Research. Global Real. Annual Review and Outlook 2012

Transcription

1 Research Global Real Estate Markets Annual Review and Outlook 2012

2 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Highlights International commercial property markets have reacted to the increased uncertainty in the global economy in late 2011 and early 2012 with varying degrees of resilience. Demand for office space has remained robust in many markets in the US, Germany and mainland China, but reduced occupier confidence and falling rents have been witnessed in a number of major Asian financial centres and in the European markets most affected by the debt crisis. Strong recent leasing activity in Central and Eastern Europe, Germany and the Nordic region has contrasted with the weaker performance of markets in other European countries that have been more severely impacted by sovereign debt concerns. The pace of prime office rental growth has slowed significantly across most of Europe, and rental increases are expected to be relatively subdued in The momentum of the recovery in the US commercial property sector has been maintained, supported by an improving labour market. Class A office rents have been rising in most US markets, with the strongest growth being recorded in Manhattan and San Francisco, where occupier demand has been driven by the thriving technology sector. Asian office markets have experienced contrasting recent fortunes. Strong demand for space and low vacancy rates have pushed prime office rents sharply upwards in the major markets of mainland China, especially Beijing, and rental growth is expected to continue during In contrast, prime rents have started to come under downward pressure in Hong Kong and Singapore. The markets of the Middle East have been affected by both the recent political turbulence in the region and high levels of development activity, which have left many locations with substantial volumes of vacant office space. Occupier market activity in Dubai has, however, benefited from its perceived status as a safe haven within the region. Africa s emerging property markets have continued to develop, supported by strong economic growth and increased foreign direct investment, particularly from China. However, high quality office space remains in short supply in many cities. Globally, commercial property investment volumes rose moderately in 2011 compared with It is anticipated that annual transaction volumes in 2012 will be similar to 2011, albeit the second half of the year is expected to be stronger than the first half. Investor caution, continued constraints on debt financing and a lack of large-scale transactions have led to reduced investment volumes in early 2012 in a number of international markets. However, activity should improve if wider economic conditions stabilise over the course of the year, particularly in the Eurozone. 2

3 Contents Europe 4 North America 12 Middle East 20 Africa 24 Asia-Pacific 28 Global office rents 33 3

4 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Europe The debt crisis in the Eurozone escalated over the course of 2011, putting increased strains on the European economy. For 2011 as a whole, Eurozone GDP rose by 1.4%, but growth was concentrated towards the start of the year, and a quarterly contraction of -0.3% was observed in Q4. With fiscal austerity measures dragging on growth, it appears likely that the Eurozone re-entered recession in Q Negative growth is most likely during 2012 in the countries that are under the greatest pressure to reduce their deficits, notably Greece, Portugal, Ireland, Italy and Spain. 4

5 Figure 1 European office vacancy rates % Amsterdam Brussels Dublin Frankfurt Lisbon London Madrid Milan Moscow Munich Paris Prague Warsaw Q Q Q Q Source: Knight Frank Research Despite the gathering economic gloom, a number of European occupier and investment markets performed remarkably well in Several Central and Eastern European (CEE) cities, for example, had record-breaking years for office take-up. However, property market performance varied greatly, and broadly mirrored the economic strength of individual countries. Increased leasing and investment activity was recorded in most German, Nordic and CEE cities in 2011, but activity was subdued in the more peripheral markets affected by sovereign debt concerns. Knight Frank s European office take-up index, which provides a cumulative measure of office market activity across 15 major cities, recorded a moderate increase in overall European leasing volumes in 2011 compared with Decreased activity in central London, Madrid and Brussels was counterbalanced by improved take-up in the CEE region and Munich. Increases in prime rents were recorded in a number of European office markets in 2011, but the pace of rental growth generally slowed in the second half of the year, as economic concerns led to increased occupier caution. Overall European commercial property investment volumes amounted to billion in 2011, according to Real Capital Analytics/Knight Frank data. This was an increase of 11% on 2010, with the improvement in activity largely driven by Record office take-up was witnessed in several Central and Eastern European markets in 2011 London 5

6 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Paris increased volumes in Germany and the CEE region. London and Paris remained, by some distance, the cities with the largest investment markets in Europe, with commercial transaction volumes of 19.2 billion and 11.9 billion, respectively; the Paris total was more than three times that of the next most active city, Moscow. Investor Figure 2 European office take-up sq m 1,500,000 interest in London and Paris reflected the continued flight to prime property, as demand focused on low-risk core assets in large, liquid markets. Central London offices, in particular, saw an influx of cross-border capital, particularly from Asia, with major transactions involving buyers from countries including Malaysia, Singapore, Hong Kong, South Africa and the US. Following the hardening of prime office yields in most European markets in 2010, there was more limited evidence of yield compression in Over the course of the year, modest inward yield movements were recorded in cities including Paris, Munich, Warsaw and Prague. Prime office yields were unchanged in London and Amsterdam throughout 2011, while, towards the end of the year, yields came under outward pressure in a number of markets in Europe s weaker economies, particularly Lisbon and Dublin. Office take-up in central London in 2011 was recorded at 10.7 million sq ft, which was 27% down on the previous year. The second half of 2011 was notably stronger than the first half, but the whole year was marked by a lack of large leasing transactions, with only 16 deals in excess of 50,000 sq ft recorded, half the number of There was a significant slowing in the rate of prime rental growth; after rising by 31% in 2010, West End prime office rents increased by 9% in H but then remained unchanged in H2. In the City market, prime office rents were stable throughout There was a continued polarisation in the performance of UK retail markets during The central London market remained resilient, with demand for prime space exceeding supply. Extremely high rents have continued to be recorded on London s most expensive thoroughfare, New Bond Street, as luxury retailers compete for limited space. In contrast, many town centres in the UK now have exceptionally high vacancy rates. Occupier demand in the UK industrial 1,200, , , ,000 0 Amsterdam Brussels Dublin Source: Knight Frank Research Frankfurt Lisbon London (Central) Madrid Milan Moscow Munich Paris (Central & La Défense) Prague Warsaw property sector softened in 2011, although new requirements have continued to emerge, particularly from retailers seeking to realign supply chains or expand their e-fulfilment businesses. Speculative development remains limited and restricted to a small number of locations with good rental growth prospects. However, a number of developers have been acquiring sites in anticipation of increasing pre-letting activity. Take-up in the Paris (Île de France) office market amounted to just over 2.4 million sq m in 2011, 13% up on 2010, with the improvement primarily driven by a number of 6

