Office Vacancy Rate
Capital Value Growth
The global real estate investment landscape remains very active. A significant weight of capital is chasing commercial real estate, despite mounting geopolitical and economic uncertainty which does not appear to be overly concerning the market for now. Barring an escalation of such risks, momentum is expected to build during 2015, albeit at a slower pace, supported by improving fundamentals. Conditions in the occupational markets, while more diverse, are moving more decisively into upswing, led by the U.S., London and select Asian markets. Tenant options are being squeezed in many markets due to the dearth of quality space and corporate occupiers will be increasingly exposed to rental cost inflation over the next 12 months as positive sentiment extends over a wider geography.
Real estate assets are strongly in favour, with allocations continuing to grow from virtually all investor types. This reflects, to some extent, the continued volatility of equities, low bond yields and, despite yield compression, relatively attractive spreads between property yields and borrowing costs. Therefore, in spite of the mounting uncertainty of recent weeks, JLL remains confident that our forecast of full-year 2014 volumes of US$700 billion will be achieved.
Investor interest is spread across a broad range of geographies, sectors and asset sizes, with volumes boosted by several portfolio and large single-asset transactions. Intense competition in core markets is compressing yields to new lows and pushing activity into ‘secondary’ locations. The lending environment is favourable to maintaining high levels of activity, which should be evidenced by further transactional volume growth during 2015 (of 10%-15%).
Corporate occupiers are responding to the mixed signals in the global economy in a disparate way, with leasing markets showing greater diversity in activity, sentiment and performance. Office fundamentals are improving strongly in the U.S., where net absorption is at its highest level of the current cycle and occupier activity is rippling into secondary cities. London is registering near record take-up volumes, but in Continental Europe activity is more subdued, amid renewed economic concerns. The recovery in Asia Pacific’s leasing market is patchy, but year-to-date volumes across the region are up 16%. Demand in China is being driven by domestic firms and tech firms are leading in India; Manila is the star performer in emerging South East Asia as firms expand to lower-cost locations and diversify their operational risks.
Globally, gross leasing volumes are likely to finish the year at levels similar to 2013, though more encouragingly, net absorption is likely to be around 30% higher than a year ago, highlighting the selective return of expansion demand. Volumes are expected to improve steadily in 2015, up by 5% year-on-year, supported by stronger global economic growth, as well as increasing corporate headcount and capital expenditure.
The global office vacancy rate (across 98 markets) has dropped below the 13% threshold for the first time in the current cycle. Mounting supply shortages have prompted another rise in construction activity and, globally, new deliveries are anticipated to be around 25% higher in 2015 compared to 2014, with prospects of even larger construction volumes in 2016.
Falling vacancy rates, combined with a gap of another 12-18 months until the next wave of new office deliveries hits the market, should ensure rental uplift during 2015 in most dominant office markets. JLL is projecting prime rental growth (across 25 major office markets) to accelerate from 3% currently, to 4%-5% in 2015. Tokyo and Beijing are set to be the top performing office rental markets in 2015 on the back of falling vacancy rates, however it is the emergence of the major U.S. cities (Boston, Chicago, Los Angeles, New York and San Francisco) among the top performers that will be a key feature of the market in 2015.
The U.S. retail market is edging slowly into recovery, while Europe has lost some of its impetus due to concerns about economic growth and geopolitical risk. Retailers are also showing caution in Asia Pacific, save for international brands continuing to target Southeast Asia. Retailer demand is stable in mainland China, but sales in Hong Kong are partly dented by the ‘Occupy Central’ protests.
The U.S and European warehousing markets are at their tightest for several years, underpinned by robust demand for modern functional space. Rents are increasing across multiple geographies in the United States; however, growth is much more selective in Europe (e.g. London and Munich). Construction is increasing steadily in the U.S., which will start to test the market in 2015-2016. Europe’s response has so far been limited to build-to-suit, although there is a growing appetite among major international logistics operators to build on a speculative basis.
Capital markets activity in the hotel sector is strong. Hotels’ income growth continues on a steady upward path, lenders’ confidence in the sector has returned, and sellers are motivated given the wide audience of buyers. Nonetheless, several downside risks have emerged which may adversely affect volumes – namely mounting geopolitical risk, anxieties about the Ebola epidemic and concerns that economic growth may be faltering in Europe.
Institutional investor interest in Europe’s residential sector is strengthening, led by Germany and the Netherlands. At the same time, the UK’s nascent ‘build-to-rent’ sector, styled on U.S. multifamily assets, is finally gathering pace, and in the U.S., tight market conditions in the multifamily sector are maintaining healthy rental growth, particularly in its tech-rich cities. Meanwhile, policy restrictions in Asia’s major markets continue to dampen high-end residential sales. Dubai has seen a welcome cooling in sales prices, while price growth is moderating in London.