A Measured Recovery

The world's major commercial real estate markets have been in recovery mode since the crisis of 2008/2009, with 2011 having shown the strongest evidence of an upswing so far. As we move through 2012 nonetheless, first quarter market data suggests a slowing in forward momentum, with investment and leasing volumes down by about one-fifth on a year ago. We believe this is a lagged market response to the escalation of the euro crisis during the second half of 2011 and, as such, it is likely to be a temporary slowdown. Given the more positive outlook for the global economy, the significant weight of capital targeting commercial real estate and the strong pipeline of deals, we fully expect the global real estate markets to resume their steady, measured recovery during the remainder of 2012.

The key highlights from the Second Quarter 2012 Global Market Perspective are:

• A brighter global economic outlook for 2012 is supporting a steady recovery in real estate sentiment.
• Global investment volumes are down 21% year-on-year, due to a lack of product in core markets and constraints on debt finance but, with a strong pipeline of deals, transaction volumes for full-year 2012 are expected to match 2011 levels. The Americas region offers the greatest potential to outperform in 2012.
• London is the top city destination for real estate capital in Q1 2012, followed by New York and Tokyo.
• Overall leasing activity has slowed, a delayed response to corporate occupier caution during H2 2011. Q1 2012 volumes are down 15%-25% year-on-year. Gross leasing volumes are expected to be slightly lower in full-year 2012 compared to 2011.
• Several business sectors are in growth mode - technology, energy and commodity-rich markets are registering robust corporate occupier demand. Domestic corporations and outsourcing (BPO) are driving demand in many emerging markets. By contrast, leasing activity by the financial sector remains subdued.
• The office supply-side continues to tighten. The global office vacancy rate stands at 13.4% (versus 14.3% a year ago). A low development pipeline in most mature markets will not ease the shortages of high-quality space.
• Rental growth has softened. The Global Office Index increased by 0.5% in Q1 2012 against 0.8% in Q4 2011. Expectations have been tempered, but modest growth is expected to be a feature of most major markets for 2012.
• Prime yields and capital values are holding firm in the majority of major markets on the back of robust investor demand for high-quality core well-let assets.
• International retailers are targeting emerging markets, with a strong focus on Greater China. Retailers are moving deep into China's secondary and tertiary cities.
• Europe's prime retail leasing markets are proving resilient, with rents rising at their fastest rate in over a year.
• The major industrial markets are maintaining a steady pace of recovery; development is focused on 'build-to-suit'.
• Hotel investment activity steadied in Q1 2012; hotel operators are stepping up acquisitions.
• The U.S. rental apartment market remains strong and continues to be the most sought-after U.S. property sector.