7 very large leasing transactions of over 20,000 sq m. There was, however, a slowdown in the number of deals recorded between 5,000-20,000 sq m, partly due to the diminishing availability of prime space in this size range. While the overall Île de France vacancy rate remained at 7.0% at the end of 2011, unchanged from the start of the year, availability in the Paris CBD fell from 5.7% to 4.6%. This supported a gradual increase in prime rents over the course of 2011, which rose by 11% to reach 830 per sq m per annum. Demand for retail space in France has been increasingly concentrated on prime locations, with brands competing for space in the best shopping centres and high streets. With consumer spending slowing, retailers have begun to rationalise their portfolios and close stores in weaker locations. Prime retail rents have come under modest downward pressure, while more marked decreases have been seen in secondary areas. Demand for space in the major German office markets proved to be resilient during 2011, with increased take-up recorded in cities including Munich and Berlin. Take-up was moderately down in Frankfurt, but demand for the best space was strong enough to push prime rents up by 6% to 432 per sq m per annum. With development completions at a limited level, vacancy rates have fallen across the largest German markets. Confidence in Germany s relative economic strength was reflected in robust investment market activity. Commercial investment volumes amounted to 22.7 billion, a rise of 45% on Retail property attracted an increased share of activity, boosted by several major shopping centre deals such as the acquisition of the PEP mall in Munich by US institutional investor TIAA-CREF for c. 408 million. In contrast to Germany, market conditions deteriorated in 2011 in many countries entangled in the Eurozone debt crisis. Sentiment in Spanish property markets was weak, which was reflected in reduced office leasing activity in Madrid. At 292,000 sq m, take-up was nearly 20% down on 2010 and 45% below the ten-year average. Prime office rents have continued to drift downwards, Figure 3 European prime office rents annual change, Q to Q % Changes calculated in local currency terms Source: Knight Frank Research ending the year at 27 per sq m per month, a modest fall of 4% compared with 2010, but 36% down on the level reached in In the Spanish investment market, the sale of the Torre Picasso building to Pontegadea Inmobiliaria, the property firm owned by Spain s richest man Amancio Ortega, at the end of 2011, proved that there remains interest in prime Madrid property, particularly from local cash-rich buyers. However, the extent to which property values have fallen in Spain in recent years was illustrated by reports suggesting that the sale price of 400 million was less than half the building s value at the market peak in Madrid Stockholm Paris Oslo Moscow London (West End) Warsaw Helsinki Frankfurt Manchester Milan Berlin Copenhagen Munich Vienna Prague London (City) Budapest Bucharest Brussels Birmingham Amsterdam Madrid Lisbon Barcelona Dublin The Lisbon office market endured a tough 2011, with take-up of approximately 80,000 sq m, 25% down on 2010 and the lowest annual total recorded in more than 15 years. The overall vacancy rate has risen steadily over the last three years to reach over 12%, while availability is above 20% in the Parque das Nações and Western Corridor submarkets. A very limited development pipeline should help to constrain further growth in vacancy rates, but prime rents, which fell by 6% in 2011, may continue to come under downward pressure. There were positive signs in the Dublin office market in 2011, with take-up improving on the previous year. The overall vacancy rate 7

8 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Figure 4 European office take-up and vacancy rate indices H1 2005= Despite the negative news surrounding the Italian economy, there were robust levels of leasing activity in Milan in Nonetheless, availability has increased, particularly in peripheral areas, as occupier interest has been focused on prime central space at the expense of lower quality offices in secondary locations H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H Recent office market activity in Vienna has largely been driven by tenants relocating to more cost-effective premises. The city s vacancy rate has risen to 6.3%, but this remains low compared with most other European capitals. Prime rents were stable at per sq m per month throughout the year. Indices are based on 15 key European markets, weighted by size and market maturity Source: Knight Frank Research remains high at over 20%, but there are very few large spaces available in the city centre and no significant office developments are currently under construction. In Belgium, occupier and investor sentiment weakened in 2011, influenced by concerns over both the wider Eurozone debt crisis and the country s own troubled public finances and political instability. Office take-up in the Brussels market was 324,000 sq m, which was the lowest for nearly 20 years. There were a number of large leasing transactions involving public sector occupiers, but corporate tenants remained cautious, putting expansion and relocation decisions on hold. Frankfurt Office take-up index Office vacancy rate index The uncertain climate also led to a 25 basis points softening of prime office yields, to 6.25% in the final quarter of The Amsterdam market remained relatively robust in 2011, with office take-up rising by 7%, to 258,000 sq m. The strength of demand, together with decisions to change the use of some unmarketable office buildings, contributed to a slight decrease in Amsterdam s structurally high vacancy rate, taking it from 17.5% to 17.0% over the course of the year. In contrast, other Dutch markets including Rotterdam and The Hague saw reduced take-up and continued rises in availability in Occupier and investor confidence in the Nordic region was relatively high in The Nordic countries have been comparatively unaffected by the debt crisis, having low levels of public debt and, with the exception of Finland, being outside the Eurozone. Stockholm and Oslo recorded some of the strongest prime office rental growth anywhere in Europe in Commercial property investment in Sweden amounted to 7.1 billion, up by 20% on 2010, making it the fourth most active country in Europe, behind the big three markets of the UK, Germany and France. The CEE region also performed strongly in 2011, being home to some of Europe s fastest growing economies and largely immune from the worst effects of the Eurozone debt crisis. Poland, in particular, continued to see buoyant economic growth, with GDP rising by 4.3%. This translated into strong demand in the Warsaw office market, which saw take-up reach a record 573,000 sq m. Prime office rents moved upwards by 8% during 2011, to end the year at per sq m per month. The Prague office market also witnessed record take-up, of 276,000 sq m, in While tenant renegotiations have continued to be an important driver of the market, corporate expansion accounted for an increased proportion of activity. The city s vacancy rate fell to 12.0% at the end of 2011, from 13.2% a year earlier, but this was not enough to put serious upward pressure on prime rents, which remained unchanged at per sq m per month. 8

9 Bucharest was another CEE office market to have its strongest year on record, with annual take-up of 240,000 sq m in Only 115,000 sq m of new office space was brought to the market, 70% down on the previous year, and there are very few large-scale projects currently in the development pipeline. Vacancy rates have fallen, currently standing at 10% in the CBD, and below 1% in the Calea Floreasca/Barbu Vacarescu area, which has become an increasing focus of occupier demand in recent years. The CEE area saw some of the sharpest rises in investment activity seen anywhere in the world in 2011, as commercial property sales came to approximately 8.2 billion, well over double the 2010 figure. Over 80% of investment volumes came from cross-border sources, with institutional investors from Germany, Austria and the US among the most active buyers. Further east, Russian commercial property markets have recovered well over the last two years, after occupier demand collapsed in Take-up of Class A and B office space in Moscow was 989,000 sq m in 2011, almost exactly the same level as 2010, but still some way short of the totals recorded in the boom years of Since peaking at 19.5% in 2009, the Class A vacancy rate has steadily fallen, ending 2011 at 12.5%. Average Class A Moscow rents rose by 9% in 2011, and further increases are expected in Rental growth is anticipated to be strongest in the city centre, as a result of falling supply levels and new government restrictions on construction activity. Figure 5 European prime office yields % 10 St Petersburg also recorded rising office rents and falling vacancy rates. The most significant recent development in the market has been the growth of the Pulkovo business district, south of the city and near the airport. This location has become a significant focus of construction activity, and the availability of large, modern offices has attracted international and Russian occupiers to the area The weakening of economic conditions around the turn of the year has added to the already uncertain outlook for European occupier markets in 2012, and it is possible that activity may yet be impacted by further developments in the Eurozone. Generally, 0 Amsterdam Brussels Dublin Frankfurt Source: Knight Frank Research Lisbon London (City) London (West End) Madrid Milan Q Q Moscow Munich Paris Prague Stockholm Warsaw 9

