Office Vacancy Rates
Capital Value Growth
Following a strong final quarter of 2014, the first few months of 2015 have seen the global real estate market settle into a steady pattern of growth. The dominant real estate markets are displaying an air of quiet confidence, underpinned by expectations of robust activity and performance during the course of 2015. Corporates are now committing to new office space, improving consumer confidence has put the stride back into the retail markets, and the warehousing sector is benefiting from the vigorous expansion of e-commerce. Now that the global economy appears to be on a sounder footing, the main downside risks are geopolitical.
Investment activity has continued to expand in 2015, but the strength of the U.S. dollar has masked the true depth of activity. Volumes in the first quarter were up 9% year-on-year in U.S. dollar terms; however, they were 13% higher when denominated in local currencies. Yields for core primary office property are at record lows, yet spreads remain healthy and further yield compression is likely in H1 2015.
Source: JLL, May 2015
The U.S. is currently the standout investment market, with volumes up 24% year-on-year. In the meantime, Japan is driving expansion in Asia Pacific while the UK and Germany have put in respectable growth in Europe. There is further evidence of movement up the risk curve into Europe’s recovering markets (such as Spain and Italy), as well as in India and Vietnam.
With abundant equity, availability of debt and the continued low interest rate environment, investment volumes are expected to continue to rise in 2015 by at least 5% to US$740-760 billion. Both the Americas and Asia Pacific are set to hit new records this year. However, in Europe, despite improving economic fundamentals, it may well be geopolitical developments that play a bigger role and guide investor behaviour. We anticipate European volumes to be stable in euro terms in 2015.
Office absorption rates in the first quarter of 2015 have been modest, but the figures belie a global leasing market that is building in confidence as corporates across a broad range of industries commit to new space and increase employee numbers. Expansion demand across the globe remains elusive, but nonetheless a 20% uplift in net absorption is projected for this year. In the U.S. office market, expansionary activity is more evident and we expect a spike in new absorption later in 2015. The occupational markets in several Asia Pacific and European cities are also showing improved sentiment, which is translating into new deals.
Corporate occupiers are focusing primarily on CBD space and/or those decentralised markets that have amenity, density and a diverse mix of office inventory to create dynamic environments. However, tenants are finding it increasingly difficult to procure prime CBD space, particularly in the dominant office markets – such as London, New York, Tokyo and Hong Kong – where single-digit vacancy rates prevail. New construction is emerging quickly, but there are limited prospects of a respite from supply shortages until at least 2016. These shortages are encouraging landlords to push up rents, but there is still some resistance from cost-conscious tenants.
Sustained global growth, job creation and the diversity of demand will power further rental uplifts. Annual growth of 4% is projected for the full-year 2015 across major markets. Tokyo is forecast to be the star rental performer, but the main U.S. markets have the potential to see a sharp increase in rents during the year.
Increased consumer confidence and retail sales are fuelling optimism in the U.S., Europe and selectively across Asia Pacific. Several standout U.S. markets like Miami and New York are continuing to see the strongest growth conditions typical of a rising market. Meanwhile, the outlook for Europe’s recovery markets has improved significantly, particularly in Spain and Ireland. In Asia Pacific, new-to-market foreign retailers and/or growth of inbound tourism are supporting retail markets in Tokyo, Australia and South East Asia.
There is growing pressure on companies to implement seamless omni-channel distribution services and this is boosting warehousing demand across the globe. There is a particular push on mega-sheds and smaller urban/urban fringe distribution and sortation centres to support a seamless customer experience and, in particular, shorter delivery times. The fastest growth in warehousing rents is being recorded in global gateways such as Los Angeles, London, Tokyo and Hong Kong.
2015 has got off to a robust start for the hotel investment market, with transaction volumes rising by more than 80% in Q1 to US$20.4 billion; this equates to 30% of the US$68 billion that we expect to be transacted during the year. Investment funds and private equity firms were the most active buyers in the quarter.
Economic growth and evolving demographics continue to bring strong demand levels to the U.S. multifamily rental segment. However, new supply is building and by 2016-2017 the demand for units will begin to fall short of supply. Policy restrictions have remained in place in various Asian markets to curb speculation, but China is seeing an improvement in buying sentiment after the recent loosening of lending requirements.