Signs Point to Slow Growth in Global Office Market

Growth in the global office market was stymied early on in 2011 by increased concern over the struggling U.S. economy and mounting debt in the Eurozone, and it …

Growth in the global office market was stymied early on in 2011 by increased concern over the struggling U.S. economy and mounting debt in the Eurozone, and it appears the trouble will impact the sector moving into next year. Cushman & Wakefield’s Global Office Forecast indicates slow growth in 2012 and beyond as office needs shrink in several market regions and confidence in the global economy continues to wane. Leasing activity is expected to slow based on correlations measured against forecasted GDP growth, and as more firms attempt to do more work with less space. For more on this continue reading the following article from Property Wire.

Global office real estate markets are set to undergo a slow recovery through 2012 and 2013 with several key markets poised to see growth, according to Cushman & Wakefield’s Global Office Forecast.

While 2011 began strongly in office markets around the world, apprehension and uncertainty led to a major bump in the road to recovery during the third quarter, resulting in a conservative outlook for the next year.

Although the forecast for growth has become more moderate, strong leasing fundamentals and limited supply will sustain global office markets, the majority of which have little or no new construction planned for either 2012 or 2013, it says.

It explains that leasing activity through 2012 is best characterized as mixed. In the Americas, markets dependent on government leasing will stall, though growth industries such as technology, healthcare and energy will fuel markets like San Francisco, Calgary, Houston and Downtown Toronto.

While Europe’s overall economy will remain sluggish, Frankfurt, Munich, Paris, Istanbul, Stockholm and London are expected to outpace other European markets. In Asia, growth in second tier markets in China is expected to accelerate, as well as in countries where regional trade accounts for the majority of exports, such as Indonesia and Australia.

The report also points out that increased leasing activity early in 2011 made little impact on global office rents. Accordingly, significant upward pressure on rents is not forecast until 2013 for the majority of US markets. Several European markets did experience good rental growth earlier in 2011 meanwhile, but a number will expect downward pressure on rents to return if economic conditions do not improve in the near term.

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In Asia, rental values correlation to GDP growth and inflation will support slight growth. Occupiers across the world are focused on controlling costs associated with their corporate real estate; yet, at the same time, have begun to take a more strategic approach to their real estate to derive value for their firms.

Organizations with multiple locations are centralizing functions to create greater synergy, while sustainability, technology and changing work habits have led many occupiers to pursue a strategy of ‘less space is more’.

Portfolio expansion is expected to remain moderate. In a recent survey of Cushman & Wakefield’s top global clients, only 6% indicated they would significantly increase the size of their portfolio over the next 12 months, with 36% indicating moderate expansion, 33% indicating moderate contraction and 24% indicating no expansion.

While most office markets in the Americas are expected to slow into 2012, prime centres, such as New York, San Francisco and Seattle in the US, Calgary in Canada and Mexico City, Santiago, Sao Paolo and Buenos Aires in Latin America, are expected to tighten further once economic uncertainty subsides.

Moving into 2012, leasing activity will pull back from the pent up demand driven levels seen in 2011, though absorption should remain positive in most markets due to limited new speculative construction. Rental rates in the Americas will hold steady in most markets. In the US and Canada, minimal new construction will mean limited competition for existing owners, allowing them to hold their ground on asking rents. In Mexico and South America, increases in domestic consumption and trade with Asia will offset any decreases in European demand and drive expansion plans for corporations.

‘By 2013, all major markets in the Americas are projected to be back on solid footing, with increased leasing activity, higher absorption levels and steady demand,’ said Maria Sicola, executive managing director and head of Americas Research for Cushman & Wakefield.

‘An expansionary cycle lies ahead, and firms will profit by focusing on long term corporate strategies and growth,’ she added.

While for the most part of 2011 the European office market moved steadily towards becoming a landlords’ market, recent economic instability has put occupiers back in the driving seat. However, the declining availability of high-quality space has made it clear that current conditions will support a delayed rather than a cancelled recovery.

Even while demand is weakening, businesses are still looking to improve productivity and cut costs. When it comes time to replace older space, consolidate, reorganize or achieve greater sustainability, tenants are faced with limited opportunities for high-quality space. This will ultimately drive rental growth in some markets, says the report.

Performance throughout Europe will vary by market. Overall vacancy is expected to see a modest fall, but some cities will see an increase due to lower demand or more development. While some areas, including Milan, Warsaw, Madrid and Stockholm, will see new building completions increase in 2012, overall development continues to drop throughout Europe.

‘While the number of active occupiers is forecast to increase, most will be seeking improved efficiency rather than expansion and 2012 is widely expected to be a difficult year. The market will remain very polarized but most markets are expected to see absorption soften and then bounce back in 2013,’ said David Hutchings, head of European Research for Cushman & Wakefield.

The highest net absorption relative to inventory will continue to be in Central European markets. Frankfurt will see a steady improvement and Budapest, Dublin, Madrid and Amsterdam will see increased relative activity. Prime rents increased 3% in 2011 for major cities, but rental growth is expect to slow to less than 1% in 2011 before another increase sets in during 2013. Paris, Istanbul, Dublin, Luxembourg, Munich and Stockholm will see the highest growth over the next two years, while Moscow is expected to perform well after 2012. In 2013, 14 of 20 markets are forecast to see higher growth than in 2012.

This article was republished with permission from Property Wire.

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