10 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Figure 7 Top ten European commercial investment markets, 2011 billion London Paris Moscow Frankfurt Stockholm Hamburg Manchester Munich Berlin Warsaw Prague Office Retail Industrial Hotel Source: Knight Frank Research/Real Capital Analytics however, the trends that characterised European markets in 2011 look set to continue over the next twelve months. Corporate occupiers will remain cautious and focused on saving costs and improving the efficiency of their leased space. Development completions will continue to be well below historical levels, albeit there are signs of construction activity increasing moderately in certain markets, including London and Warsaw. Figure 6 European commercial investment volumes billion The prospects for office rental growth have weakened, although the continued scarcity of prime space in many city centres may lead to some modest rental increases in 2012, especially if sentiment improves in the second half of the year. However, rents may continue to come under downward pressure in peripheral markets, particularly on the Iberian peninsula. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q UK Germany France Nordics Benelux Central/ Rest of Eastern Europe Europe Source: Knight Frank Research/Real Capital Analytics Investment volumes in 2012 are expected to be at fairly similar levels to 2011, albeit there is potential for activity to improve in the second half of the year if economic conditions stabilise. There remains an appetite for prime property, particularly with prime yields currently offering a significant premium over historically low risk free rates. However, the availability of debt seems unlikely to improve significantly in the short-to-medium term, which will continue to restrict transactional activity. Cash-rich investors will remain in an advantageous position within the market, and the recent movement of capital into Europe from overseas sovereign wealth funds and pension funds, which has so far been largely concentrated in London, may spread further to other markets, particularly in France and Germany. With the majority of investors remaining cautious, demand will continue to be concentrated on perceived safe havens such as London, Paris and Germany. This should help to support prime yields in these markets at their current levels, although yields for secondary assets and properties in peripheral markets are likely to come under outward pressure in The divergence in the performance of prime and secondary property, which has characterised European markets over the last three years, is therefore expected to continue for the foreseeable future. 10

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12 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook North America United States US commercial real estate performance continued to improve in 2011, adding to the momentum spurred by the recovery in Investor interest, liquidity and leasing activity all combined to create a substantial tailwind that buoyed prospects for both the industrial and office sectors. Other positives, like reduced unemployment, higher market indices and headline-driven IPOs, combined to establish a firm foundation for the fundamentals to continue to improve into

13 In the office sector, $58.0 billion in sales volume took place in 2011 more than doubling the $26.4 billion total for 2010, although still less than half of the $118.7 billion annual average volume seen from 2006 to Office sales averaged $207 per sq ft in 2011, a 21.8% improvement over the 2010 average price of $170 per sq ft, while the average cap rate for the office market in 2011 was 7.1% compared with 7.8% in Figure 8 US Class A CBD office average asking rents US$ per sq ft per annum Investment activity for industrial properties in the US also increased in A total of $24.4 billion in industrial sales took place during the year, compared with $13.7 billion in Volume has yet to reach the amount of activity seen from 2006 to 2009 when the market averaged an annual $40.4 billion of sales. The average sale price for industrial properties in the US was $55 per sq ft in 2011, the same as 2010, while the average cap rate was 7.5% compared with 8.1% Atlanta Boston Chicago Dallas Denver Source: Newmark Knight Frank Research Detroit Houston Los Angeles Manhattan Miami Nashville New Jersey Philadelphia San Francisco Washington, DC The average asking rent for Class A office space in select US CBD markets at the end of 2011 improved to $40.42 per sq ft per annum from the 2010 year-end average of $37.83 per sq ft, a 6.8% increase that provided pricing strength to the market. The overall vacancy rate for office space in the select US markets finished at 13.4% at the end of 2011, compared with 13.8% at the end of 2010 and 13.7% at the end of Net absorption of office space in the select US markets was positive on the year at 8.5 million sq ft, an improvement over the 3.4 million sq ft of positive net absorption that took place in 2010, and the best yearly performance since 2006 when 18.0 million sq ft were removed from the market. Leasing activity totalled 36.0 million sq ft in 2011, representing a slight decline over the 37.3 million sq ft of leasing that took place in Between 2006 and 2009, leasing activity in these select markets averaged 30.8 million sq ft per year. Factors that influenced the market performance included improvement in the financial position of companies as shown by their total liquid assets. By the end of the third quarter of 2011, corporate assets were at their highest level in more than 50 years. The accumulation of cash, or assets easily convertible to cash, was $2.1 trillion, up 19.1% over the $1.8 trillion reported in the third quarter of the prior year. As companies begin to invest in growth, market activity will start to push upward. The US unemployment rate, which was 9.4% at the start of the year, finished the year at 8.5%, while job openings hit a nearly three-year high. There were 3.4 million jobs available at the end of December 2011, up from 3.1 million in the prior month, according New York to the US Bureau of Labor Statistics Job Openings and Labor Turnover Survey. Development of new office properties slowed as a total of 7.1 million sq ft of Class A office space were under construction in select US markets in 2011, the lowest yearly figure in well over a decade. This figure was less than half of the 14.7 million sq ft that were under construction in 2010, down significantly from the annual average of 35.0 million sq ft under construction between 2006 and

14 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook The US industrial market experienced a bounce in the fourth quarter of 2011 as 25.7 million sq ft of net absorption took place, nearly matching the results from the prior two quarters of 26.7 million sq ft. The 2011 total net absorption was positive as 62.7 million sq ft were removed, reversing conditions that saw 9.3 million sq ft returned to the market in Figure 9 US Class A CBD office vacancy rates % Atlanta Boston Chicago Dallas Denver Source: Newmark Knight Frank Research Detroit Figure 10 US industrial average asking rents U$ per sq ft per annum Houston Los Angeles 2010, and was the best performance since 2007 when 98.2 million sq ft were removed from the market. The US industrial vacancy rate fell to 12.1% at the end of the year, down from 12.5% at the end of The 2011 year-end average asking rental rate was $4.90 per sq ft, slightly Manhattan Miami Nashville New Jersey Philadelphia San Francisco Washington, DC higher than the asking rent of the prior quarter and the end of 2010, both of which reported $4.87 per sq ft. Leasing activity in US industrial properties was million sq ft in 2011, compared with million sq ft in 2010 and the annual average of million sq ft leased between 2006 and The industrial market continued with the rehabilitation of existing infrastructure and the continued attrition rate of performing assets. New construction in 2011 in the industrial sector remained well off the previous decade s pace. At the end of the year, a total of 17.1 million sq ft of new industrial space was delivered in the US, a slight increase over the 15.9 million sq ft that were delivered in 2010 and still significantly lower than the annual average of million sq ft of industrial space that were delivered between 2006 and Sustainability and energy efficiency carried the upbeat tone in the market throughout 2011 with an emphasis on properties associated with LEED, also known as the green office market. The national green office market strengthened in 2011 as the vacancy rate improved to 13.4% at the end of the year from the 14.9% rate at the end of Net absorption totalled 2.1 million sq ft in 2011, adding to the 1.7 million sq ft removed from the market in The average asking rent for green office space at the end of 2011 was $39.54 per sq ft, down from the $39.79 per sq ft average at the end of Atlanta Boston Chicago Dallas Denver Detroit Houston Los Angeles Miami Nashville Source: Newmark Knight Frank Research New Jersey New York City Philadelphia San Francisco Washington, DC By the end of 2011, conditions for office space in the Atlanta market showed signs of improvement with total net absorption of 55,878 sq ft. Although positive for the year, the net absorption total was below the level seen in 2010 when 169,093 sq ft of positive net absorption took place. The average asking rental rate declined throughout the year, finishing 2011 at $19.54 per sq ft, compared with $19.70 per sq ft at the end of The vacancy rate was 19.9% at the end of 2011, an improvement from the 20.8% vacancy rate reported at the end of Based on dollar volume, the Atlanta office market experienced tremendous year-overyear growth in investment activity in Following a weak year in 2010 with $385 14

