Office rental growth 13th September 2013

Over the next five years London’s West End is set to see the highest regional rental growth (6%) of the 90 office markets surveyed in DTZ’s latest Occupier Perspective Global View report. Unsurprisingly, occupiers in London West End are paying the highest rents in the region. By contrast, DTZ expects Prague, Rome, Bucharest, Hamburg and Geneva to offer occupiers cost saving opportunities going forward. However, their rental adjustments will be modest and range from -1% in Prague to -0.2% in Geneva. Geneva is the fourth most expensive market in Europe and the gentle fall will have a minor impact on its rental level.

The report, which analyses 90 office markets across Europe, Asia Pacific and the US, found that in the first half of 2013, most global corporations were still waiting for confirmation of sustained economic growth before expanding and committing to new office space.

DTZ's take-up data shows sustained activity levels in most major European markets. Take-up in London City was 16% higher in the first half of 2013 compared to the same period last year. The growth was particularly strong in the second quarter with 240,000 sq m committed. In Asia Pacific, general sentiment and demand for office space has cooled as a result of the slow-down in Chinese growth. This resulted in rental declines in H1 2013 in several mainland China markets, namely Shanghai, Chengdu and Hangzhou. However, demand held up relatively well in emerging South East Asia. This was particularly the case in Jakarta where rents increased by 9% over the period.

In Europe, cost cutting remains a priority and most corporate expansion plans are still on hold. As a result, rental changes were mixed in the first half of 2013 - with an equal number of markets posting increases and declines. Increases in Moscow, Germany and the Nordic markets were due to solid demand and constrained supply. In contrast, declines were registered in Bucharest, Rome, Warsaw, Geneva and Glasgow. These were the biggest declines for individual markets globally.

In the US, limited rental growth was recorded in the first half of 2013. This modest rental growth occurred despite the fact that more than half of US markets registered lower absorption levels in H1 2013 compared to the same period last year. The low absorption levels were attributed to a slow-down in tech demand, specifically in San Francisco and New York. Absorption was further held back by occupiers increasingly seeking open work environments. This will increase efficiency and limit demand for class A high-rise offices.

However, limited supply offset these factors. Therefore, on a regional basis our outlook in office rents shows the widest range in forecasted growth in Asia Pacific followed by Europe. Several European markets are projected to offer cost savings for some time to come, whilst a large number of Asian markets are showing strong costs increases. The US has forecasted rental growth below the global average and within a much tighter range than the other two regions.