Higher vacancies to depress rents in 2011

Dubai has a significant overhang of vacant office space, which will depress rents and take many years to absorb, believes Jones Lang LaSalle (JLL).

The global real estate consultancy in its global real estate outlook for 2011 said: “Prime office space is now available with over 50 per cent discount on its 2008 peak and residual decline will still be recorded.”

In October, JLL said Dubai is the fastest growing office market in the world on a per capita basis, with the total area of occupied Grade A quality office space increasing by 2.8 square feet per capita since the beginning of 2008.

According to Landmark Advisory, office space in Dubai will almost double to 80 million square feet by beginning of 2015 from 41 million square feet as of early 2010, while Colliers International expects 2.5 million square feet of office space to enter the market between now and end of 2011, taking the total space to 6.4 million square metres.

Dubai is not the only city where rents will continue to bottom out. On the property clock projects for fourth quarter 2011, it is joined by Mexico City, Seoul, Madrid and Los Angeles.

Overall global office vacancy rates will gradually trend downwards during 2011. In Europe and the US, new office deliveries are near historic lows and commencements are few and far between. This dynamic will intensify in 2011, leading to increasing shortages of Grade A space. Most markets are still without speculative development finance and although injections of funding have been seen in London, they have been focused on trophy tower schemes. A supply gap is likely to emerge in many markets, with refurbishment and “green” retrofits a logical strategy to exploit the lack of new build. The market will increasingly polarise, with shortages of Grade A space and rising volumes of vacant secondary space.

By contrast, Asia Pacific will reach the peak of its development cycle in 2011 with a record additional 6.8 million square metres of office space to be delivered. Nonetheless, strong corporate occupier demand will absorb much of the additional space and, in most markets, vacancy rates will not rise significantly. The exceptions will be some Indian and Chinese cities, and to a lesser extent Singapore, where large supply pipelines will force up vacancy rates. In markets such as Hong Kong, Tokyo and Sydney, limited supply combined with strengthening demand should see vacancies trend downwards, JLL said.

Several major office markets in Latin America including Sao Paulo, Rio de Janeiro, Santiago and Panama City still feature vacancy rates near or below equilibrium levels.

JLL, however, believes that many of the world’s high-order office markets will be firmly in the rental upswing phase in 2011, with double-digit growth forecast for well-located trophy and Class A product in a number of markets. Strongest prime rental growth is projected for Hong Kong (at over 25 per cent), followed by Moscow, Singapore, Tokyo and London (at 10-20 per cent). Paris, Frankfurt and Sydney are also expected to register real (inflation-adjusted) growth, while rental spikes could begin to appear by the second half of 2011 in well-located trophy assets in some US gateway cities such as New York, San Francisco and Washington DC. Meanwhile, rental growth in China’s Tier I cities of Shanghai and Beijing is likely to moderate from the hectic pace of 2010.

Office leasing volumes in 2011 are projected to be at their highest level since the global financial crisis, with corporate occupiers displaying greater confidence to do deals. Higher churn will be helped by improved corporate profitability, but occupiers will continue to push for the best possible terms and to strive for cost efficient space. Their focus will be on better grades of space, leading to the eventual release of poorer quality second-hand property, which could potentially overhang the market for several years.

In Asia Pacific, strong economic conditions and business confidence will boost office take-up in 2011. Relocation and upgrading are likely to underpin the bulk of demand, although with stronger hiring activity in markets such as Hong Kong, Singapore, China and India, expansion demand is expected to accelerate as corporate occupiers equip themselves for future growth.

Net absorption across Asia Pacific’s Tier I office markets is projected to reach a record 4.5 million square metres in 2011, almost double the 2009 level and about 10 per cent higher than the previous peak in 2007. Tier I markets in India and China will see the highest net absorption rates, enhanced by rapidly-growing domestic corporate sectors and expansion by multinational corporations (MNCs).

In both Europe and the US, take-up levels are expected to rise modestly on 2010 levels. Overall, net absorption is likely to remain flat, although some core Tier I office hubs could register relatively strong absorption rates. German, Nordic and CEE markets will also see strengthening demand, the report said.

Follow Emirates 24|7 on Google News.