While the world’s major real estate markets have been unsettled by economic uncertainties in Europe and the US, so far investment volumes, tenant absorption rates, prime rents and capital values have held up remarkably well, according to Jones Lang LaSalle Global Office Index, published on Wednesday.
“Most key markets are in better shape than they have been for several years and are making steady progress through this period of heightened economic volatility. Nonetheless, weaker sentiment has caused investors to pause and appetite for risk has diminished as refuge is taken in core well-let product. Meanwhile, some corporations are delaying real estate decisions and face renewed pressure to drive down costs,” it added.
Real estate markets are diverging. While the major emerging markets remain resilient, by contrast, leasing activity in the main financial hubs – notably London, New York, Hong Kong and Singapore – has weakened.
Global commercial investment volumes have held firm in Q3, but there is a possible downside of 10% on our projected outcome for full-year 2011 of $440 billion. Debt is harder to come by; the CMBS market has slowed and growth in the trading of secondary property has softened.
Prime rents continue to grow, albeit at a reduced pace. Our Global Office Index, which tracks the rental performance of prime office space across 81 major markets, increased by 1.1% in Q3, compared to 1.6% in Q2.
Rental expectations for 2012 have been lowered, but they are still in positive territory, with most major office markets expected to register at least single-digit growth next year. Hong Kong and Singapore, however, may see rents soften.
Prime yields are stable, underpinned by on-going investor demand for core assets. Capital values for prime offices have increased by 14% year-on-year (across 23 major markets). Spreads on bond yields have widened, which has further increased the attraction of real estate.
Strong demand from the technology sector is boosting the performance in some tech hubs. Silicon Valley’s prime market has recorded the world’s fastest rate of rental growth in Q3 (at 60% year-on-year).
Vacancies have continued to edge downwards. At 13.8%, the global office vacancy rate is now at its lowest for two years. The supply pipeline in advanced markets remains very low and, in the current climate, further cancellations/postponements of projects are likely.
Retailer demand across major emerging markets remains buoyant, as retailers seek to tap into rising incomes and favourable demographics.
Increasing caution is tempering the recovery of industrial warehousing markets. Demand for logistics space remains healthy in China.
Trading performance continues to be strong in the hotels sector, although global volumes are likely to slow from the lofty levels of H1. Portfolio deals dominate hotels activity.
The US rental apartment sector continues its expansion. In the tightest multifamily markets, rental growth is likely to remain robust, underpinned by low supply and positive demographics.