London Unseats Hong Kong As World's Most Expensive Office Market
London’s West End unseated Hong Kong-Central as the world’s highest-priced office market, but Asia continued to dominate the world’s most expensive office locations, accounting for four of the top five markets, according to CBRE Global Research and Consulting’s semi-annual Global Prime Office Occupancy Costs survey. The study also found that rents are rising fastest in the Americas, where real estate fundamentals continue to improve. Overall, the Americas accounted for eight of the 10 markets with the fastest growing occupancy costs with Boston (Downtown), Mexico City and San Francisco (Downtown) included among the top five.
London’s West End’s overall occupancy costs of US$259.36 per sq. ft. per year topped the “most expensive” list. Hong Kong-Central followed with total occupancy costs of US$234.30. Beijing’s Finance Street, Beijing’s Central Business District (CBD) and Hong Kong’s West Kowloon rounded out the top five.
Globally, occupancy costs rose 2.2% for the 12 months ending Q3 2013, up from the 1.4% annual growth rate seen at the end of Q1 2013. All three of the world’s regions saw annual growth, led by the Americas, at 4.6%, followed by Asia Pacific, at 3.2%, and EMEA, at 0.4%. This performance reflects the relative strength of the recovery across global regions.
“The growth of occupancy costs for prime office space in the past year underscores that even in a slowly recovering economy, demand for the best space in the best locations continues to be strong,” said Dr. Raymond Torto, Global Chairman, CBRE Research.
CBRE tracks occupancy costs for prime office space in 126 markets around the globe. Of the top 50 “most expensive” markets, 20 are in Asia Pacific, 19 are in EMEA and 11 are in the Americas.
Occupancy cost comparisons in U.S. dollars are affected by currency exchange rates. However, the annual percent change in occupancy costs are in local currency and are not influenced by currency changes (except Jakarta, Indonesia where leases are typically written in U.S. dollars, but paid in rupiah, which means the occupancy cost increase is greatly affected by the currency depreciation in Indonesia).
Asia-Pacific had 20 markets ranked in the top 50 most expensive, including six of the top ten— Hong Kong Central, Beijing’s Finance Street, Beijing’s CBD, Hong Kong-West Kowloon, New Delhi’s Connaught Place CBD and Tokyo (Marunouchi/Otemachi).
Several key Asia markets have a limited supply of prime office space, which are in demand by major institutions (often large multinational or financial services firms); competition for this limited prime space has driven prime occupancy costs higher.
Though Hong Kong (Central), at US$234.30 per sq. ft. per annum, dropped to second place, it remained the only market in the world other than London’s West End with an occupancy cost exceeding $200 per sq. ft. per annum. The cautious approach to decision-making by large occupiers, coupled with a vacancy rate higher than most other districts in Hong Kong, has pressured Central landlords to become more flexible in rental negotiations. As a result, occupancy costs have dropped 4.7% on a local currency basis over the past 12 months.
The most expensive market in the global ranking from the Pacific Region was Sydney (US$104.39 per sq. ft.), which came in at 17th.
High-tech markets such as Boston (Downtown), San Francisco (Downtown), and Seattle (Suburban) reported some of the strongest annual prime office occupancy gains, with Boston (Downtown) posting a significant 15.4% annual increase in occupancy costs. Rents in these markets have increased as a result of extremely tight market conditions, as strong demand from technology tenants, combined with low vacancy rates, has given landlords leeway to increase rents significantly.
North America was again led by New York’s Midtown, which posted a prime office occupancy cost of US$120.65 per sq. ft., reflecting a 5.6% year-over-year increase.
In Latin America, Rio de Janeiro replaced São Paulo as the most expensive market, posting an office occupancy cost of US$112.22 per sq. ft. and ranking as the 13th most expensive market globally. Mexico City reported the strongest annual increase in occupancy costs in Latin America. Mexico City is in the middle of a transformation of its skyline, with the market delivering high-quality buildings with elevated prime rents. This new, high-priced supply, coupled with strong occupier demand, has led to higher occupancy costs, which were up 14.7% year-over-year.
Europe Middle East & Africa (EMEA)
Though EMEA posted the lowest 12-month increase in prime occupancy costs among global regions, it was home to the world’s most expensive market, with London – Central (West End), at US$259.36 per sq. ft. per annum. Development restrictions in core areas of London have contributed to the West End’s low vacancy rate and placed upward pressure on occupancy costs—which rose 14.3%. At the same time demand is rising from financial firms, such as hedge fund managers, which were more willing to pay a premium for prime office space in the most prestigious areas.
Other markets from the region in the list’s top ten are Moscow (US$165.05 per sq. ft.), London’s City (US$142.71 per sq. ft.) and Paris (US$122.10 per sq. ft.).
Palma de Mallorca, Spain, and Valencia, Spain, were the only two markets globally that posted a double-digit decrease in prime occupancy costs, falling 11.3% and 10.7%, respectively, over the past 12 months, a reflection of the effects of the lingering Eurozone crisis.