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March 2011
Global investors, who are armed with ample equity and a low
cost of debt capital, are in many cases still frustrated by a
relatively limited supply of available core product. However,
strengthening economic and property market recoveries
will increase available product and encourage investors to
broaden their search in 2011. Downside risks, particularly
inflation and interest rates, may act to dampen investor
sentiment, but the balance will be on the upside, fuelling
global investment activity and even higher capital values.
4 On Point • Global Office Outlook • March 2011 Jones Lang LaSalle
In this report
Americas
Leasing
Capital markets
Office statistics
Jones Lang LaSalle On Point • Global Office Outlook • March 2011 5
Global
Sustained global economic growth central banks in Asia Pacific have >>> For the first time
The global economic outlook has brightened and anxieties over a begun to implement tightening since the Global Financial
‘double-dip recession’ and a ‘jobless recovery’ have receded. Growth measures to combat inflation,
is expected to accelerate in the latter half of 2011 and into 2012, but and further policy interventions Crisis, downside risks are
the strength of the recovery and expansion remains, in geographical are likely in 2011. The probability being outweighed by the
terms, remarkably uneven. Asia Pacific, Latin America and some of policy interest rates rising in upside risks of improving
Central and Eastern European (CEE) economies have been motoring Europe this year is also mounting business optimism and
strongly, however growth is expected to moderate this year as and, although official rates in the
global monetary policy and other regulatory tools are employed to developed economies will remain spending, more hiring,
address increasing inflationary pressures and fears. China, despite its near historical lows this year, and a boost to the income
recent moves to prevent overheating, will remain the world’s fastest markets are likely to start to ‘price streams associated with
growing large economy with projected growth of 9.5%. Most mature in’ future increases. Likewise, real estate investment.
economies, where policies remain very accommodative, are still institutional investors are starting
battling combinations of high unemployment, household and public to rebalance asset allocations, factoring in a higher inflation
sector debt loads, weak housing markets and tight credit conditions. base case.
Even so, the recovery fared better than expected during the second
half of 2010 in North America and in some European countries Balancing upside risk
(notably Germany), and this bodes well for sustained growth during For the first time since the Global Financial Crisis, downside risks are
2011. North America is expected to accelerate modestly to 3.2%, being outweighed by the upside risks of improving business optimism
while Western Europe is projected to achieve 1.6% growth, slightly and spending, more hiring, and a boost to the income streams
lower than 2010. With an improving outlook, the IMF has recently associated with real estate investment. However, while the global
raised its 2011 global growth forecast to 4.4%. economy appears to have finally moved into a more sustainable
growth phase, there are several potential downside risks including
Demand prospects: A multi-speed market trade imbalances, government deficits, currency wars, commodity
market volatility, inflation and rising interest rates, social unrest, and
BRIC/E7, Hong Kong the ultimate impact of the devastating natural disaster in Japan. Real
High growth
Singapore, Poland estate investors and occupiers will be watching these lurking issues
and monitoring their potential impact on economic growth and real
estate recovery.
North America, Australia
Growth
Nordics, Germany Global leasing markets move into upswing
Fuelled by improving economic growth, renewed corporate
UK, France, Benelux confidence and prospects of increased spending and hiring, office
Low growth market demand and leasing activity are back in an upswing. While
Italy, Japan
local conditions still vary widely, globally office markets have reached
the bottom of the cycle and are now in the initial stages of growth.
Stressed Iberia, Greece, Ireland
Corporate occupiers are again flexing their muscles and
improvements in the leasing markets are helping to build investor
confidence. Corporate cash balances and earnings are strong, and
Inflationary pressures and policy tightening major companies are poised to start spending again. Although
The rapid growth in emerging economies, along with extremely spending will remain cautious, and be spread across real estate
accommodative global monetary policy in 2010, have created and other categories, increased activity is coming just at the time
pressure on commodity and asset prices and remain a dangerous when new supply in both North America and Europe is at a cyclical
mixture for potential inflation. Rising inflation and higher interest rates low. Shortages of quality space will emerge during 2011 in the best
are likely to become a key concern markets and buildings, limiting relocation options and causing a
for investors this year. Inflationary >>> Rising inflation and shift from tenant to landlord-favourable market conditions in some
pressures will be a crucial issue higher interest rates are sectors. This trend will help to make the ‘flight to quality’ experienced
for the emerging markets of Asia likely to become a key by occupiers in 2010 more of a challenge in 2011. While, in general,
Pacific and Latin America, and are many markets are still presenting tenants with abundant options of
also causing growing unease in concern for investors
overall supply, many leading sectors are seeing the availability of
some developed economies. Most this year.
