Commercial property markets throughout the world continued to expand and strengthen in 2005, according to Princeton, NJ-based NAI Global, which has released its 2006 Global Market Report. By year-end 2005, average rents had increased in nearly all property sectors in the United States, and vacancy rates were trending down in almost every property type.
NAI Global’s annual report features information on 208 international markets, including major markets and key secondary and tertiary markets in 40 nations worldwide. The report provides market highlights, trends, demographic and business profiles, rental rates, vacancy rates, and land prices.
“There is a growing sense that the recovery has firmly taken hold and that the outlook is for continued strengthening in rental rates and continued declines in vacancies,” said NAI Global President and COO Jeffrey Finn.
Competition for Manhattan office space, for example, has guided vacancy rates to a 4-year low and marked a shift to a landlord’s market. There was a widening disparity between vacancy rates and asking rents in the midtown and downtown office submarkets. The midtown vacancy rate fell from 9.1 percent to 6.8 percent, while downtown remains in flux.
Overall, retail demand still led the way in 2005, with the industrial market mixed and the office market showing a strength not seen in several years. The “flight to quality” is slowing down as quality property becomes shorter in supply, and tenants’ desire to purchase rather than rent office space has begun to fade, as inventories tightened and financing costs were expected to increase.
Developers in some areas have positioned themselves to take advantage of the next significant increase in demand, but little speculative development is evident. Nearly all key international markets were cautious as well, reacting to the current global situation and uncertainties over interest rates, the price of oil, and the weakness of the dollar.
Select U.S. Market Highlights
The downtown Chicago office market remains tenant-driven. Despite an overall vacancy rate of more than 18 percent, ongoing development continues to be driven by the technology and efficiency needs of some of Chicago’s largest firms.
Miami’s maturation continued with every market segment improving. The market will likely experience space shortages in 2005, given that few new projects were delivered in 2005 and fewer deliveries are scheduled for 2006. The office market is projected to see rising occupancy levels and rapidly increasing rents. Construction and land costs have risen dramatically, requiring rents 20-percent to 30-percent above current rent rates to justify construction.
Although vacancy rates have been stable in Austin throughout 2005, rental rates continue to rise despite the overall negative absorption. There were great expectations for Dallas in 2005 with unemployment rates falling and healthy projected job growth. However, the 2005 numbers fell short of expectations. Office absorption for the Dallas area did see positive net gains, but amounted to only 1 percent of the market. The Ft. Worth office market shifted in the last 18 months from a tenant’s market to a landlord’s market.
Demand for commercial real estate in the District showed no signs of slowing during 2005. Northern Virginia's stability will be tested by the Pentagon's recommendation, recently seconded by the federal base closure commission, to move about 20,000 defense-related jobs out of leased space here. The move would affect more than 3 million square feet of real estate in Arlington alone. Office rents are stabilizing in suburban Maryland as former high-tech space is being absorbed.
The major West Coast commercial real estate markets, like most of the rest of the country, posted healthy activity in 2005, pushing rents up and vacancy rates down, nearly across the board.
The investment climate for Southern California office property remains red hot, sending per square foot prices to all-time highs. Beverly Hills recently witnessed a Class-A property trade at more than $600 per square foot. San Francisco County’s office market is on track to recovery. Overall, the vacancy rate is down by more than 3 percentage points from the end of 2004 to 13.1 percent. Accordingly, asking rents there increased more than 10 percent in 2005.
An office condo craze has swept Phoenix and Tucson over the past several years. The trend has siphoned tenants from leasing markets into ownership positions, particularly within buildings ranging from 3,000 square feet to 10,000 square feet. Developers are producing approximately 1.5 million square feet of this type of product, and it is being absorbed as rapidly as it is built.
Select Global Market Highlights
Minimal new development in London, coupled with a strong financial services sector, has resulted in higher absorption and lower vacancies. The vacancy rate has fallen to approximately 10.5 percent, with little additional space scheduled for completion in the near future. Prime rents remained broadly static at around £45 to £50 per square foot, but significant incentives still have to be offered to tenants to achieve this rent.
Paris is also seeing improved absorption, with much of the demand derived from companies undertaking cost reduction and rationalization activity. Development activity has remained relatively subdued, helping push the vacancy rate down to about 6 percent for the Paris region. While average rents have been broadly stable, prime headline rents in the Paris central business district have increased to €650 per square meter.
Natural disasters, fear of terrorism, and Avian flu have not kept major multinational corporations from expanding into Asian markets.
While corporations have not had any trouble finding quality office space in Beijing, it was not cheap. A glut of new office building deliveries brought more than 1.3 million square meters of new space to the market in 2005, pushing vacancy rates for prime Class-A space to 12.8 percent. Even with the higher vacancy, Beijing rents have almost doubled in the past year, reaching $35 to $50 per square foot.
Strong internal growth and the continued influx of multinational companies helped Hong Kong evolve into a landlord’s market. Average rents for Class-A office space increased nearly 60 percent year over year, rising to HK$52 per square foot.
Tokyo appears to have worked through most of the record amount of Class-A office space that was added to the market in 2003. Tenants have been upgrading their space at comparable rents.
With a growing economy and investment grade rating, Mexico is increasingly viewed as a stable environment for foreign investors. Class-A lease rates are running from $18 to $28 per square meter per month. In Mexico City, during 2005, global firms accounted for 50 percent of the leasing activity for Class-A space, Mexican government agencies were responsible for another 20 percent and Mexican national firms fueled the rest of the activity in the market.
Because of its importance in Brazilian economy, São Paulo has many central offices of national and international companies and is a mandatory location for businesses in Brazil. Currently, there are approximately 17.21 million square feet of Class-A and Class-A Plus office space in the city, with a vacancy rate decreasing to 14 percent at year-end 2005, from more than 17 percent earlier in the year. Demand remains strong for high-quality office.
This information was reprinted with permission from NAI Global, a global leader in commercial real estate services, combining superior coverage, innovative technology, and expert professionals to deliver maximum results. The brokerage network comprises 3,500 professionals in more than 300 offices in 40 countries providing commercial real estate services. Last year, NAI Global professionals completed more than $33.5 billion in commercial real estate transactions. All market information in the 2006 Global Market Report is available online at (www.naiglobal.com) and is updated quarterly throughout the year.