Elsewhere: Rental Rates Recover

Cushman & Wakefield, a U.S. consulting firm specializing in the commercial real estate market, has published an annual survey of office rentals on the world’s most expensive markets. The company’s analysts calculated costs related to office rentals on 202 of the most expensive markets in 47 countries.

The lion’s share of costs accounts for rental payments. But the survey also took into consideration taxes and public utility payments. As a result, London proved to be the most expensive city in the world in terms of office rent, the authors of the survey reported. Paris is ranked a distant 2nd. Tokyo and New York ranked 3rd and 4th respectively, followed by Hong Kong., where rental rates more than doubled in 2004.

Rental charges grew across major markets, and that growth proved to be much faster than in 2003. While the 2003 results showed that about half of the world’s markets were experiencing such growth, in 2004 that share grew to 60%. The increasing costs are explained mostly by the growing activity of financial institutions, many of which reported record profits last year.

Annual office rentals in Mayfair in London’s West End ran up to $199 per square foot, or $19,900 per square meter, which is 20% higher than in the previous year when the average rate fluctuated around $165 per square foot. London also tops a list compiled by Colliers International of the world’s most expensive office property markets.

“The growing demand for office rentals in London in 2004 is largely a result of the growing activity of companies offering financial and consulting services,” says Regina Lochmele, office real estate analyst at Colliers International. “Seven out of ten of the largest tenancy agreements were sealed by financial companies. The total volume of office rental and sale deals in 2004 reached a four-year maximum in 2004.”

London’s West End has always been a prime location with the highest office rental charges, which is due to the current restrictions on the height of buildings, expansion of buildings and high taxes that can run up to 40% of the annual rental costs, says James Sharno, head of client services at Cushman & Wakefield.

Office rental rates in Paris are less expensive but are growing, too. While in 2003 office space in the city center was offered at $106 per square foot, in 2004 costs grew by 13% to $120. Paris is followed by Tokyo where offices in the central business district were leased at $92 per square foot per year. In fact, the situation has not changed compared to 2003.

As regards rental rates, Colliers reports that Tokyo’s top rates for office properties have reached a 20-year low and are continuing to drop. “Rental rates in Tokyo are dropping,” says Regina Lochmele. According to the company’s experts, the supply of new office blocks is growing faster than demand.

That is why to make their new projects attractive to potential tenants, office property owners have to show great ingenuity to fill new buildings. For example, they move their tenants to new blocks, attract tenants from other office centers and open offices for their own group of companies in their new blocks. Thus, the office market in Tokyo today is a tenant’s market – a buyer’s market.

Only slightly behind Tokyo is New York with office rental rates in the city center being approximately $86 per square foot, compared to $85 in 2003.

Though it may be insignificant, that growth fills market analysts with optimism. Experts at Reis, the New-York based real estate market analysis corporation, reported that rental rates reached their all-time low last year, but have begun to grow again and in 2005 will increase considerably.

Hong Kong’s office rental rates grew considerably, ranking 5th in 2004, up from 17th position in 2003. Rates grew from $47 per square foot to $81, increasing by over 100%. While Tokyo is a buyer’s markets, Hong Kong today is quite the opposite. “The office market in Hong Kong is a landlord’s market, or a seller’s market,” says Lochmele.

The main trend in the growing demand for offices is the demand generated by major international companies, and small and medium-sized financial firms seeking to expand their offices and move to new blocks of a higher quality, she says.

When sealing tenancy agreements some companies take up more space than they currently need, proceeding from considerations of future business expansion and trying to save on rent, because analysts are firmly convinced that Hong Kong’s rates will continue to grow in the future.

The Hong Kong market has historically always been a highly dynamic market and however high the rental rates were in 2004, they still remained 42% below the record level they reached in 1997, says Bruce Mosler, president and CEO of Cushman & Wakefield.

The company’s analyst forecast further rental growth in 2005, mostly on the world’s most expensive market, due to the growing demand and minimal supply of premium-class offices in prime locations.

Colliers International’s experts agree with that forecast. In London rental rates may grow as the demand for office space grows, while the volume of construction will decrease in 2005, which may bring about a drop in vacancy rates.

In Tokyo rates are unlikely to grow in 2005. “The vacancy rate in the premium-class office sector has stabilized while the rate of vacant properties in less competitive blocks is growing, which enables tenants to seal deals with more favorable conditions,” says Lochmele.

New York’s market is likely to grow as U.S. corporations are gradually expanding their operations and, consequently, need more office space.

“If we recall that only recently companies were trying to get rid of excess office space, the worst appears to be in the past,” says George Slusser, president and COO at Coldwell Banker Commercial. “The general trend is a course for expansion that opens up good opportunities for 2005.”

Hence, the demand for office space will continue to grow along with rental rates, while vacancy rates will continue to fall.