Office Vacancy Rates
Capital Value Growth
The major global real estate markets are in better shape than at any time since the Global Financial Crisis, with the continued momentum in capital markets now supported by improving corporate occupier demand across all the main global regions and property sectors. Abundant liquidity has pushed investment volumes back to the level of 2006, with expectations of further growth during 2015. Meanwhile, rising construction levels and developer confidence underline the strength of demand for modern space. Economic and geopolitical headwinds may affect future growth prospects but, equally, 2015 offers the global real estate market upside potential on the back of a robust recovery in the U.S. economy, lower oil prices, quantitative easing in the Eurozone, a resurgence of India and 6%-7% economic growth in China.
Records have been broken in the global capital markets over the past year. Asia Pacific volumes hit a new high in 2014 following a very strong final quarter; in the Americas they were also at near-record levels; and an exceptional Q4 in Europe propelled full-year totals well beyond expectations. The largest single quarter that JLL has recorded, pushed full-year 2014 global investment volumes to US$710 billion, a 20% increase on 2013.
There is a notable growing interest in higher-yielding assets in smaller and second-tier locations, particularly in the U.S. and Europe – in part due to intense competition and yield compression in prime markets, but also now due to broadening and strengthening property market fundamentals. Investors are becoming more flexible and, in Asia, new players are moving into markets like South Korea, India and Thailand.
The huge demand for direct real estate is continuing into 2015. Although the U.S. has ceased its QE programme, the Eurozone and Japan are taking up the baton of providing ample liquidity to global markets. Interest rates in the U.S. may move higher later in 2015, which would gain the attention of real estate investors in the world’s most liquid market. JLL estimates that the rate of growth in global investment transactions will moderate to between 5%-10% in 2015; however, this will still result in volumes of US$740-760 billion, matching the record levels of 2007.
Overall corporate occupier activity is strengthening. The U.S. has seen its highest quarterly net absorption gains for more than five years, underpinned by solid GDP, consumer spending and employment growth. Europe has witnessed its largest quarterly take-up volumes for seven years, fuelled by a number of major corporate occupiers taking advantage of favourable market opportunities. Meanwhile in Asia Pacific, Q4 leasing volumes were up 14% year-on-year.
Occupier activity will be more balanced across industry sectors in 2015. For the past several quarters, technology and energy firms have been the most active occupiers in global real estate markets. However, 2015 may be a year in which activity in these sectors shows reduced cadence as oil prices plummet and as tech valuations are corrected. In this context other industry sectors such as manufacturing, banking, consumer and healthcare will become more prominent.
Improved global economic growth, increasing expansionary demand and portfolio restructuring are expected to boost office leasing volumes in 2015, but growth will be incremental and uneven. In many markets, activity will be constrained by a scarcity of high-quality available stock. JLL expects higher levels of pre-letting, as well as growing demand for secondary product.
Development activity is continuing to increase as tenant expansion and tightening fundamentals further justify new construction. Confidence among developers is likely to persist, but supply will remain in check in most markets and it will be 2016/2017 before new office deliveries move perceptibly above the long-run average.
Rental growth is accelerating, with the annual rate of growth on prime office assets increasing from 1.7% in 2013 to 3.1% in 2014 and another 4% rise projected for 2015. While Tokyo, Sydney, Beijing and London will be among the top-performing rental markets in 2015, the highest ranks are likely to be dominated by the major U.S. markets (notably Boston, Chicago, Los Angeles, New York and San Francisco).
The sharp fall in oil prices, which has raised disposable incomes at a stroke, is likely to provide a welcome boost to the global retail real estate sector. Following a slow recovery in 2014, the retail sector in the United States is expected to build momentum in 2015 on the back of consumer tailwinds. In Europe, growth will probably be strongest in the UK, Germany, Sweden, the CEE and Turkey, but recovering markets in Southern Europe are also now improving. The Asia Pacific region is, in general, seeing healthy retailer demand, with the expansion of international fashion retailers continuing to buoy demand in SEA and Australia.
The logistics warehousing markets continue to benefit from e-commerce and significant network reconfiguration. The U.S. national vacancy has fallen to only 6.9% (lower than the last cycle) boosting annual rental growth to 4%, with further upside expected in 2015 as tenant demand increases. The European industrial vacancy is at an historic low with virtually no large buildings being immediately available on the market. Warehousing construction is increasing, particularly in the U.S, but new supply is still largely in check.
2014 was a robust year for hotel investment, with global transaction volumes exceeding US$58 billion, marking a seven-year high. Single-asset deals climbed to the highest annual level on record. Investor confidence is high and the market will continue to gain traction in 2015, with volumes expected to increase by another 15%. Investment funds and cash-rich private equity firms will remain the most active buyers. The floodgates are opening up for Chinese outbound capital – which rose by 80% in 2014 and looks set to increase by up to fivefold in 2015.
Improved economic growth and evolving demographics are fuelling demand in the U.S. rental apartment market, but with construction deliveries exceeding long-run averages, rental growth is softening and apartment tenants may begin to regain some leverage from landlords by 2016-2017. In Europe, institutional activity is strong in both Germany and the Netherlands, while the number of investors announcing new funds to allocate to the sector in the UK is still growing. In Asia, we are starting to see improving sentiment among buyers in Shanghai and Hong Kong, while Singapore should also improve this year as ongoing price correction boosts affordability.