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Week of August 28, 2000 Snapshot from the Field |
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Global Rents Ratcheting Up with Strong Economy,
Surging regional economies and skyrocketing growth in the technology sector: Those two factors pushed office occupancy costs to all-time highs in many world major cities during the first six months of 2000, according to the "Global Market Rents" semi-annual survey released by CB Richard Ellis Global Research & Consulting, a business unit of CB Richard Ellis Services (CBRE at www.cbrichardellis.com).
Occupancy costs rose in most cities tracked in the CBRE report, officials commented.
"The global economy generally is in good shape, and this has translated into strong office markets in many major cities. We've seen a significant premium on occupancy costs in many markets as a result of the rapid expansion in the technology sector, especially within so-called new economy industries," said Bill Rothe, senior executive managing director, CBRE Global Research & Consulting.
Rothe, however, cautioned, "It remains to be seen whether this technology dividend will continue to pay off for office landlords around the world." (Rent data are for July 2000.)
Inner central Tokyo ranked No. 1 among the "top 20 most expensive cities for office space" in the "Global Market Rents" report, with an annual rate of US$155.23 per sq. ft. All told, six Asian cities were among the study's 20 most expensive, five in the top 10 (see accompanying chart).
Europe, however, had the highest proportion of the 20 most expensive cities, with 11. Topping the European list was the London's West End, with its $133.54 per sq. ft. annual tab ranked No. 3.
U.S. cities made up the rest of the survey's 20 most expensive areas, topped by No. 9 San Francisco, with a rental rate of $64.70 per sq. ft. per year. That marked the first time that a U.S. city has cracked CBRE's global top 10.
Said the "Global Market Rents" survey, "Average annual occupancy costs in San Francisco shot up more than 26 percent the first six months of the year. . . . Over the last 12 months, occupancy costs have risen 36 percent in the city."
Here's a look at the report's regional findings.
"Nowhere was the deepening impact of a technology-sector boom more apparent than in North America," CBRE's survey reported. "With major markets such as Boston, Los Angeles witnessing their lowest office vacancy in recent history, there was little surprise that the region saw a 1 percent decline in the overall national vacancy rate to 7.4 percent, also an all-time low."
The "Global Market Rents" survey's biggest rent increase in North American, though, came in the Silicon Valley submarket, the 13th most expensive area. "In the last six months, tenants in the technology hotbed have seen occupancy costs shoot up almost 30 percent," CBRE reported. "In the last year, costs have risen 43 percent."
The Canadian market also strengthened significantly, said CBRE.
"The impact of the new economy was also felt strongly in Canadian office markets where a strong national economy and low unemployment has created increased demand for space with little new development the report," the survey reported. "In the last 12 months, the national vacancy rate has dropped from 11.1 percent to 8.8 percent and in cities such as Toronto, Vancouver and Ottawa vacancies are lower than at any time in the past decade."
In the Europe, Middle East and Africa (EMEA) region, noted CBRE, "Buoyant regional economies are increasing the demand for office space." Rents increased in 32 of the 38 EMEA markets covered in the report.
Europe, the report noted, is where the EMEA's space crunch is hitting hardest, with little new development underway in most of the 21 European office markets within the "Global 50 Index" of most expensive markets.
"The relative dearth of new construction, combined with strong economies and demand for space in many markets, is likely to result in further increases in occupancy costs throughout [Europe] by the end of the year," commented Nick Axford, CBRE director of research & consulting for the EMEA.
Barcelona, Madrid and Stockholm showed the biggest rent gains, CBRE officials noted.
"Office construction levels are up in some European cities, but with much of this new space pre-leased, the prospect of further space tightening is likely," said the survey report. "On average, rents increased 10 percent within the region."
Asian markets also showed strength in the survey, much of it owing to the new economy, CBRE noted. Hong Kong, Singapore and Seoul, CBRE reported, "have seen strong growth in information technology businesses, which has resulted in heavy demand for office space from the low/middle end of the market up."
The report noted that "prime office markets in Asia are headed up. Rental rates across the region increased by 5.3 percent in the first six months, [with] Melbourne, Hong Kong and Singapore witnessing the fastest growth. Only the weakness of Asian currencies against the US dollar kept Asian markets from showing dramatic increases in U.S. dollar terms."
The test for Asia's surging real estate markets will come if the region's new economy hits a significant bump, commented Tim Kirkus, CBRE research director for Asia.
"The technology sector is driving the resurgent office markets in Asia just as much as it is elsewhere in the world, Kirkus noted. "The true test of these markets will come if -- as many observers predict -- there is a shakeout in the tech sector and start-ups fail or consolidate."
But CBRE sees the region's markets staying strong in the near term, "with economic growth forecast at 6.5 percent or more in 2001 and limited new development." As a result, CBRE "expects to see continued rent increases in most markets over the next 12 months."
Latin American real estate markets also showed signs of a rebound in CBRE's "Global Market Rents" report.
"While increases in occupancy costs have been minimal to date in the region, the signs point to more significant increases for tenants in the near future," said Liza Him, CBRE research director for Latin America.
Latin America's strengthening economies, she added, indicate that major cities including Mexico City, Buenos Aires, Rio de Janeiro, Sao Paulo and others "are well on their way to posting positive results throughout their commercial real estate markets this year."
Tighter fiscal policies and increased trade with the rest of the world have combined "to put many of the region's economies back on track for growth," CBRE noted. "While the region still has a way to go, CBRE expects many Latin American and Caribbean commercial real estate markets to begin showing renewed strength by the end of this year."
Top 20 Most Expensive Cities for Office Space, July 2000
1. Tokyo (Inner Central)....................$155.23
Source: CB Richard Ellis Global Research & Consulting,
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