The strong leasing conditions that characterised the global office markets during the latter part of 2017 have continued into the first few months of 2018. At 10 million square metres (across 96 markets), Q1 2018 saw the highest first quarter leasing volumes since 2008, 7% higher than a year ago.
The positive Q1 results put the global leasing market on track for another robust year, although volumes are unlikely to exceed last year’s impressive tally, with a modest 2% fall projected for the full year.
Asia Pacific experienced the sharpest rise in leasing activity, registering one of the highest quarterly volumes on record and increasing 12% year-on-year. Healthy, broad-based occupational demand was reported in most markets, with Delhi, Bengaluru, Hong Kong and Beijing recording sizeable volumes. Positive economic prospects for the region will continue to underpin healthy leasing volumes during 2018. Traditional occupier segments such as financial services and technology will remain key pillars of demand, and flexible space operators will be increasingly active.
European office take-up totalled 3.1 million square metres in Q1 2018, a 6% increase year-on-year and 23% above the 10-year Q1 average. This robust performance follows a record final quarter and full-year 2017, underlining the strength of the European office occupier market. Paris saw the highest Q1 volumes since 2006 and London continued to outperform expectations, with take-up increasing 8% year-on-year, while Germany’s ‘Big 5’ office markets saw more subdued demand compared to a robust Q1 2017.
The U.S. office market demonstrated further signs of movement into a more balanced, slower-growth phase of the cycle. As the market remains near peak employment and talent shortages become more acute in an environment of rising supply, occupancy growth continues to cool. During Q1, net absorption totalled just 340,000 square metres annualised. This rate of absorption, if maintained through the remainder of the year, would result in the slowest year since 2010. Absorption should recover to a degree as demand from creative and knowledge-intensive tenants pre-leasing new space moves into delivered assets, but will remain below previous years.
Once again, global office vacancy has defied expectations, with the aggregate vacancy rate falling by another 20 bps during Q1 to stand at 11.7%, the tightest of the current cycle. In contrast to previous quarters, all three global regions registered a decline in vacancy during Q1, despite a rise in new deliveries.
European vacancy tightened further during Q1, down 30 bps to 7.0%, and edged down in Asia Pacific to 10.9% despite the elevated level of completions. Meanwhile. U.S. vacancy showed no meaningful change.
The global office development cycle will peak this year at 17.2 million square metres, as development peaks in Asia Pacific driven by markets including Shanghai, Delhi, Bengaluru, Mumbai and Tokyo. With the delivery of new offices expected at a relatively elevated level during 2018, vacancy is forecast to edge up to over 12% by the end of the year.
Rental growth for prime offices across 30 major markets continues to accelerate and is now running at 3.8% year-on-year, the strongest rate since Q2 2016. For the full-year 2018, rental growth is projected to average close to 3%, with top performance anticipated in Singapore and Sydney. Other stand-outs are likely to include Toronto, Sao Paulo, Moscow and Berlin.
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