15 million in sales transactions closed, 2011 ended with $1.4 billion in closed deals, a 270% increase in dollar volume. The average price per sq ft paid grew to $120 per sq ft in 2011 from $98 per sq ft in The average cap rate for office properties sold in 2011 was 7.7%, compared with 8.4% in CMBS debt totalling $4.6 billion was secured by office properties in the Atlanta market by the end of Of the $4.6 billion outstanding, nearly $1.6 billion, or 34%, was considered delinquent by the end of the year. The vacancy rate for office properties in Boston settled at the end of 2011 at 11.8%, following rates as high as 13.0% earlier in the year, and remained above the 11.2% rate reported at the end of The average asking rent grew to $43.51 per sq ft by the end of 2011, improving 2.6% from the $42.39 per sq ft rate reported at the end of The year-end net absorption total for office space in Boston was positive at 472,342 sq ft in 2011, a considerable improvement from the combined 1.8 million sq ft of negative absorption which took place in 2009 and In 2011, 700,000 sq ft of new office space were delivered to the market, while another 580,000 sq ft remained under construction. Little development has taken place over the past few years, with 920,000 sq ft of space delivered to the market in the past five years. By comparison, from 2001 to 2006, a total of 3.4 million sq ft of new space was delivered to the market. The average asking rent for green office space in Boston finished 2011 at $47.48 per sq ft, which stands at 9.1% over standard Class A office spaces in the Boston market. The vacancy rate for green office space ended the year at 11.1%, almost 200 bps above the 9.3% rate reported in A total of 662,000 sq ft of transactions were signed for green office space in The 2011 year-end total for net absorption in the Chicago office market was positive at 787,033 sq ft, adding to the 605,296 sq ft of positive net absorption in The vacancy rate in the market finished 2011 at 14.6%, a slight improvement over the 14.8% rate reported at the end of 2010, and the lowest Boston level seen since mid Average asking rents in the Chicago market fell to $31.34 per sq ft at the end of 2011 from $31.79 per sq ft reported at the end of In 2011, office investment activity in Chicago grew by more than 20.0% from the previous year as $3.3 billion worth of transactions were closed, the highest level seen in this market since The average sale price for office properties in Chicago in 2011 was $164 per sq ft, a drop from the $182 per sq ft rate seen in The average cap rate for the year was 7.4%, down from 7.9% in The Chicago industrial market, one of the largest in the US, finished 2011 with a vacancy rate of 14.4%, an improvement over the 15.5% rate reported in 2010 and its lowest level since The average asking rent for industrial space reached $4.17 per sq ft at the end of the year, up slightly from $4.13 per sq ft reached in Ozburn Hessey Logistics signed one of the largest industrial leases in the Chicago market in 2011, inking a deal for 477,000 sq ft at 2780 McDonough Street. The average asking rent in the Dallas office market remained nearly flat throughout 2011, finishing the year at $20.83 per sq ft, a 1.4% decline from the average reported at the end of The Dallas vacancy rate ended 2011 at 25.6%, its highest level since 1997 and one of the highest office vacancy rates within the US CBD marketplace. The third quarter of 2011 was the only quarter in the year to post positive absorption, bringing the year-end total for net absorption to negative 258,815 sq ft, retreating further from the 133,012 sq ft of negative net absorption in Although development of new office towers slowed in 2011, investment activity grew in the year as more than $120 million in sales activity took place, from a nearly inactive One of the largest leasing transactions in 2011 was for the advertising firm TracyLocke. The firm signed a renewal lease for 112,000 sq ft at 1999 Bryan Street in the Dallas CBD. Delinquencies of CMBS debt on Dallas office properties stood at 12.5% or $516 million by the end of $4.2 billion of securitised debt remained outstanding by the end of 2011, 88% of which was originated prior to

16 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Chicago In the Houston office market, 2011 marked a year of new construction and active leasing. The year-end total for net absorption was positive at 842,400 sq ft, compared with the negative 240,345 sq ft of net absorption in By the end of 2011, leasing activity had Figure 11 US industrial vacancy rates % improved to nearly 3.2 million sq ft, a level not seen since 2006 when 3.4 million sq ft of transactions took place. The vacancy rate in the market finished the year at 10.6%, an increase from the 8.6% rate reported at the end of 2010, as 1.8 million sq ft of new construction was completed and brought to the market. The average asking rent rose to $36.02 per sq ft at the end of 2011, from $35.68 per sq ft reported in One of the largest transactions of the year was signed by Shell Oil Company. The company signed a renewal lease for nearly 800,000 sq ft of space at 910 Louisiana Street. The Houston market is home to the fourth largest green office market in the US. In the past year, more than 1.8 million sq ft of green office space was delivered to the market. The vacancy rate ended 2011 at 9.3%, 130 bps below the overall vacancy rate. The average asking rent for green spaces ended the year at $37.19 per sq ft Atlanta Boston Chicago Dallas Denver Detroit Houston Los Angeles Miami Nashville Source: Newmark Knight Frank Research New Jersey New York City Philadelphia San Francisco Washington, DC The office market in Los Angeles saw declining conditions during 2011, with the exception of asking rents which grew to $34.18 per sq ft from $33.37 per sq ft reported at the end of The market vacancy rate rose to 16.0%, compared with 14.3% at the end of 2010, reaching the highest rate in the market since the end of The year-end total for net absorption was negative 381,515 sq ft, making 2011 the fourth consecutive year to post negative net absorption. By the end of 2011, nearly 16