Jones Lang LaSalle On Point • Global Office Outlook • March 2011 7
Q4 2009 Q4 2010
Toronto
Chicago, Los Angeles
Rental Value Rental Values New York, San Francisco Rental Value Rental Values
growth slowing falling
Amsterdam, Brussels growth slowing falling
Frankfurt, Madrid Sao Paulo
Rental Value Rental Values
bottoming out Singapore Rental Value Rental Values Dubai
growth London
Paris growth bottoming out
accelerating Hong Kong Chicago
Washington DC accelerating
Dubai Singapore Los Angeles
Washington DC
Moscow Shanghai Madrid
Sydney Brussels
Tokyo
Shanghai Moscow New York, Amsterdam
Mumbai San Francisco, Mumbai
London, Sao Paulo Toronto, Frankfurt
Paris, Tokyo
Hong Kong, Sydney
Americas
Based on rents for Grade A space in CBD or equivalent. In local currency.
EMEA
The Jones Lang LaSalle Property Clocks SM
Asia Pacific
As of Q4 2010
The Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle.
Markets generally move clockwise around the clock, with those on the left side of the clock generally
landlord-favourable and those on the right side of the clock generally tenant-favourable.
quality Grade A options tighten with rental growth accelerating as a and will serve as a catalyst to real estate markets as corporate
consequence. Asia Pacific, in particular, is likely to see few tenant- real estate (CRE) teams seek to manage, merge and revise space
friendly markets left by year-end. portfolios. Capital will also be invested by companies in upgrading IT
infrastructure, implementing workplace strategies aimed at enhancing
Corporate mindset – growth returns with focus on productivity utilisation and productivity rates, and in facilitating upgrades of space
While corporations are more active, hiring in most developed before market opportunities evaporate. On a global level, office
economies remains muted. Nevertheless, headcount growth has expansion plans remain disproportionately directed towards emerging
been building in Asia Pacific for several quarters and selective markets where customer demand and long-term growth prospects
hiring is also returning to the are most compelling. Within mature markets, growth has been
Americas and Europe. Attention >>> Corporate occupiers concentrated in high-order business centres, technology clusters and
is now turning markedly towards will be actively focused in commodity hubs, as well as in select national capital cities benefiting
generating office footprints from government growth.
2011 on additional market
capable of accommodating future
moves that accommodate
growth. Corporate occupiers will Vacancy rates edging down
be keenly focused in 2011 on anticipated increases Globally, Grade A office vacancy rates have reached a plateau
additional market moves that in hiring; the need to and edged down across all three regions in the latter half of 2010
factor in anticipated increases in access new workers amid – averaging 14.1% across 104 markets worldwide. Rates in Asia
hiring, the need to access new Pacific have been falling the fastest despite a high supply pipeline,
a renewing ‘war for
workers (amid a renewing ‘war for and declines in vacancy are particularly large in some Chinese cities
talent’), and a necessity to make talent’; and a necessity (e.g. Beijing and Guangzhou) due to strong demand from domestic
workspace more productive. M&A to make workspace more end-users. Among the tightest markets are Hong Kong Central (3.0%
activity will also be a likely outlet productive. vacancy), Melbourne CBD (4.4%), London West End (6.5%), Paris
for the corporate cash reserves, CBD (5.5%) and Downtown Toronto (6.6%). Vacancy rates are also
8 On Point • Global Office Outlook • March 2011 Jones Lang LaSalle
sub-7% in São Paulo and Rio de Janeiro. While vacancy has started continue to drift down and incentives rise. This is likely to characterise
to fall in most major markets, a few office markets will buck the trend cities such as Seoul, Osaka, Kuala Lumpur, Madrid, Barcelona,
- Mexico City, Singapore, Seoul and some Indian markets are in the Dublin, Dubai and Abu Dhabi, which will be among the few tenant-
middle of a heavy supply delivery cycle and are expected to see a friendly major markets left by the end of 2011.
rise in vacancy rates during 2011.
