signs that this is feeding through to weaker rental growth. According to Jones Lang LaSalle’s Global Office Index, prime office quarterly rental growth (across 81 major markets) has slowed to 1.1% in Q3, compared to 1.6% in Q2.
*Continued uncertainty is likely to dampen leasing prospects over the next few quarters, and expectations for 2012 leasing volumes are being downgraded by around 5-10%. Nonetheless, supply of high-quality space remains relatively tight, construction activity is still muted in the advanced markets and, in the current climate, further cancellations/postponements of projects are likely. In this context, we continue to expect positive rental growth in most major prime office markets during 2012 of up to 10%, with some markets such as Beijing, Tokyo, San Francisco and Toronto achieving double-digit increases. Hong Kong and Singapore may see a temporary softening in 2012 following this year’s very strong rental growth. However, there are downside risks to these forecasts, particularly in Europe, where the risk for the region’s economic recovery has already translated into declining business confidence and raises concerns over the sustainability of recent real estate improvements.
*Commercial real estate transaction activity has held up remarkably well during the past quarter. Global direct real estate investment volumes have provisionally totalled US$99 billion in Q3 2011, which is only marginally lower than in Q2 and up 36% on the same period in 2010.
There were $19 billion country investment markets in Q3 2011, among which the most active were the US (US$32.0 billion), the UK (US$12.4 billion), Germany (US$8.8 billion), France (US$5.0 billion) and Japan (US$4.8 billion). Among the very large markets, Japan has seen the strongest growth in Q3 as it bounces back from the effects of the tsunami. Poland, the Czech Republic and Taiwan have also seen sharp uplifts in volumes during the quarter.
*The retail sector continues to court favour with investors. Typically the sector accounts for around 20-25% of investment activity; however, in the first nine months of 2011 its contribution to total activity has risen to 30%, and as high as 34% in Europe. Shopping centres are by far the favoured option among investors in Europe’s retail sector, accounting for two-thirds of retail property deals, while the UK and Germany are the most popular markets for those seeking opportunities in this area.
*Prime yields have held steady during Q3 in most major global real estate markets, with yields maintained on the back of a combination of continued robust investor demand for high-quality well-let assets in core markets and widening spreads (as ‘risk-free’ government bond yields plummeted during Q3). Capital value growth is decelerating however, echoing the trends in prime rents. Across 23 major office markets, prime capital values grew by an annualised 14%, compared to 18% in the year to Q2.