17 2.0 million sq ft of office leasing transactions took place, compared with the 2.2 million sq ft which took place in As the second largest in the nation at nearly 490 million sq ft, the Los Angeles industrial market did not fare much better than the office market throughout In the fourth quarter of 2011, 624,155 sq ft of positive absorption took place. While positive for the quarter, the year-end total for net absorption was negative 2.8 million sq ft. As with the office market, 2011 marked the fourth consecutive year of negative net absorption. The vacancy rate for industrial properties in Los Angeles ended the year at 6.5%, compared with 6.1% at the end of Average asking rents finished the year at $6.36 per sq ft, down from $6.40 per sq ft at the end of 2010, and were 19.5% below the market high of $7.90 per sq ft reported in As one of the stronger performing US office markets, conditions in Manhattan showed signs of improvement in The average asking rent rose by the end of 2011 to $66.48 per sq ft from $61.44 per sq ft, an 8.2% increase year over year. The year-end total for net absorption was positive 3.7 million sq ft, 3.2 million of which occurred in the first half of the year. By comparison, the 2010 year-end total was positive 3.0 million sq ft. The vacancy rate improved by the end of 2011 to 7.1% from 7.3% reported at the end of 2010, and remained above the 6.9% rate reported in Conditions in the Miami office market improved by the end of 2011 as the vacancy rate fell to 22.3% from 23.1% reported at the end of The vacancy rate in Miami has been above the 22.0% mark since the beginning of Following a strong finish to 2010 with positive net absorption of 120,490 sq ft, the pace of absorption slowed Figure 12 US average office cap rates % Atlanta Boston Chicago Dallas Denver Detroit Houston Los Angeles Source: Newmark Knight Frank Research/Real Capital Analytics Figure 13 US average industrial cap rates % 12 a little in 2011 as the year-end total ended at positive 61,681 sq ft. The average asking rent in the market ended the year at $42.08 per sq ft, a slight drop from the $42.53 per sq ft rate reported in 2010, and remained 6.6% below the market peak reached in Rents in the Miami office market are among the top five highest in the country. Manhattan Miami Nashville New Jersey Philadelphia San Francisco Washington, DC Leasing activity in Manhattan slowed a little in the second half of 2011, following a strong first half in which 9.5 million sq ft of leasing activity took place. By the end of the year, 16.3 million sq ft of leasing transactions took place compared with 18.9 million sq ft reported in The annual average for leasing activity over the past 10 years has been 14.4 million sq ft While several Class A projects remain in the planning stages in Midtown, 1.8 million sq ft of Class A space is scheduled to be delivered to the market in the next two years. In 2010, the tower at 11 Times Square was completed and delivered to the market, adding 1.1 million sq ft of Class A office space. 0 Atlanta Boston Chicago Dallas Denver Detroit Houston Los Angeles Manhattan Miami Source: Newmark Knight Frank Research/Real Capital Analytics Nashville New Jersey Philadelphia San Francisco Washington, DC 17

18 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Figure 14 US Class A CBD office rents, annual change, Q to Q % San Francisco Manhattan Boston Los Angeles Houston Nashville Denver Washington, DC Philadelphia Dallas Detroit Atlanta Chicago Miami New Jersey Source: Newmark Knight Frank Research In 2011, nearly $360 million in investment sales activity took place, an increase over the $220 million of activity seen in The average price per sq ft also increased to $166 per sq ft from $127 per sq ft in One of the larger leases signed in 2011 was for the General Services Administration for 33,000 sq ft at 100 SE 2nd Street. Following the effects of the economic downturn, the San Francisco office market has been surging over the past year. Leasing activity in the market grew to nearly 5.6 million sq ft in 2011 from 4.7 million sq ft of transactions in The year-end total for net absorption finished the year at 924,752 sq ft, compared with the negative 218,235 sq ft of net absorption in Average asking rents in San Francisco grew 25.3% to $40.77 per sq ft from $32.53 per sq ft reported at the end of Rents in this market still remain below the peak of $72.44 per sq ft reached during the dot-com period in The vacancy rate finished the year at 10.4%, nearly 200 bps below the 12.1% rate reached at the end of 2010, and the lowest level since In the San Francisco green office market, the average asking rent rose to $41.31 per sq ft at the end of 2011, indicating a 23.2% climb from the $30.01 per sq ft rate reported in The vacancy rate improved to 9.8% from 12.6% in 2010, making San Francisco one of the leading green markets for vacancy improvement over the past year. Nearly 3.3 million sq ft of green office leasing transactions took place in 2011, compared with 3.0 million sq ft in Following a rough first half of 2011 in the Washington, DC market as nearly 330,000 sq ft of negative absorption took place, the second half of the year appeared to rebound as 280,572 sq ft of positive absorption took place. The vacancy rate for the market ended 2011 at 13.7%, rising above the 12.8% rate reported at the end of The average asking rent in Washington, DC ended 2011 at $54.74 per sq ft, up 1.4% from the $53.98 per sq ft average at the end of The average asking rent in the market has been more resilient to the declines seen in other major markets over the past few years. Average asking rents have actually grown 2.3% since Leasing activity was robust in 2011 as 2.0 million sq ft of leases were signed. This level of leasing activity has not been seen in the Washington, DC office market since Construction activity in the Washington, DC market remained strong over the past two years with more than 1.0 million sq ft of new space brought to the market. In the investment sales arena, average cap rates in 2011 were 6.0%, a slight drop from the 6.5% seen in 2010, as investors continue to seek out prime properties in core markets. Canada The Canadian economy performed solidly throughout 2011, despite the difficulties experienced elsewhere in the world. Foreign trade accounts for approximately 45% of the country s GDP, and an improving economic outlook in the United States bodes well for maintained economic stability throughout According to Statistics Canada, the country s economy grew by 2.5% in 2011, down from 3.2% in 2010, but surpassing economists earlier forecasts. Over the course of the year, all major sectors posted gains, with mining, oil and gas extraction, construction, public sector spending and manufacturing leading the way. As of March 2012, the Canadian dollar was trading above par with its US counterpart, which causes challenges for the country s exporters, and the consensus is that annualised GDP growth will slow in 2012, with forecasts coming in at around 2.0%. Overall unemployment levels are expected to remain relatively stable, at approximately 7.5%. The overall Class A and B vacancy rate in Canada s major cities stood at 4.7% at the end of 2011, down from 6.8% a year earlier. In most major cities, office space, especially high quality space in new towers, continues to be leased at an accelerated rate. Indeed, while vacancy rates declined by over 200 bps in 2011, the total inventory of built space increased by nearly 2 million sq ft, most of this coming online in Calgary and Toronto. In 2012, it is expected that there will be positive space absorption in virtually all of Canada s major cities, more new office tower developments and upward pressure on asking rents in most cities as space availability continues to decline. Montreal s combined Class A and B vacancy rate fell from 7.7% to 5.9% in 2011, and Class A rates dropped from 6.8% to 6.2%. With the decline in vacancy rates, asking net rental rates began to creep upward by the year-end. Development and pre-development activity is energising the downtown real estate market, and the imminent announcement of 18

