Jones Lang La Salle’s Global Premium Office Rent Tracker Q4 2016: Upward Pressure on Premium Office Costs

Jones Lang La Salle’s Global Premium Office Rent Tracker Q4 2016: Upward Pressure on Premium Office Costs

The second edition of JLL’s Premium Office Rent Tracker (PORT) compares occupancy costs for premium large offices across a broad range of the world’s major cities. PORT includes the key elements of occupancy costs – net effective rent, service charges and property tax – all standardised to enable true international comparisons.

The Premium Office Rent Tracker
Provides a snapshot of the rarefied world of the premium office market. While only a fraction of a city’s corporate base will pay such premium rents, the tracker benchmarks office occupation costs on a like-for-like basis. It provides a useful barometer of relative city attraction and highlights the intense strains that many cities face as their real estate markets try to accommodate growth.

Trends to watch

• Corporate demand for premium office buildings in the world’s most prestigious commercial office districts continues to outstrip supply, serving to push up occupancy costs in several premium office markets.

• Nonetheless, in tandem with overall global office trends, there is mounting evidence that the premium segment is moving into a late-cycle phase, with upward pressure abating as markets move more into balance.

• Shortages of premium space continue to characterise many of the global gateway cities. In general, vacancy rates are below 5 percent, and in some gateway markets, they are lower than 2 percent.

• Affordability is a concern in many cities and, in order to remain competitive, the top global cities will need to execute bold urban transformation projects to ensure a supply of appropriately priced and flexible commercial space.

• Traditionally, premium office space has been the domain of high-value, high-margin businesses in financial services (e.g. private banking, corporate and investment banking), professional services (e.g. legal, management consulting) and high-end fashion/luxury goods. More recently, a greater number of tenants from the technology sector are targeting premium buildings to attract top talent and enhance their brand equity.

The top six are amongst the world’s most connected cities

• Unsurprisingly, the world’s most important, influential and interconnected cities with deepest pools of firms and talent continue to command the highest office occupation costs – notably Hong Kong-Central (1st), London-West End (2nd), New York-Midtown (3rd) and Tokyo (5th), with China’s Alpha cities, Beijing (4th) and Shanghai (6th) completing the top six.

Hong Kong remains the most expensive office location. Most striking is the differential that has emerged between Hong Kong and the next most expensive cities, with costs for premium office space now in excess of 50 percent greater than either London or New York.

Hong Kong’s top position is testament to its attraction as a “globally fluent” business hub with a range of internationally recognised strengths. Its Central District has seen robust growth in premium rents over the past 12 months on the back of demand from mainland Chinese firms and very limited supply. However, affordability and lack of available space are concerns that are likely to accelerate decentralisation to nearby growing core districts that offer more than 50 percent discounts to premium rents in Hong Kong Central, a trend supported by significant infrastructure works.

London, in second position, has been impacted by the Brexit vote as corporate occupiers adopt a more cautious approach until there is greater political and economic clarity. Costs in U.S. dollar terms are some 15 percent to 20 percent lower than a year ago due to a combination of sterling’s depreciation and a modest reduction in net effective rents. Any further downward pressure on London rents could see it fall to third position during 2017, overtaken by New York where premium rents have grown by over 10 percent this year and a further uplift is in prospect during 2017.

• China’s Alpha cities have slipped marginally in the ranking. While premium rents have been maintained in Beijing and Shanghai, both cities have dropped one place in the global ranking due to the relative outperformance of New York and Tokyo respectively.

Tokyo’s move up the ranking is supported by high leasing activity and bolstered by large ticket pre-commitments. A further boost from a strengthening yen has seen Tokyo move into fifth position and, having overtaken Shanghai in 2016, the market has potential to move ahead of Beijing in cost terms during 2017.

Extending the coverage of PORT

In this second edition of PORT, we have extended coverage to include a further 11 markets. PORT now covers occupation costs across 35 major office markets in 31 cities. Recognising the polycentric characteristics of many premium office markets, coverage in Hong Kong (Island East), New York (Downtown), London (City) and Paris (La Défense) has been extended to include additional submarkets. The two largest office markets in Latin America – São Paulo and Mexico City; the emerging Asian hub of Jakarta and four cities in Europe – Brussels, Geneva, Milan and Zurich – have been included for the first time.

The 31 cities represent the full spectrum of markets of differing function and evolution, ranging from the Established World Cities (of New York, London and Tokyo) to Emerging World Cities (like Mexico City, Moscow and Mumbai) and New World Cities (as exemplified by San Francisco, Sydney and Toronto).

Looking beyond the top six

• Several U.S. markets have raised their position in the ranking. Boston (11th) has moved into the top 12 for the first time, where a recently completed building has set a new rental benchmark. New supply has also increased premium rent levels in Washington, DC (13th), while double-digit rental uplift in Los Angeles (17th) has been supported by robust corporate demand for premium space. Meanwhile, San Francisco has held strong in eighth position as rents begin to plateau.

• Sydney (23rd) and Madrid (28th) also stand out for their growth in premium rents over the past year. Underpinned by robust demand from professional services, Sydney is poised to be one of the healthiest rental performers in 2017. In Madrid, supply shortages are boosting premium rents and the city is likely to be among Europe’s top rental performers next year.

• Notable by their absence from the top 10 are two Established World Cities – Singapore (18th) and Paris (20th). Singapore has seen a rental correction as new supply has come on stream. This has put Singapore at a competitive advantage over other more costly Asian gateways. Paris has witnessed an increase in demand for iconic buildings which, combined with a lack of immediately-available supply, should push up premium rents in the coming months.

• European cities are concentrated in the lower half of the cost ranking, with only London and Moscow (15th) featuring in the top half. Among the 35 markets covered by PORT, Amsterdam (34th) and Brussels (35th) offer the most competitively priced premium office space, with occupancy costs barely 15 percent of those in Hong Kong-Central.

• Latin America’s two largest office markets, S„o Paulo (31st) and Mexico City (32nd), have joined PORT for the first time. They appear towards the bottom of the global ranking as they contend with formidable new supply, which has put downward pressure on premium rents.

DISCLAIMER: The data above represents the findings of Jones Lang La Salle IP, Inc and is not in any form and endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.

This article was first published in the iProperty.com Malaysia January 2017 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine.  Better yet, order a discounted subscription by putting in your details in the form below!

 

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