Cushman: Global Office Markets Mixed Heading into 2012, 2013

While some road bumps will continue through the foreseeable future, global real estate markets will undergo a slow recovery through next year and into 2013, according to a report by Cushman & Wakefield Inc.

By Nicholas Ziegler, News Editor
December 12, 2011

San Francisco. Image courtesy Flickr user m.john16.

While office markets in 2011 started to come back quite strongly, a few bumps in the road prevented a full-blown recovery. And while those road bumps – continued unemployment, fiscal crises at home and abroad – will continue through the foreseeable future, global real estate markets will undergo a slow recovery, with several key markets poised to see growth continue through next year and in into 2013, according to a report by Cushman & Wakefield Inc.

Leasing activity through 2012 is best characterized as mixed. In the Americas, markets dependent on government leasing will stall, though growth industries such as technology, healthcare and energy will fuel markets like San Francisco, Calgary, Houston and Downtown Toronto. While Europe’s overall economy will remain sluggish, Frankfurt, Munich, Paris, Istanbul, Stockholm and London are expected to outpace other European markets. In Asia, growth in second-tier markets in China is expected to accelerate, as well as in countries where regional trade accounts for the majority of exports, such as Indonesia and Australia.

“By 2013, all major markets in the Americas are projected to be back on solid footing, with increased leasing activity, higher absorption levels and steady demand,” Maria Sicola, executive managing director & head of Americas research for Cushman, said. “An expansionary cycle lies ahead, and firms will profit by focusing on long-term corporate strategies and growth.”

Rental rates in the Americas will hold steady in most markets. In the U.S. and Canada, minimal new construction will mean limited competition for existing owners, allowing them to hold their ground on asking rents. In Mexico and South America, increases in domestic consumption and trade with Asia will offset any decreases in European demand and drive expansion plans for corporations.

While for the most part of 2011 the European office market moved steadily towards becoming a landlords’ market, recent economic instability has put occupiers back in the driving seat. However, the declining availability of high-quality space has made it clear that current conditions will support a delayed rather than a cancelled recovery. Even while demand is weakening, businesses are still looking to improve productivity and cut costs. When it comes time to replace older space, consolidate, reorganize or achieve greater sustainability, tenants are faced with limited opportunities for high-quality space. This will ultimately drive rental growth in some markets.

Performance throughout Europe will vary by market. Overall vacancy is expected to see a modest fall, but some cities will see an increase due to lower demand or more development. While some areas, including Milan, Warsaw, Madrid and Stockholm, will see new building completions increase in 2012, overall development continues to drop throughout Europe. In 2009, new construction as a percentage of total inventory peaked at 3.7 percent, and is forecast to fall to 1.7 percent in 2011 and 1.4 percent in 2012/2013.

“While the number of active occupiers is forecast to increase, most will be seeking improved efficiency rather than expansion and 2012 is widely expected to be a difficult year,” David Hutchings, head of European research, said. “The market will remain very polarized but most markets are expected to see absorption soften and then bounce back in 2013.”

Asia Pacific’s 2012 economic forecast portends moderate strength, enough to fuel activity in the occupier market. Demand will remain broad-based, with the banking sector continuing to be a vital player, despite an expected decrease in expansion. Continued global outsourcing and information technology spending will benefit India, and pharmaceutical firms are targeting China and India for their growing middle class and large population base as well as Japan, given its large, aging population. The booming mining sector is also expected to be a critical growth driver in Australia and Indonesia.