The Expert: Global Financial Centers Take It on the Chin

Recently, attention has been focused on Manhattan, as the financial crisis gripping much of the country continues to hollow out its largest office market. But New York is not alone in what is now a global recession. Other leading financial centers–including London, Tokyo, Frankfurt, Hong Kong, Shanghai and Singapore–have all taken a very big step backwards as investment banks scale back and layoffs from all corners of financial services ensue. By most measures, New York is suffering commensurately with nearly all other financial centers around the world.Almost every major financial center is now characterized by rising vacancy and falling rents. In New York, the Midtown vacancy rate has risen by more than 50 percent, to 10.2 percent at year-end 2008 from 6.4 percent in June 2007. London’s West End submarket has seen vacancy levels increase to 6.1 percent at the end of 2008 from 4.1 percent in December 2007, while its City submarket has seen a similar increase, rising to 9.7 percent at the end of 2008 from 6.5 percent at year-end 2007. Frankfurt has seen a more muted increase, rising just 20 basis points in the latter half of 2008. And in Asia, the Shanghai office vacancy rate increased by 770 basis points during 2008 to average 10.2 percent, while Tokyo and Singapore saw their respective vacancy levels increase 150 and 280 basis point to register at 4 percent and 8.9 percent, respectively. Meanwhile, in just the last six months of 2008, Hong Kong’s vacancy rate increased two-and-a-half percentage points, to finish the year at 4 percent.Expressed in U.S. dollar terms, the cost to lease space in the latter half of 2008 fell in every major financial center with the exception of Frankfurt, which registered a minor increase. Both of London’s primary office markets registered substantial declines: The West End saw office occupancy costs drop by 45.9 percent to $112 per square foot, while City rents fell 43.1 percent to $83. In Asia, Singapore rents fell 22.4 percent to $97, Hong Kong was down 16.8 percent to $178, Shanghai dropped 2.1 percent to $53 and Tokyo saw rents move just 0.5 percent lower to $128. By comparison, Midtown rents fell 15.3 percent to $82.Buffeted by an ongoing financial crisis while fighting to maintain its status as the financial capital of the world, Manhattan faces one of the worst years on record for its office market. While New York landlords may find little comfort in the fact that financial centers around the globe are likewise struggling with rising vacancies and falling rents, they may be better cheered by prospects that the reprieve tenants are receiving may be short lived, as the next cycle will almost certainly lead to rising real estate costs in the world’s leading financial centers.Ross Moore is executive vice president & director of market & economic research for Colliers International USA.