19 at least two new projects is expected. This is significant news, as there have been only two major office building projects in the Greater Montreal area in the last decade, with the completion of Phase 2 of E-Commerce Place in 2004 and the delivery of the Bell Canada campus on Nun s Island in Ottawa, as the nation s capital, is generally protected from economic downturns by the tenancies of the federal government, and downtown Class A vacancy rates dipped as low as 4.0% at the beginning of However, the completion of a major new office tower, coupled with the federal government s decision to address some of its space needs outside of the downtown core, caused vacancy rates to skyrocket to 8.0% at the end of It remains to be seen how announced federal spending reductions will further impact downtown occupancy rates. In the western region of the Greater Ottawa area, where there is a strong concentration of hi-tech businesses, vacancy rates at the end of 2011 were 13.7%. Toronto s office market is the largest in Canada, with a total inventory of approximately 62 million sq ft of Class A and B space in the downtown district. The downtown office market is very much in growth mode; over the past three years, more than 3.5 million sq ft of new space has been delivered to the market. Most of this new space has been absorbed, and the Class A vacancy rate at the end of 2011 was at 4.5%, down from 6.3% a year earlier. In the new towers, where demand continues to be strong, landlords will be focused on filling the remaining smaller pockets of space and should be able to achieve healthy rents as demand is currently outstripping supply. However, there are still leasing opportunities in the older Class A space that has been freed up by tenants relocating to the new towers. The substantial demand for the new breed of office space has led to late-stage discussions for further development projects. Calgary s office market has surged over the past two years, and occupancy rates now approach 100% in the downtown core s Class A buildings. As a consequence, tenants are turning to Class B properties for office space, where there is somewhat greater availability, but even in this space class asking rents are rising rapidly. A number of new developments are planned or in progress, which should bring million sq ft to the downtown market, but nothing will be completed before mid-2014, so the market will remain exceedingly tight. Vancouver continues to experience an office space squeeze in the downtown core. The combined Class A and B vacancy rate was a very low 2.9% at the end of 2011, and there is little relief in sight for tenants. Larger blocks of available space, greater than 20,000 sq ft, are extremely rare, and asking rents are rising. There are new developments in the pipeline, which will provide over 1 million sq ft of high quality inventory, but none of these projects are scheduled to be completed until mid As has been the case for the past few years, tenants will find more abundant leasing opportunities in the suburban markets. Montreal 19

20 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Middle East The Middle East remains overshadowed by the political upheaval taking place in a number of countries, which has led to considerable caution over the outlook for business and investment. Nonetheless, the IMF estimates that GDP growth for the region was a solid 4.9% in Looking forward, growth in 2012 is expected be lower at around 4%, although there remains a considerable degree of uncertainty surrounding the wider global economy and the ongoing push towards greater democracy across the region. 20

21 Figure 15 Middle East prime office rents US$ per sq m per annum Dubai Abu Dhabi Doha Riyadh Manama Kuwait City Muscat Figure 16 Middle East prime office yields % Manama Riyadh Abu Dhabi Dubai Doha Muscat Kuwait City The political turbulence in the Middle East has impacted markets already affected by high vacancy levels Source: Knight Frank Research Source: Knight Frank Research In addition to economic and political headwinds, the oversupply of commercial space has been a major issue in some locations. In Bahrain, for example, office vacancy rates in Manama have reached very high levels after rising consistently since While the development pipeline has slowed, it is estimated that it will take around five years for current supply to be absorbed. The impact of civil unrest has been most evident in the retail sector, which is heavily driven by weekend visitors from Saudi Arabia. Tourist numbers have fallen dramatically over the last year, leading to reduced retail sales. While occupancy levels in the largest prime malls have remained above 90%, many tenants have been encouraged to renew leases through lower rents. However, some retail schemes at the middle-to-lower end of the market are now experiencing much higher vacancy rates of up to 60%. In Bahrain s industrial sector, while there has been a significant drive to allocate land for industrial use and strong interest from local and regional occupiers, demand for high specification warehousing space is currently limited. In Dubai, the office occupier market has struggled for a number of years, although an increase in activity was recorded in late 2011 and early 2012, in part due to the Arab Spring. Dubai s safe haven status in the Gulf has led to a number of companies expanding and consolidating their operations in the Emirate. As prime headline rents are nearing the bottom of the current cycle, the more astute Manama 21

22 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook occupiers are aware of this and are trading up in order to secure best deals. In contrast, rents in secondary locations are still experiencing downward pressure, notably with vacancy rates across the city remaining at very high levels. For many retailers, Dubai remains the major entry point into the wider Middle East, attracted by the presence of western-style mega-malls, high spending power and a young population eager for new brands. Large regional malls account for 60% of retail space, although an increasing number of smaller community malls are being developed. Rents have not moved significantly over the year, although prime schemes recorded a modest degree of growth, while more secondary schemes saw rents edge down. As in much of the region, Dubai has a limited supply of good quality industrial and logistics stock for which there is strong competition. As a result, many occupiers are seeking pre-let options in order to secure better quality, purpose-built units. The Abu Dhabi office occupier market remains subdued as a result of the current economic climate, with requirements averaging around 250 sq m. Supply increased significantly in 2011, with the delivery of over 300,000 sq m of new Grade A space. The retail market remains active, although there are limited opportunities in the traditional downtown areas to source the quality of space required by international brands. Rents remain stable, with forthcoming developments expected to soon provide retailers with new opportunities. In Abu Dhabi s industrial market, rents are expected to fall further as more stock enters the market, although the better quality stock coming through should mitigate the extent of any declines. In the Middle East as a whole, investment activity remains generally muted, with most investors adopting a wait-and-see approach to see how political events play out. However, given the sharp correction in rental levels seen in the last 2-3 years and the softening in property yields which are now in the range of 8-9%, the region offers some potentially very attractive investment opportunities. Abu Dhabi 22

23 Dubai 23

24 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Africa Many African economies continued to grow at an impressive speed in 2011, with the global slowdown having a relatively limited effect on the continent. The IMF estimates that GDP growth in Sub-Saharan Africa was approximately 4.9%, however growth in North Africa decelerated sharply to around 2.0% as a result of the economic impact of the Arab Spring. 24

25 Figure 17 Africa prime office rents US$ per sq m per annum 2,000 1,500 1, Luanda, Angola Lagos, Nigeria Cairo, Egypt Lusaka, Zambia Dar es Salaam, Tanzania Kampala, Uganda Johannesburg, South Africa Durban, South Africa Gaborone, Botswana Cape Town, South Africa Lilongwe, Malawi Harare, Zimbabwe Nairobi, Kenya Blantyre, Malawi Economic growth and inward investment have continued to support the development of Africa s property markets Source: Knight Frank Research While high commodity prices have buoyed growth in Sub-Saharan Africa, its economies have also been aided by advances in technology and communications, improved regional trade integration and increased political stability in a number of countries. GDP growth of over 6% was estimated in 2011 not only in oil-rich West African countries such as Nigeria and Equatorial Guinea, but also in East African nations including Tanzania and Uganda. The IMF forecasts that annual GDP growth in Sub-Saharan Africa will continue to run at above 5% over the next five years, although serious challenges, including infrastructure difficulties and skills shortages, remain present in many countries. Any slowdown in China s economic growth would also cause concern, as it has become a hugely important trade partner and investor in Africa. The economic development of Africa has supported the growth of its commercial property sector. However, outside of South Africa, property markets generally remain small and underdeveloped, with many major cities having a limited stock of high quality office space. African retail property markets continue to grow; while small-scale informal retail activity remains very common, modern shopping centres, targeted at Africa s growing middle class, continue to be built across the continent. Luanda, Angola, and Lagos, Nigeria, are among the most expensive cities in the world in which to rent offices, with both markets having a very limited supply of high quality space able to meet the requirements of international occupiers, particularly those from the oil and gas industries. Lagos continues to be severely affected by overcrowding and poor infrastructure, but Cape Town several very large projects aimed at improving the city s built environment are in the pipeline, including Eko Atlantic City and the Lekki Free Trade Zone. The development of the new Central Business District in Gaborone, Botswana, is expected to have a major impact on the city s office market in the coming years. While a limited amount of space has been completed so far in the new district, nearly 90,000 sq m of offices are due to be delivered in 2012, most of which will be completed on a speculative basis. 25