Prime offices - rental change, 2010
Office vacancy rates - major markets, Q4 2010
Hong Kong
% Singapore
Moscow
25 Americas Europe* Asia Pacific Sao Paulo
17.0% 10.2% 11.1% Shanghai
London
20 Brussels
San Francisco
Washington DC
15 Paris
Toronto
Sydney
10 Mumbai
Chicago
New York
5 Amsterdam
Tokyo
Frankfurt
0
Los Angeles Americas EMEA Asia Pacific
Madrid
Sao Paulo
Dubai CBD
Tokyo CBD
Amsterdam
Shanghai
Los Angeles
Paris
Hong Kong
Sydney
Brussels
San Francisco
Singapore
Washington DC
Frankfurt
Toronto
Chicago
London
Mumbai
New York
Madrid
Moscow
Dubai % change
Q4 2009 Q4 2010
Shanghai
Americas Notional capital values based on rents and yields for Grade A space in CBD or equivalent. In local currency.
EMEA The Jones Lang LaSalle Property Clocks SM
Asia Pacific As of Q4 2010
The Jones Lang LaSalle office capital value clock demonstrates where each market sits within its real estate cycle.
Markets generally move clockwise around the clock, with those on the left side of the clock enjoying capital value growth
and those on the right side of the clock experiencing capital value declines.
Prime offices - capital value changes, 2010 Prime offices – projected value changes in 2011
San Francisco Rental Values Capital Values
Washington DC
Moscow
Toronto + 20% Hong Kong Hong Kong
Sao Paulo
London Shanghai, Singapore, Tokyo, Moscow, Shanghai, Singapore, Tokyo, New York*,
New York + 10-20% Sao Paulo, New York*, San Francisco, San Francisco, Sao Paulo, Moscow,
Hong Kong Toronto, Washington DC Paris, Toronto, Washington DC
Chicago
Paris London*, Paris London*
+ 5-10% Sydney Chicago, Los Angeles
Singapore
Shanghai
Brussels Amsterdam, Brussels, Frankfurt Amsterdam, Brussels
Los Angeles + 0-5% Chicago, Los Angeles, Mumbai Frankfurt, Mumbai, Sydney
Mumbai
Amsterdam
Frankfurt - 0-5%
Madrid Americas Europe Asia Pacific
Sydney
Tokyo % change
- 5-10% Madrid Madrid
0 10 20 30 40 50 60
Notional capital values based on rents and yields for Grade A space in CBD or equivalent. In local currency. - 10-20% Dubai Dubai
Source: Jones Lang LaSalle, January 2011
*New York – Midtown, London – West End. Nominal rates in local currency.
Source: Jones Lang LaSalle, January 2011
Capital markets outlook
Global investors, who are armed with ample equity and a low cost of
debt capital, are in many cases still frustrated by a relatively limited
supply of available core product. However, strengthening economic
and property market recoveries will encourage investors to broaden
their search and assume greater risk to achieve intended returns.
Downside risks, particularly inflation and interest rates, may act to
dampen investor sentiment, but we believe the balance will be on the
upside. Barring further financial shocks, we are expecting investment
volumes to rise by a further 20-25% in 2011, which follows their 50%
growth in 2010. This competition will introduce more liquidity into
the sector as the credit markets loosen and the lending environment
improves as banks successfully refinance their loans. Many lenders -
large and diverse national banks, insurance companies, international
banks and even the CMBS market
- see 2011 production levels >>> Capital values are
increasing as core property values expected to rise further
rebound, market fundamentals in many major global
stabilise and the economy office markets this year,
improves which, combined with
accommodative monetary policy, as market fundamentals
is sparking renewed lender continue to improve and
interest in commercial real estate. the strength of capital
growth starts to free up
In 2011, the strong performance more product.
in pricing trends experienced at
the prime end of the market will
begin to spread, both by asset quality/risk level and by geography.
Capital values are expected to rise further in many major global
office markets this year, as market fundamentals continue to improve
and the strength of capital growth starts to free up more product.
