Global prime office rental market stabilising: JLL

Prime office rents globally are beginning to find their market trough, and both "face rents" and incentives are stabilising, according to Jones Lang LaSalle (JLL).

A few markets have registered prime rental growth in 2010, notably London, Moscow, Shanghai and Hong Kong, and these cities will continue to lead the recovery in 2010, with 20 to 25 per cent rental growth projected for Hong Kong, 10 to 20 per cent for Beijing, Shanghai and London, and in the region of 10 per cent for Moscow, Singapore and Sydney, the global real estate consultancy said in its latest global perspective report.

"We also expect to see rental growth emerging in Brazil during 2010 as well as in the North American gateway cities of New York, Washington DC, San Francisco, Boston and Toronto. Rental growth, however, will be restricted to a narrow band of prime office space, and a common theme in all these markets is the 'two speed' (and even 'two direction') dynamic between prime and secondary products and locations," it added.

In most parts of the world, the office supply pipeline has remained controlled throughout this downturn, which will help in the recovery.

Office completions over the next two years amount to a modest five per cent of total stock and are particularly low in the US and Europe. The global office vacancy rate, which stands at 14.2 per cent across 100 office markets, is expected to show a modest rise in 2010 before reaching a plateau in late 2010 or early 2011. However, there are notable differences in office development cycles when comparing Asia-Pacific to Europe and the US.

In Asia-Pacific, vacancies are trending downwards but will start to rise again (mainly in emerging markets) with construction expected to reach its peak in 2010-11 before moderating in 2012. In Europe and the US, we are at the tail-end of the development cycle and most new supply will dry up by 2011. This will open up opportunities for new development, refurbishment and retrofits, and in a few markets such as London, speculative development is back on the agenda.

Pockets of occupier demand are appearing across every region. Financial services are expanding again in Sydney, Singapore, Hong Kong and Shanghai, and there are early signs of recovery from some banks in London. Technology is driving demand in India and Beijing and in the main technology hubs in the US such as San Francisco/Silicon Valley, Austin and Boston. In the US, the energy, healthcare and biotech sectors are expected to provide longer-term sustainable demand.

"Furthermore, we have seen higher demand from the government, public sector and related services, which has boosted activity in cities such as Brussels, Washington DC and Baltimore, though inevitable budgetary cuts will soon curtail demand from the public sector," JLL said.

While most real estate investment markets have continued to strengthen in the first quarter of 2010, the recovery in corporate occupier markets has been patchier with activity more closely aligned to underlying economic fundamentals. In the Asia-Pacific region, office markets have seen a major expansion in occupied space since 2009, whereas in Europe and the US, the corporate occupier markets have begun to stabilise, though leasing volumes are still below trend and net absorption remains negative.

Europe may see modest recovery in 2010. However, the US will continue to lag and it is likely to be 2011 before recovery really takes hold, the report said.

Real estate investment markets across the world continue to build momentum, although higher prices combined with underlying concerns about sovereign debt contagion have introduced a note of caution to some of the more buoyant markets. In Asia-Pacific, investor interest has cooled over the last month and the velocity of transactions is down on the robust levels of first quarter of 2010.

Policy tightening in China is also starting to impact on investor appetite in the region. Following its lead in the global recovery, London is also starting to see a more balanced investment market with prime yields now stabilising and larger volumes of product being brought onto the market as investors look to take advantage of improving prices.