Asia Pacific leading the real estate upswing
Activity in the world’s major commercial real estate markets is expected to continue to strengthen during 2011, building on the footholds established during 2010. The recovery, however, will be segmented by product type and geography, with prime property continuing to perform better than secondary, Tier I cities outperforming Tier II and III cities, and Asia Pacific leading the upswing, ahead of Europe and North America.
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More churn by corporate occupiers
Office leasing volumes in 2011 are projected to be at their highest level since the Global Financial Crisis, with corporate occupiers displaying greater confidence to do deals. Higher churn will be helped by improved corporate profitability, but occupiers will continue to push for the best possible terms and to strive for cost efficient space. Their focus will be on better grades of space, leading to the eventual release of poorer quality second-hand property, which could potentially overhang the market for several years.
In Asia Pacific, strong economic conditions and business confidence will boost office take-up in 2011. Relocation and upgrading are likely to underpin the bulk of demand, although with stronger hiring activity in markets such as Hong Kong, Singapore, China and India, expansion demand is expected to accelerate as corporate occupiers equip themselves for future growth. Net absorption across Asia Pacific’s Tier I office markets is projected to reach a record 4.5 million square metres in 2011, almost double the 2009 level and about 10% higher than the previous peak in 2007. Tier I markets in India and China will see the highest net absorption rates, enhanced by rapidly-growing domestic corporate sectors and expansion by multinational corporations (MNCs).
In both Europe and the US, take-up levels are expected to rise modestly on 2010 levels. Overall, net absorption is likely to remain flat, although some core Tier I office hubs could register relatively strong absorption rates. German, Nordic and CEE markets will also see strengthening demand. Conversely, most Tier II cities, suburban and Grade B segments will continue to languish with levels of demand well below trend. A fully-fledged and sustained recovery in demand across Western Europe and North America will not materialise until there is real and consistent jobs growth in office-using sectors.
Vacancy rates trending down, but markets polarising
Overall office vacancy rates will gradually trend downwards during 2011. In Europe and the US, new office deliveries are near historic lows and commencements are few and far between. This dynamic will intensify in 2011, leading to increasing shortages of Grade A space. Most markets are still without speculative development finance and although injections of funding have been seen in London, they have been focused on trophy tower schemes. A supply gap is likely to emerge in many markets, with refurbishment and ‘green’ retrofits a logical strategy to exploit the lack of new build. The market will increasingly polarise, with shortages of Grade A space and rising volumes of vacant secondary space.
By contrast, Asia Pacific will reach the peak of its development cycle in 2011 with a record additional 6.8 million square metres of office space to be delivered. Nonetheless, strong corporate occupier demand will absorb much of the additional space and, in most markets, vacancy rates will not rise significantly. The exceptions will be some Indian and Chinese cities, and to a lesser extent Singapore, where large supply pipelines will force up vacancy rates. In markets such as Hong Kong, Tokyo and Sydney, limited supply combined with strengthening demand should see vacancies trend downwards.Several major office markets in Latin America including Sao Paulo, Rio de Janeiro, Santiago and Panama City still feature vacancy rates near or below equilibrium levels. With strong demand from MNCs for the highest-quality space, many of these markets have chronic shortages of premier-grade offices. However, the construction pipelines are well-stocked and, while much of it will be absorbed, there is a risk of overbuilding in certain geographies over the short to medium term.
Double-digit rental growth for trophy assets
Many of the world’s high-order office markets will be firmly in the rental upswing phase in 2011, with double-digit growth forecast for well-located trophy and Class A product in a number of markets. Strongest prime rental growth is projected for Hong Kong (at over 25%), followed by Moscow, Singapore, Tokyo and London (at 10-20%). Paris, Frankfurt and Sydney are also expected to register real (inflation-adjusted) growth, while rental spikes could begin to appear by the second half of 2011 in well-located trophy assets in some US gateway cities such as New York, San Francisco and Washington DC. Meanwhile, rental growth in China’s Tier I cities of Shanghai and Beijing is likely to moderate from the hectic pace of 2010. Residual declines will still be recorded in a few Tier I cities such as Seoul, Madrid and Dubai. Dubai has a significant overhang of vacant office space which will depress rents and take many years to absorb – prime office space is now available with a 50%+ discount on its 2008 peak.
Retail – a mature versus emerging market story
In most mature retail markets prospects for 2011 are mixed. Retailers remain cautious in the light of persistently high unemployment, the need to repair household balance sheets and concerns over the impact of austerity measures. Nonetheless, demand for space in prime locations and well-established malls will be strong, and many large cross-border retailers are back in expansion mode. Shopping mall completions will be at very low levels in 2011, which should support prime rents and, in the US, help to erode the excess inventory. Problems will persist in secondary locations, with vacancy rates in many countries showing little sign of receding significantly in the short term. Some mature markets are expected to outperform, notably where employment growth and consumer sentiment is comparatively healthy, such as in Hong Kong, Australia, Germany and the Nordics.
A combination of favourable demographics, robust economic growth and buoyant consumer markets in 2011 will continue to support dynamic retail markets in the ‘E7’ - China, India, Brazil, Turkey, Mexico, Russia and Indonesia. Most of these markets are now in the middle of a major development cycle, however strengthening retailer demand is expected to absorb much of the new stock. Demand for new mall space is expected to be particularly strong in China as international brands continue to open new stores. For 2011, the largest increases in retail rents are expected in Greater China.
Industrial – boosted by recovery in global trade
Industrial market fundamentals are anticipated to improve in 2011 on the back of trade and retail sales growth. An upturn in corporate occupier activity will be helped by the faster than expected recovery in global trade flows. The WTO has predicted global trade to increase by 13.5% in 2010, which would be the fastest year-on-year growth registered since records began in 1950. However, in general, rental growth prospects will remain subdued in 2011, with the industrial markets of Greater China and Singapore likely to show the strongest rental growth (of 5-15%). In the US, the industrial property sector still faces considerable slack from a demand overhang that has now lasted two years. Prospects for the US market in 2011 are expected to be relatively flat, although gateway ports and key distribution hubs will outperform. The industrial market in Mexico is rebounding strongly, as US manufacturers shift production south of the border.
Demand for logistics will be driven by structural changes in international supply chains, with corporate occupiers striving for efficiency improvements in order to contain cost levels. This will result in ongoing merger and acquisition activity, space consolidation and upgrading to modern stock.
source: http://www.joneslanglasalle.com/Pages/global-market-perspective-global-real-estate-market.aspx
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