However in some markets, such as London and Hong Kong, the pace
of growth may slow from the very strong 2010 levels as prime yields
stabilise. In top-tier markets, we believe future yield compression
will be more modest, leaving rental growth as the main driver of
performance and thereby accentuating the importance of local
market characteristics.
12 On Point • Global Office Outlook • March 2011 Jones Lang LaSalle
Asia Pacific
Jones Lang LaSalle On Point • Global Office Outlook • March 2011 13
Asia Pacific
Property market fundamentals continue to improve across Asia Vacancy has started to fall in most markets
Pacific, supported by strengthening business conditions and solid The overall vacancy rate in Asia Pacific continued to fall over 2010 to
corporate hiring. The recent tragedy in Japan will impact the reach 11.1% by year-end, compared to 11.8% 12 months earlier. The
immediate economic outlook for that country and will in turn affect largest declines in vacancy during 2010 were in Beijing (where the
some other countries in the region, both positively and negatively. overall rate fell from 28.1% to 12.4%) and Guangzhou (from 16.3%
The ultimate economic impact is still far from determined. However, to 11.7%) and were due to strong demand from domestic end-users.
the general economic outlook for Asia Pacific remains positive, the The lowest vacancy rates are currently in Hong Kong Central (3.0%),
leasing market has become more landlord-favourable, and many Melbourne CBD (4.4%) and Singapore Raffles Place (5.8%). The
markets have now moved into the upturn phase of the rental cycle. highest are in Ho Chi Minh City (37.1%), Chennai (31.4%) and Seoul
Capital values have recovered ahead of rents and are now rising CBD (21.0%), and a result of significant new supply. Vacancy has
in most markets across the region. Likewise, investment activity is started to fall in most key precincts, but is still set to rise in a few
strengthening and we expect volumes to pick up further in 2011. markets in 2011 such as Singapore and some Indian cities.
Asia Pacific leads world space demand Asia Pacific approaching the peak of the supply cycle
Demand for Grade A office space strengthened during 2010 and, for The development cycle in Asia remains on track, with the exception
the full year, net take-up for Tier I markets was in excess of 5.1 million of India, with developers bolstered by a stronger regional economy
square metres, more than double that of 2009. During Q4 2010, and improving occupancy levels
leasing demand remained strong in the major financial centres of for quality office space. In India, >>> For Asia Pacific as a
Hong Kong and Singapore, fuelled of the 4.7 million square metres whole, the office market is
by the relocation and expansion >>> Consistent with of office space that was expected approaching the peak of
of financial and professional the improving business to become operational in Tier I
services firms. MNCs became markets at the beginning of 2010,
the development cycle with
environment, regional net record supply projected
more visible and drove large only 65% actually came online,
spatial requirements in China and absorption is expected to with the remainder delayed to this in 2011 but likely to
India, where domestic corporates increase further in 2011. year. Markets such as Singapore moderate after this year.
were also more active in seeking and Guangzhou are also predicted
high-quality office accommodation. In some markets, expansion to see significant supply additions
demand has begun to overtake relocation and upgrading demand in in 2011 (equal to between 15% and 50% of existing Grade A stock)
driving leasing transactions; corporate occupiers are often finding that while limited supply is anticipated in markets such as Hong Kong,
large space is in short supply. Consistent with the improving business Tokyo and Sydney. For Asia Pacific as a whole, the office market is
environment, regional net absorption is expected to increase further approaching the peak of the development cycle with record supply
in 2011. projected in 2011 but likely to moderate after this year.
Tier I cities - Net absorption at record levels Most markets are now in rental upswing
Driven by improving occupancy levels, the leasing market turned
6
India (DL, MB, CN, BG)
Australia (SYD, MEL, BRI, PER)
China (BJ, SH, GZ)
Singapore
North Asia (TK, OS, SL)
Hong Kong more in favour of landlords in Q4 2010 and there were further rent
Other
rises in most markets. The strongest performer was Beijing where
5
net effective rents increased 9.0% q-o-q in the CBD, while rents
in Shanghai also grew by a solid 7.9% q-o-q. Rents climbed in
Net Absorption (million sqm)
4
Singapore (+8.6% q-o-q in Raffles Place) and Hong Kong (+4.6%
q-o-q in Central). In a few markets, where tenant demand remains
3 weak, rents are generally beginning to stabilise or grow moderately.