26 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Cairo A number of major occupiers, from both the private and public sector, are planning to move to the new CBD, which may cause availability to increase in the city s existing business parks. In Lusaka, Zambia, over 14,000 sq m of new office space is currently under construction and expected come to the market in While Zambian tenants remain reluctant to pre-let space, there has been increased evidence of pre-let demand from international companies entering the Zambian market. Lusaka s retail sector has continued to grow, with Levy Business Park and Makeni Junction adding approximately 40,000 sq m of new retail space in 2011, but no new retail schemes are due for completion in There is currently a surfeit of Grade B offices available in Kampala, Uganda, with vacancy rates for such space currently standing at approximately 30%. Occupation costs have risen considerably as a result of increased power outages, which have necessitated the use of standby generators for longer periods. A number of new office projects were delivered to the market in Dar es Salaam, Tanzania, in the second half of 2011, with most of the space being let to tenants moving from dilapidated premises. Several major office schemes are currently under construction the city, with development activity being encouraged by strong occupier demand and a lack of available space in the CBD. Office market activity in Harare, Zimbabwe, has been restricted by the recent liquidity crisis in the country s economy. The highest office rents are currently recorded in suburban business parks, while the CBD continues to see significant vacancy rates. Demand for retail space has remained relatively strong, in both the CBD and better quality suburban shopping centres. This has put some upward pressure on retail rents, albeit increases are likely to be limited by the low spending power of much of the population. In Nairobi, Kenya, significant volumes of new office space have continued to be delivered to the market, most of which have been well-let. New completions in 2011 included 14 Riverside, with approximately 30,000 sq m of commercial space. Over the longer term, there are ambitious plans for several large-scale urban developments in Kenya, notably TATU City and Konza Technology City. Of Malawi s two largest cities, Lilongwe has seen a greater level of office development activity in recent years than Blantyre, where availability rates are high. In the retail sector, the 18,000 sq m Gateway Mall, which will be Malawi s largest shopping centre when completed, is currently under construction in Lilongwe and due for completion in Occupier demand for office space in South Africa was fairly subdued in 2011, and vacancy rates drifted upwards during the year in many of the country s major cities. While prime office rents were generally stable, rents for lower quality space came under downward pressure. In Johannesburg, demand has been strongest in decentralised nodes including Illovo and Sandton, and these areas have been able to command higher rents than the CBD. While vacancy rates rose in most of Cape Town s submarkets during 2011, the availability of premium grade space has remained low. In Durban, demand has been healthy in the Umhlanga/La Lucia Ridge area, but the CBD has continued to record high vacancy rates. 26

27 Durban 27

28 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Asia-Pacific Asia-Pacific led global economic growth in 2011, with GDP for the region as a whole rising by 6.2% according to IMF estimates. However, growth slowed by the end of year in many parts of Asia, with mounting global economic uncertainties, particularly in the Eurozone, dampening international demand for Asian exports. Government measures aimed at tackling high inflation and the risk of a residential property market bubble have also affected economic activity in markets including China, India, Singapore and Hong Kong. 28

29 Figure 18 Asia-Pacific office vacancy rates % Hanoi Kuala Lumpur Mumbai Guangzhou New Delhi Ho Chi Minh City Bangalore Bangkok Singapore Sydney Tokyo Seoul Q Q Jakarta Brisbane Melbourne Beijing Shanghai Perth Hong Kong Office vacancy rates have fallen below 5% in Shanghai and Beijing, putting upward pressure on rents Source: Knight Frank Research Some moderation in economic growth is expected in Asia-Pacific in 2012, albeit it should remain the fastest expanding region of the global economy. The IMF anticipates that GDP growth in China will ease from 9.2% in 2011 to 8.2% in 2012; likewise, growth in India is forecast to fall from 7.4% to 7.0%. Demand for office space in the region was affected by global economic concerns towards the end of 2011, particularly in cities most closely integrated with international financial markets. Hong Kong and Singapore became Shanghai two of the first major global office markets to see rents reach their peak in the current cycle, and recorded falls in prime rents in the final quarter of the year. The major office markets of mainland China performed strongly in 2011, in sharp contrast to the residential property sector, which saw prices decrease as a result of government moves aimed at cooling the market. Prime office rents rose rapidly in Shanghai and Beijing, and vacancy rates fell below 5% in both cities, driven by strong demand and limited development completions. The Beijing market recorded exceptionally strong rental growth in 2011, with prime rents rising by 46%. Beijing and Shanghai are both forecast to see continued rental growth in The rapid growth of China s retail market and the rising spending power of its consumers have continued to attract investors and developers. A notable example is the Singaporean mall owner CapitaMalls Asia, which has quickly expanded its operations in China, and now has interests in more than 50 shopping centres in the country. International retailers continue to grow their presence in China; during 2011, IKEA opened its secondlargest store in the world in Shanghai, US clothing retailers Hollister and American Eagle Outfitters launched their first shops in mainland China, while luxury retailers Dior and Marni opened new flagship stores in Beijing. Following two years of exceptional growth, prime office rents peaked in the Central district of Hong Kong in the second half of 2011, and rental falls were recorded in the final four months of the year. Hong Kong s exposure to global economic headwinds has engendered increased occupier caution, and a growing number of tenants have sought to reduce their operating costs by moving to less expensive 29

30 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Figure 19 Asia-Pacific prime office rents US$ per sq m per annum 1,800 1,600 1,400 1,200 1, Hong Kong Tokyo Singapore Perth Sydney Source: Knight Frank Research Mumbai Brisbane Beijing offices. Prime rents in Central are anticipated to fall by 10-15% during 2012, but rents should remain firm in non-core districts such as Causeway Bay, Quarry Bay and Wan Chai. While sentiment in the Hong Kong office market has cooled, the retail sector has New Delhi continued to perform well, buoyed by strong private consumption and increased tourist arrivals from the mainland. Prime retail rents rose by around 20% in 2011, and further growth is anticipated in 2012 with international retailers maintaining an interest in expanding into Hong Kong s major shopping centres. The Hong Kong retail sector also provided the largest global commercial property investment transaction of 2011, with the sale of Festival Walk shopping centre to Mapletree Investments for HK$18.8 billion (c.us$2.4 billion), reportedly reflecting an initial yield of c.4.5%. Following the devastating earthquake in March, the Japanese economy picked up well in the third quarter of 2011, but activity weakened again in the final quarter, with exports hit by slowing global trade. Prime office rents in Tokyo remain under moderate downward pressure, with landlords needing to offer competitive rents in order to attract Melbourne Ho Chi Minh City Q Q Shanghai Hanoi Seoul Guangzhou Bangkok Phnom Penh Bangalore Jakarta Kuala Lumpur cost-conscious tenants. The opening of the 138,600 sq m Sumitomo Fudosan Shinjuku Grand Tower added to availability in Tokyo towards the end of 2011, and vacancy rates may edge further upwards with a significant number of projects due for completion in The outlook for Singapore s trade-based economy has worsened, with government forecasts suggesting that GDP growth will slow from 4.8% in 2011 to no more than 3% in This is expected to cause office occupiers to rein in their expansion plans and office market activity is likely to weaken in the next year. Prime office rents began to fall in the final quarter of 2011, and are forecast to decrease by up to 15% over the course of Grade A office rents in Seoul have continued on a downward trend in the face of relatively weak demand and rising levels of new supply. There were a number of large completions in the CBD during 2011, while the Yeouido Business District will also see major deliveries over the next two years, most notably the Federation of Korean Industries Hall, with a floor space of 169,000 sq m, and Two IFC and Three IFC, part of the mixed-use International Financial Center project, which will include a total office space of 328,000 sq m in three towers when complete. Grade A vacancy levels have remained high in Hanoi and Ho Chi Minh City, keeping prime rents under downward pressure. The Grade A vacancy rate in Hanoi rose sharply to reach 33% at the end of 2011, mainly due to the delivery of a large volume of new space in the west of the city. In HCMC, the Grade A vacancy rate is 14%, but this figure is skewed by the Bitexco Financial Tower, a 262 metre tall building opened in 2010, which remains less than 50% occupied. The recent sale of Saigon Tower to the Japanese investor Daibiru reflected a yield of approximately 8.5%, setting a new benchmark for prime offices in HCMC. Strong demand for office space in Jakarta helped to push the vacancy rate down to 6.3% at the end of 2011, from 11.9% a year earlier. While demand is expected to weaken somewhat in 2012 as a result of concerns in the global economy, most of the new space expected to be delivered to the market over the next 12 months is already pre-let, which will help to support occupancy levels. Jakarta 30

