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Corporates reacting to changing market
Global Office Property Clock
Turnaround in market conditions in Asia Pacific
Real estate market conditions are changing rapidly across the Asia Pacific region. In 2009, the global financial crisis gave tenants an advantage, but in 2010 many countries are moving from the downturn to a more balanced environment and in some markets, landlords are already regaining the upper hand. The opportunities for tenants to upgrade their space and locations at zero or little cost are diminishing as rental rates bottom. Financially strong corporations are using their leverage to enhance non-economic lease provisions, which will drive an improvement in leasing volumes in 2010. However, such activity will be tempered by a continuing sustained attack on occupiers' core space as better ‘line of sight’ regarding real estate costs and ambitious saving targets are put in place.
China: Upgrading and expanding
In China, domestic firms are driving the market, and upgrades and expansion are a significant feature as domestic tenants move from Grade B to Grade A space. Since the beginning of 2010 there is also evidence of an uptick in MNC business activity, but the majority of MNCs continue to renew existing space rather than expand into larger offices. Purchases of office space by financial firms are a growing trend, and in Shanghai, a significant portion of newly built space has been taken out of the market by sales to owner occupiers. New supply is emerging in all major cities across China, much of which is of high quality, encouraging the movement from older to new buildings. The role of decentralised offices will also rapidly grow in Tier 1 cities. The window of opportunity for occupiers to upgrade at favourable terms in Tier 1 markets is now reducing; both the Shanghai and Beijing rental markets are bottoming out and are expected to rebound in 2010. A 15 to 20 percent rise is forecast for Grade A office rents in Shanghai’s Pudong district. Office rents will stabilize in Tier 2 cities though vacancy will remain high. Developers of Grade A office space in Tier 2 cities will be forced to explore strata title sales, given the relatively slow pace of take up against a significant amount of supply.
India: A new generation of offshoring
In India, office absorption rates have gradually improved from 7 percent in early 2009 to 17 percent by year end, but are still well below 2005 - 2007 rates. Commercial leasing activity is increasing, led by telecommunications, pharmaceuticals and healthcare industries. Demand from the IT sector is gradually recovering and should regain its position as the main demand driver by 2011-12. A significant trend which will impact on the India market is a new wave of offshoring, as cost-cutting pressures among MNCs mount; several US companies including Deloitte and NetApp have posted significant space requirements. Office rental values in the main Indian cities have corrected by up to 40 percent and have now returned to 2005 - 2006 levels, presenting good opportunities for corporate occupiers. However rents are now stabilizing, and are expected to start rising by end 2010. Mumbai, Bangalore and Delhi will lead the rental recovery.
Indian office vacancy rates which currently stand at 17 percent will continue to increase sharply due to a massive supply injection. Vacancy rates in suburban markets are expected to breach 30 percent in the near term, while in CBD locations, they will hover below 10 percent. A supply overhang will remain a feature of the market over the medium term. Nonetheless, the supply pipeline is being turned off; of the 200 million square feet of offices planned between 2009 and 2011 (which would have doubled the existing stock), one-third (or 60 million square feet) has been shelved or delayed. Developers are now focusing on the execution of existing projects.
Divergent opportunities across Europe
The similar market conditions seen across Europe’s office markets over the last 18 months are now diverging. The majority of markets present a window of opportunity for corporate occupiers over the coming months, but conditions are tightening in a few key segments, with rental growth anticipated during 2010 in London, Moscow, Warsaw, Oslo and Copenhagen. Occupiers are reacting to the window of opportunity to upgrade space, but this is tempered by continued caution and controls on corporate capital expenditure. Decentralisation is apparent and is driven by supply and cost considerations, but smaller requirements have led to some CBD focus.
Russian market stabilizing
The start of the economic recovery in Russia has brought the market back to life. Rents have stabilised across the board in Moscow which has proved to be a reliable reference point for occupiers, many of whom were sitting on the sidelines since the beginning of the crisis. Average transaction size has fallen sharply and pre-lets, which accounted for a large part of take-up during the boom times, have almost disappeared. Many projects at the construction stage have been postponed, mostly due to problems with financing and expectations of market oversupply. Nevertheless, we expect a high level of completions in 2010. The demand recovery is expected to favour higher quality properties in Moscow, allowing landlords to lift rates for prime properties.
US corporate real estate market seeking new solutions
In the United States landlords have dropped asking rents for six consecutive quarters, in order to drum up demand among the growing competition for available space. Asking rents fell by 2.2 percent in the fourth quarter and by 10.4 percent in 2009 overall, marking the largest annual decline for two decades. The fall in peak to trough asking rents is expected to be in excess of 15 percent in 2010, while net effective rent declines will come close to 20 percent. With the current market discount, tenants are now starting to evaluate new space moves to lock in long-term deals.
US corporate occupiers are also turning to sale-leasebacks to fund new equipment, inventory, acquire competitors or fund new business lines, and investors are lining up to purchase stabilised properties in core markets. The high level of interest is driving down capitalisation rates with bids in the mid-to-high 6 percent range today. Even the government is participating in the sale-leaseback action. The state of California announced a plan in February to sell 11 state office properties and lease them back for 20 years, in order to retire more than $1 billion in debt and stave off further cuts in state programmes and services. California’s move is likely to be followed by several other US states seeking to raise capital as a result of record budget deficits.
In Brazil, office vacancy rates at 5 to 10 percent are low by current international standards and rental values are rising. Rio de Janeiro was one the few major office markets worldwide to record double digit prime rental growth in 2009 (up by 22 percent), boosted in particular by demand from the energy sector; Petrobras, for example, is taking 60,000 square metres in downtown Rio de Janeiro. Brazil's financial services sector is also undergoing significant consolidation, with the merger of Itau and Unibanco (the largest and third largest Brazilian private financial institutions respectively) which should generate significant churn.
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Global Market Perspective - global property - corporate real estate market conditions
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