Rents are expected to register stronger growth this year in markets
2 such as Sydney and India, though others such as Singapore,
Shanghai and Hong Kong may see growth decelerating marginally
1 from the brisk pace set in 2010. Hong Kong (Central) is anticipated to
register the strongest growth, of around 30%. Markets such as Seoul,
0
Kuala Lumpur and Bangkok are still likely to lag behind the rest of the
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F region, with either no growth or some residual declines in rents.
Source: Jones Lang LaSalle (Real Estate Intelligence Service), 4Q10
14 On Point • Global Office Outlook • March 2011 Jones Lang LaSalle
Strong volumes and surging capital values appreciating real exchange rate against the US dollar. There are
Investment volumes in Asia Pacific across all commercial property three reasons to expect inflation to continue upwards in Asia Pacific
assets for full-year 2010 amounted to US$85 billion, up 29% from in 2011. First, food cost rises are hitting the headlines and there are
2009 (US$66 billion). Office remains the biggest investment sector at expectations of future price increases. Secondly, wages are rising
50% of the total market. While overall investment volume increases for skilled workers across China, which is likely to raise the costs of
were driven by higher-than-expected Q4 activity in China, the volume exported manufactured goods. Finally, there is a continued push from
of office activity remained at US$43 billion in 2010, largely unchanged liquidity, both within Asia Pacific and from the other regions, for the
from 2009. Within the region, Japan continued to be the largest good growth rates offered by Asia Pacific. Despite these pressures,
office investment market, recording US$13.3 billion in transactions a combination of negative real interest rates and appreciating real
during 2010, down a third from 2009 levels. Singapore recorded the exchange rates makes continuing to invest in Asia real estate an
largest expansion in office volumes of 622% from 2009 to 2010, while attractive option for investors.
Australia, New Zealand, Hong Kong, and India also experienced
increased year-on-year volumes. Capital values across Asia Pacific Prime office yields
are expected to increase in nearly all markets during 2011, in some
cases by up to 25%, based on rental growth of up to 30%. Melbourne –50
Sydney –25
Sources of capital
The substantial basis for investment in Asia remains either domestic Seoul 0
sources of capital (accounting for around two-thirds of all deals
in 2010) or other Asian investors buying cross-border within the Beijing –150
region. Looking at overall capital flows, cross-border volumes rose
by 61% y-o-y in 2010 to US$27 billion. Money is on the move and is Shanghai –160
4Q10 Grade A rents 2010 % change in 12-month rent 2010 % change in 12-month capital
Market Currency (PSqM) rents forecast capital values values forecast
Figures represent Class A CBD; Rents represent Class A CBD net effective; Percentage changes are in local currency terms
16 On Point • Global Office Outlook • March 2011 Jones Lang LaSalle
Dusseldorf
Stockholm
Lyon
Paris
Brussels
Madrid
Milan
Berlin
Dublin
Barcelona
Munich
Hamburg
London
’000 m²
Prime rents across the region continued their modest expansion, with
Jones Lang LaSalle’s European Office Index increasing by 0.8% over
Q4 2010 compared with 0.7% in Q3. In comparison to 12 months ago,
office rents now stand 5.4% higher after four consecutive quarters
of growth. Rents remained stable in over half of the Index markets;
however there were a number of notable exceptions. Falls were
recorded in Barcelona (-2.6%), Madrid (-1.9%) and Edinburgh (-1.7%)
while there were increases in seven of the Index markets - the most
substantial being in Lyon (5.2%), Milan (4.0%) and Stockholm (2.6%).
