An increasing office development pipeline is beginning to result in a moderation in rental growth, a situation which will continue into 2017, according to analysis from JLL.
The latest JLL Global Office Index shows rental growth for prime office assets slowed to 2.9 percent year-on-year at Q3 2016, down from 3.4 percent in Q2, across the 110 major markets tracked by the report.
Global leasing volumes in Q3 were broadly in line with the previous quarter, but are down 7 percent compared to 2015.
Europe and North America dominate the list of markets achieving higher annual rental growth, accounting for seven of the top 10 markets alone.
“Global office demand has remained steady in many of the world’s dominant commercial real estate markets, in spite of various political and economic headwinds,” says Jeremy Kelly, Director in JLL Global Research.
“An anticipated uptick in supply is feeding through to a moderation in rental growth in some markets – the amount of stock expected to complete globally over 2016 will be 18 percent higher than 2015, and 2017 is likely to be the peak of the current development cycle, with 17.5 million square metres of new office space due for delivery, before supply tails off towards 2019.”
“As new supply comes through and more markets move into balance, there is increasing evidence that the global office vacancy rate is flattening out, having fallen steadily since Q3 2010. Nonetheless, many markets continue to see severe shortages of space and the direction of rents will continue to be upwards during 2017 in the majority of major markets”.
The Global Office Index paints a picture of varying office market performance, region-by-region:
The Index rose by 0.6 percent quarter-on-quarter as more buoyant conditions in most markets were hidden by falls in London (-4.2 percent) and Moscow (-6.3 percent). Excluding those two markets, European office rental growth in Q3 achieved 1.8 percent for the quarter, up 5.8 percent for the year – the highest uplift since Q2 2011. Leasing volumes for Q3 dropped 7 percent, dragged down by reduced activity in the UK and Spain. However, office market fundamentals remain strong in mainland Europe, with Q3 take-up 9 percent ahead of the 10-year average. JLL predicts net effective rents to come under pressure in London over the next 18 months, driven by slower leasing volumes and occupiers seeking greater lease flexibility. However, the downward correction is likely to be mitigated slightly by low vacancy rates. In core European markets, robust leasing activity is expected to erode limited supply, although rents will continue to rise in the short term before easing in 2017.
Growth slowed over the course of Q3 2016, with prime rents increasing by just 0.4 percent, half the rate of Q2. This rate of growth is expected to increase again in 2017 as rents bottom out in some of the harder-hit markets, while new trophy assets in some US markets will provide an additional boost. Buenos Aires (+4.8 percent) posted the highest rental increase for the region, on the back of robust tenant demand and declining CBD vacancy rates. Silicon Valley posted the biggest loss in rental rates after exceptional growth earlier in the cycle, at -4.2 percent quarter-on-quarter
Rental performance has been a mixed bag for the region, with Grade A office rents increasing 0.5 percent quarter-on-quarter, down slightly on the 0.6 percent recorded for Q2. Rents were up 2.6 percent for the full year. Subdued rental growth in many Asian markets was offset by uplifts in key Australian markets. Melbourne posted the highest rise in growth for the region over the quarter, at 5.7 percent. Sydney is expected to be the top rental performer in Asia Pacific in both 2016 and 2017, on the back of ongoing robust demand levels.
MENA: The region was stable over Q3 with growth of 10.3 percent, down slightly from 11.3 percent in Q2. Dubai remains the top regional performer on an annual basis (+20.0 percent), with strong demand for limited Grade A space in central locations and declining CBD vacancy. However, most other markets remain favourable to occupiers. Prime rents are expected to remain broadly stable in MENA through the rest of the year and into 2017.
JLL expects global leasing volumes for the 2016 full year to be 5 percent lower than 2015, and remain stable through 2017 at about 40 million square metres. With the current development cycle expected to peak next year, JLL is forecasting prime rental growth of between 2 percent and 3 percent for the full year 2016, softening further in 2017 to around 2 percent.
Kelly says the outlook for rental growth into 2018 is slow and gradual.
“We are still expecting generally steady leasing demand globally, but as new deliveries come through leasing conditions will become more balanced, with larger development markets in the US becoming more tenant-favourable, while vacancy rates are expected to increase gradually in Asia Pacific over 2017” he says.