Office Vacancy Rates
Capital Value Growth
The world’s dominant commercial real estate markets appear to be back on track following a jittery start to the year. Stock market volatility, heightened global economic uncertainty and concerns over a China slowdown certainly made investors and corporate occupiers think more carefully in Q1; but, by and large, decisions were being delayed rather than postponed. Recovery in investor sentiment since the mid-February low has been swift and there remains a huge amount of capital targeting real estate assets. Meanwhile leasing markets held up reasonably well during the quarter, and with sentiment improving, corporate activity is likely to ramp up during the course of the year.
Leasing, vacancy, rental and capital value projections relate to the office sectorSource: JLL, May 2016
The heightened levels of volatility and risk aversion experienced in the first 4-5 weeks of 2016 combined with what is usually the quietest quarter of the year to make the results for Q1 2016 look quite weak, with volumes down 14% year-on-year. Nonetheless, recovery has been particularly rapid; equity markets are back to November 2015 levels and credit spreads have narrowed again. A sizeable amount of capital remains unspent across all investor types and we expect this to be deployed as we move through the year. With political uncertainty set to continue, from Chinese regulators to UK referendums and U.S. elections, JLL anticipates full-year 2016 activity to be broadly in line with 2015, with a central scenario indicating that volumes could be about 5% lower.
Momentum in the leasing markets slowed moderately in Q1 2016 as occupiers carefully reconsidered relocation and expansionary plans, with leasing volumes marginally lower (-1%) on a year-on-year basis. Volumes in both Europe and Asia Pacific held up well during Q1 2016, increasing by 14% and 7% respectively year-on-year. Leasing volumes in the United States fell by 10% year-on-year to the lowest level since the Global Financial Crisis as concerns over the economy’s stability grew.
Technology and financial services continue to shape demand across all three global regions. Technology hotbeds from Silicon Valley and Seattle, to Stockholm, Berlin and Bengaluru have registered the strongest corporate demand. Meanwhile, e-commerce firms have been active in the office leasing markets in several emerging economies such as India, China and Indonesia.
In the context of a weaker-than-expected first quarter, we have revised down our global projections for the full-year 2016 and now forecast leasing volumes to broadly match 2015 levels, with some upside potential of up to 5%. Asia Pacific is projected to outperform the other regions, with volumes growing by around 10%-15% in 2016.
The global office vacancy rate has edged up slightly for the first time since 2012, rising by 10 basis points to 12.2%. The vacancy rate is expected to hover at around 12% for the remainder of the year, with falls in the U.S. rate balanced by a modest rise in vacancy in Asia Pacific. Vacancy is anticipated to be broadly stable in Europe.
Despite a slightly more subdued picture for global office demand during the first quarter, supply shortages and limited new deliveries have kept the leasing environment highly competitive in many of the world’s leading office markets, with prime office rents across 26 major markets increasing by a healthy 4.4% year-on-year in Q1 2016. A pace of about 3%-4% rental growth is likely to be maintained during 2016.
Strong consumer confidence and resilient retail sales growth are contributing to healthy demand in the U.S., Europe and selectively in Asia Pacific. Demand has exceeded supply in the past four quarters in the U.S., with several standout markets witnessing conditions typical of a peaking market. Meanwhile, Dublin and UK markets registered the strongest rental growth over Q1 in Europe, while increases were also seen in Spain’s leading cities. In Asia Pacific the demand picture remains mixed, with robust retailer demand in China’s Tier 1 markets and in Tokyo’s prime shopping areas, although rental levels have been stable in most regional markets over the quarter.
Supply chain redesigns to support omni-channel retail concepts and to further shorten customer delivery times are continuing to boost global warehousing demand. In the U.S., absorption is still outpacing new supply, with the national vacancy rate at a 15-year low. Similarly, ongoing vigorous occupier demand in Europe is anticipated to result in take-up volumes remaining at 2015’s record levels. In Asia Pacific, third-party logistics providers, e-commerce retailers and manufacturers are bolstering demand and rental growth in China and Tokyo.
Global hotel transactions activity was subdued during Q1 2016 compared to the stellar levels seen in early 2015, with deal volumes declining by 58% year-on-year. With investor sentiment showing renewed signs of strengthening, transactions activity in Q2 is expected to pick up and the second half of 2016 stands to be very busy. Overall, volumes will be less frothy in 2016 but core investors will feel more comfortable given that some transactions and valuations in 2015 had moved ahead of market fundamentals.
Rental growth accelerated meaningfully in the U.S. multifamily market in Q1 to its highest pace this cycle despite a modest increase in the national vacancy rate on the back of an expanding development pipeline. Institutional investment markets started the year on a quiet note in Europe, with Germany calmer after a record year for transaction volumes in 2015 and the UK market impacted by uncertainty around Brexit and government policy, although there was an increase in sales activity in the Netherlands. In Asia, an accommodative policy stance provided support for strong sales activity in China’s Tier 1 markets, while sales volumes also grew in Singapore.