Combined with the modest rental growth, the Jones Lang LaSalle
Capital Value Index grew 1.8% across the region in Q4 2010. On
an annual comparison, capital values now stand 17.7% higher than
2009. Regionally, growth was more pronounced in Western Europe
(+1.9%) than in CEE (+0.6%) as capital values in Moscow remained
unchanged and only increased in Warsaw and Prague. In total, 15
markets showed an increase in
values over the final quarter led >>> With yields now
by Milan, where they rose by 7.2% expected to be much more
due to rising rents and further
yield compression. However, four
stable in many markets,
markets did show decreases, capital value growth in the
and while values fell in Budapest short term will be driven
and Dublin due to the renewed by rental performance,
outward yield shift, the reductions
in Barcelona and Edinburgh were
and outperformance
entirely based on negative rental will come where the
performance. With yields now occupational market
expected to be much more stable prospects are best.
in many markets, capital value
growth in the short term will be
determined by rental performance, and outperformance will come
where the occupational market prospects are best. It could be well
beyond 2014 in some markets before 2007 peaks are
witnessed again.
Jones Lang LaSalle On Point • Global Office Outlook • March 2011 19
Europe statistics
Market Currency 4Q10 Prime rents 2010 % change 12-month rent 2010 % change in 12-month capital
(PSqM) in rents forecast capital values values forecast
Amsterdam EUR 335 0.0% 6.4%
Antwerp EUR 136 -2.9% -2.9%
Barcelona EUR 231 -8.3% -4.5%
Berlin EUR 246 2.5% 10.5%
Birmingham EUR 352 1.8% 2.4%
Brussels EUR 310 17.0% 20.9%
Bucharest EUR 228 -9.5% 4.6%
Budapest EUR 240 2.4% 0.8%
Cologne EUR 258 7.5% NA
Copenhagen EUR 228 -2.9% -2.9%
Dublin EUR 377 -12.4% -15.4%
Dusseldorf EUR 276 4.5% 11.7%
Edinburgh EUR 345 -1.8% -1.8%
Eindhoven EUR 185 2.8% 10.4%
Frankfurt EUR 396 -2.9% 6.0%
Glasgow EUR 333 1.9% 6.4%
Gothenburg EUR 244 2.3% 29.3%
Hamburg EUR 270 2.2% 1.7%
Helsinki EUR 282 2.2% 1.4%
Kiev EUR 313 0.0% 3.6%
Leeds EUR 327 0.0% 4.2%
Lisbon EUR 228 0.0% 0.0%
London EUR 1,111 17.9% 40.0%
Luxembourg EUR 456 0.0% 0.0%
Lyon EUR 242 5.2% 10.4%
Madrid EUR 324 -8.5% 4.0%
Manchester EUR 358 1.8% 1.8%
Milan EUR 520 4.0% 7.2%
Moscow EUR 634 21.4% 47.0%
Munich EUR 348 1.8% 10.1%
Oslo EUR 410 10.3% 20.4%
Paris EUR 750 7.1% 29.7%
Prague EUR 252 0.0% 7.4%
Rome EUR 420 0.0% 2.9%
Rotterdam EUR 195 2.6% 12.6%
St. Petersburg EUR 373 -9.1% 6.7%
Stockholm EUR 444 8.1% 25.2%
Stuttgart EUR 210 0.0% 6.7%
The Hague EUR 210 0.0% 9.7%
Utrecht EUR 225 0.0% 7.8%
Warsaw EUR 264 0.0% 7.4%
Figures represent Class A CBD; Rents represent prime asking rents (net); Percentage changes are in local currency terms
20 On Point • Global Office Outlook • March 2011 Jones Lang LaSalle
Americas
Jones Lang LaSalle On Point • Global Office Outlook • March 2011 21
Americas
Office markets across the Americas experienced improving demand The US office market recovery continues to be segmented by
trends and the beginning of a cyclical recovery in 2010, though geography, with coastal cities continuing to improve at a faster rate;
conditions remain very uneven across and within markets. While nevertheless, most markets are now showing signs of initial recovery.
some markets in core areas in In 2010, net absorption was positive for the final three quarters and
the US and Canada have begun >>> While we for the year as a whole, but overall remained relatively weak at 13.1
to see real recovery, with steady characterised 2010 million square feet. Two-thirds of US markets recorded occupancy
occupancy increases and initial generally by uncertainty gains, with Washington DC, New York City, Boston and Baltimore
rental growth, the majority of and angst in the US office accounting for the largest positive net absorption gains. In contrast,
markets across both countries markets that continued to experience sharp drops in occupancy
remain in the process of bottoming market, we believe 2011 included San Francisco Peninsula and Los Angeles on the west
out. Overall optimism has will best be characterised coast and Philadelphia and Westchester County on the east coast.
surfaced within the corporate by an uneven upswing and Leasing and net absorption levels will continue to increase throughout
sector with profits and balance cautious confidence. 2011 and 2012, but will be moderately tempered by the offloading or
sheets in excellent shape, and absorbing of the shadow space overhang, as well as the continued
landlords in core markets are move by corporate America towards higher space efficiency and
increasingly confident in the cyclical upswing. While we characterised greater workforce mobility.