31 Phnom Penh Tower was completed in 2011, while the 39-storey Vattanac Capital Tower, due for completion in 2012, is expected to set new standards of quality for Cambodian offices. Asking rents for the new Grade A space are significantly higher, at US$20-25 per sq m per month, than those achieved in existing Grade B buildings, where rents are typically US$9-15 per sq m per month. Prime office rents in Kuala Lumpur remained flat over the course of Office leasing activity was healthy, driven by the oil and gas and financial sectors, but the vacancy rate edged up to 20%. With a significant amount of new space due for completion over the next twelve months, rental growth is not expected in Occupier demand in the Bangkok office market has remained robust and largely unaffected by the severe floods seen in Figure 20 Asia-Pacific commercial investment volumes US$ billion Tokyo Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Japan China Australia Hong Kong South Korea Singapore Rest of India (Mainland) South East Asia Office, retail, industrial and hotel transactions only Source: Knight Frank Research/Real Capital Analytics Thailand in the second half of However, the floods have had a greater impact on the industrial sector, causing considerable damage and disruption to many industrial estates and factories. In some cases, industrial occupiers are considering relocating operations to less flood-prone areas, either within Thailand or in other countries. The Grade A office market in Phnom Penh remains in its infancy, although the 22-storey The major Indian office markets have seen a gradual recovery in demand over the last two years, albeit vacancy rates remain high in many locations. The majority of leasing activity within the National Capital Region during 2011 occurred in peripheral business districts such as Noida and Gurgaon, while a limited number of transactions were recorded in the New Delhi CBD, due to a lack of available space. Prime office rents were either stable or showed modest rises across the NCR s submarkets in The Mumbai office market was relatively subdued in 2011, with occupiers from the business, financial and insurance sector, traditionally the major drivers of the market, accounting for a reduced share of leasing activity compared with recent years. Prime office rents were flat over the course of 2011 in Nariman Point, the central business district, while modest rises were recorded in western suburbs such as Malad and Andheri. High vacancy rates and a large development pipeline are likely to keep rental levels in Mumbai under downward pressure in The Bangalore office market rebounded in 2011, with prime rents rising by 10% in the CBD and by around 15% in Whitefield and Electronic City, submarkets favoured by IT occupiers. The Indian organised retail sector showed signs of recovery in 2011, with increased demand noted in a number of cities, although retailers remain cautious about expansion. Several major markets are expected to see increased new supply over the next year, as developers gradually restart projects that had been delayed during the global economic downturn. Significantly, though, the Indian government suspended plans to open up the retail market to foreign investment in late

32 2012 GLOBAL REAL ESTATE MARKETS Annual review and outlook Demand for office space in Sydney remains relatively patchy, although prime accommodation has been surprisingly resilient in the face of reduced business confidence caused by the uncertainty in the global economy. The vacancy rate stood at 9.6% at the year-end, an increase from 8.3% at the start of 2011 caused primarily by the completion of several large new developments in the first half of the year. In Melbourne, the office vacancy rate fell from 6.6% to 5.3% during 2011, although the rate at which availability fell slowed during H2 as leasing activity softened. In both Sydney and Melbourne, demand is strongest for offices at the prime end of the market, particularly space with large contiguous floor plates. The Brisbane and Perth markets have both benefitted from increased demand from Australia s booming resources sector. In Brisbane, the vacancy rate fell steadily in 2011, to reach 6.2% at the year-end, and rents rose modestly. However, an ample development pipeline may dampen the rate of rental growth in Brisbane during The lack of available supply is more acute in Perth, with the vacancy rate now standing at 3.3% and nearly all of the new space due for delivery in 2012 already pre-let. Perth now has the highest prime office rents in the country, albeit Sydney still achieves the highest individual rents in trophy, premium buildings. Office rents in Perth are expected to rise further in 2012, with demand supported by the strength of Western Australia s economy, which is currently outperforming the rest of the nation. Consumer spending was subdued during 2011, contributing to challenging conditions within the Australian retail market. Despite this, a number of international retailers are actively pursuing expansion strategies within the country, with Topshop and Zara being notable new entrants to the market during the last twelve months. Demand from large retailers seeking prime locations for flagship stores has underpinned modest rental growth in Sydney, but rents have remained flat in other locations within the city. Average retail rental growth in Sydney is expected to be flat to negative in Marginal rental increases were recorded in the Australian industrial sector in 2011, with demand for the limited available prime space remaining strong. An increased level of speculative and pre-lease development is expected to be seen in 2012, although this is likely to remain at a fairly low level until the global economy picks up a head of steam. Overall, investment in commercial property in the Asia-Pacific region came to just under US$93.8 billion in 2011, 10% up on the previous year, according to Real Capital Analytics/Knight Frank data. While increased activity was recorded in China and Australia, volumes in Japan inevitably fell in the aftermath of the Tōhoku earthquake. Investment activity in Australia was driven by a notable increase in offshore demand, with cross-border investors accounting for around 50% of office transaction volumes in both Sydney and Melbourne. Sydney Investment volumes slowed in the final quarter of 2011, and the outlook for 2012 appears uncertain. The relative strength of economic growth in the region should continue to encourage activity, but there are signs that aggressive pricing is causing some local investors to look further afield at other international markets in search of better value, with prime office yields at sub-4% in markets such as Tokyo and Hong Kong. The occupational markets of the region face a mixed outlook in 2012, and prime office rents are expected to come under pressure in a number of major cities. Paradoxically, the economic downturn that started in the Eurozone may actually be having a greater impact on some Asian markets, with occupier caution in the historically volatile markets of Hong Kong and Singapore causing these cities to have some of the weakest rental growth prospects globally in