2010 generally by uncertainty and angst in the US office market, we
believe 2011 will best be characterised by an uneven upswing and U.S. vacancy past peak with segments tightening quickly
cautious confidence. Latin America, led by Brazil, continues to exhibit Positive absorption in the US for the first time since 2007, combined
strong economic growth and office market demand. with lack of new supply to the market, shifted down vacancy in the
fourth quarter. At the end of 2010 the total US vacancy rate had
Demand and occupancy growth return in the United States dropped to 18.5% from 18.7% in
>>> Although average
Tenants have stepped up activity levels and for the third consecutive the third quarter and thus closed
quarter both ‘tour’ velocity and leasing activity increased across the below the 18.6% level recorded at national vacancy
vast majority of US office markets. Federal government, technology, year-end 2009. Although average remains high, tenants
for-profit education and energy – both clean and traditional – have national vacancy remains high, looking for large blocks
fuelled the greatest demand for space. Technology, in particular, tenants in the US looking for large
(75,000 square feet +)
is gaining momentum around the US, with demand levels heating blocks (75,000 square feet +) of
up significantly from tech firms, particularly those in social media, office space in quality buildings and of office space in quality
gaming, mobile technology and cloud computing. Lagging behind top-tier locations will soon be at buildings and top tier
will be markets with heavy housing-related economies, as well a disadvantage. Such blocks are locations will soon be at
as manufacturing-based sectors in the Midwest and those cities becoming scarce more quickly than
a disadvantage. Such
burdened with state and local budget crises. many expected and are therefore
limiting tenants’ leverage and ‘flight blocks are becoming
US office net absorption - three consecutive quarters of to quality’ opportunities. However, scare more quickly than
occupancy gains most US markets still offer a relative many expected and
abundance of smaller space options
limiting the leverage
Net absorption as a percent of inventory and commodity office spaces. In
1.2%
addition to the size and quality of and flight to quality
1.0%
0.8%
space, a large disparity between US opportunities for tenants.
0.6% CBD and suburban vacancy levels
0.4% was still evident at the end of the year. CBDs across the country
0.2%
absorbed 8.0 million square feet in 2010, pushing vacancy levels
0.0%
-0.2%
down to 15.6% at year-end. Meanwhile, suburban markets saw a
-0.4% small increase in occupancy gains in the third and fourth quarters
-0.6% producing 5.4 million square feet, but, even so, vacancy levels closed
-0.8% the year nearly 500 basis points higher at 20.3%.
-1.0%
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Source: Jones Lang LaSalle, January 2011. Latin American growth charges ahead
Across the majority of office markets in Latin America, strong
Percent change in vacancy, 2010 economic growth is translating into healthy demand for office space.
New York (Midtown)
Where weaker market conditions do exist, the most frequent culprit
Denver
Philadelphia
United States Latin America Canada is excessive supply levels as opposed to tepid levels of demand.
Washington DC In Mexico City, which is currently in the middle of a heavy supply
Dallas
Sao Paulo delivery cycle, absorption in the fourth quarter was strong enough to
San Francisco
Houston keep vacancy rates stable. In Brazil’s major markets, tenant demand
Santiago
Boston
for office space is clearly outstripping any new supply being delivered
Buenos Aires
Seattle (Downtown)
to the market. During the fourth quarter, Sao Paulo’s overall vacancy
Chicago rate dipped to below 7%, a move that was accompanied by strong
Mexico City
Toronto rental growth, though significantly influenced by broad-based
Los Angeles
Montreal economic inflation. Similar trends were prevalent in Rio de Janeiro,
Atlanta
New York (Downtown)
with the additional benefit of the market’s considerable supply
Miami
San Diego
constraints. In Chile, Santiago’s prime office market continued to see
-20% -10% 0% 10% 20% 30% 40% 50% 60% heavy supply increases during 2010 totalling approximately 120,000
Source: Jones Lang LaSalle, January 2011. sq m of Grade A space. This included the opening of the new tallest
building in the country, the Titanium Tower (75,000 sq m), which alone
Rents broadly stable, with strong growth likely in select U.S. is home to more than 50% of the market’s Grade A vacancy.
prime markets
Net effective rents in the US are increasing, as national average US investment sales surge
levels of both rental decreases and tenant incentives have fallen. Surging sales of large office properties in December significantly
Asking rents essentially remained stable in 2010 closing the end of boosted total fourth quarter US investment volumes, leading to a
the year at an average US$27.20 per square foot. Rental growth has very strong finish to the year for the capital markets. Early estimates
returned in some market sectors where demand has strengthened reveal that both the month of December and the fourth quarter had
and confidence has returned to landlords as a result. These markets the highest office transaction volumes in the US in two years, with
include highly urban, core centres like the Financial District and projected totals of approximately US$10.3 and US$17.5 billion
SoMa in San Francisco; Midtown Manhattan; the CBD, East End and respectively. The degree of acceleration in closed deals in the fourth
Capitol Hill areas of Washington DC; the Back Bay in Boston; and quarter greatly exceeded typical end-of-year ‘bumps’ associated with
Uptown in Dallas. Some of these markets, especially for the highest- normal industry seasonality, as office volume jumped 80% from the
quality space in New York, Washington DC and San Francisco, could third quarter’s total and nearly quadrupled the volume recorded in
see rental spikes as available supply dwindles in the next 18 to 24 the fourth quarter of 2009. For the entire year of 2010 the US office
months. Suburban markets are still broadly awash with excess space sector also enjoyed the greatest percentage increase by far among
and are lagging behind from a demand and rental perspective. Many the four major property types, as office investment total volume
sectors have yet to see rents truly bottom out, though modest growth expanded by more than 140% to approximately US$39 billion, the
will likely return in the minority of suburban markets including San largest recorded annual increase, albeit on the back of severely
Antonio; Pittsburgh; the Virginia markets of Richmond, Hampton depressed volumes in 2009.
Roads and Northern Virginia; Cambridge; Baltimore; and the
Seattle Eastside.
Jones Lang LaSalle On Point • Global Office Outlook • March 2011 23
Debt markets in the United States continue to loosen of 2011 from its still relatively narrow base. Office volumes may
The US debt markets continued to further open during the fourth increase by a further 40% to 50% from 2010 levels, compared with a
quarter. Many lenders – particularly large and diverse national banks, projected increase of 35% to 40% for all sectors combined. Cap rate
life insurance companies, international banks and even the CMBS compression will also widen by asset quality and geography over the
market - saw production levels increase. Fuelling the increase were course of 2011.
rebounding core property values, stabilising market fundamentals
and an improving economy which, combined with extraordinarily
accommodative monetary policy, sparked renewed lender interest
in commercial real estate. The CMBS market is also displaying
increased signs of resurgence. In 2011, total new issuance in the
US increased to US$11.6 billion, up from under-US$3 billion overall
issuance in 2009 but still minimal by historic standards. However, the
market now anticipates real momentum finally building for a series
of large bond issuances, as several are expected to be sold during
the opening months of 2011. Total issuance in 2011 could realistically
triple, as investors continue to gain confidence in more simply-
structured, high-quality bonds.
Americas statistics
Market Currency 4Q10 Grade A rents 2010 % change in 12-month rent 2010 % change in 12-month capital
(PSF) rents forecast capital values values forecast
Contributing authors
Americas
Jim Delmonte
Ben Breslau Jane Murray Josh Gelormini
Managing Director, Americas Research Head of Asia Pacific Research John Sikaitis
+1 617 531 4233 +852 2846 5274
benjamin.breslau@am.jll.com jane.murray@ap.jll.com Asia Pacific
Myles Huang
EMEA
Bill Page
www.joneslanglasalle.com
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