New office supply to peak by 2011

LONDON: Office vacancy in Asia Pacific, which has been trending downwards in 1Q2010, are expected to rise again, mainly in emerging markets as construction reaches its peak between 2010 and 2011 before moderating in 2012, according to Jones Lang LaSalle (JLL)’s latest Global Market Perspective.

The Asia Pacific development pipeline is already at the advanced stage as projects are completed on schedule and delays are fewer owing to improved business sentiments in most markets. This is true also in markets with large supply pipelines.

However, JLL noted that the peak of the supply cycle will be supported by strong demand. In China and India, net absorption is expected to remain strongly positive over the next two to three years due to strong end-user demand.

In the quarter under review, net absorption across Asia Pacific’s Tier 1 cities has increased by nearly 20% quarter-on-quarter and returned to being positive in Hong Kong, Singapore, Seoul and most Australian markets.

Leasing activity will continue to be largely driven by relocation and upgrading over the short term. However, expansion demand should strengthen in the office sector this year as corporate occupiers position themselves for future growth, said JLL.

Meanwhile, the US and European markets are seeing the tail-end of the development cycle and more new supply will dry up by 2011. This will open opportunities for new development, refurbishment and retrofits, and in a few markets such as London, speculative development is back on the agenda, said JLL.

The European office vacancy rate has remained stable in 1Q2010 at 10.2%. A few markets, led by London have seen a decline in vacancy rates. Supply in London has fallen 15% and the lack of new developments might bring on further declines over the rest of 2010.

There remains a significant spread of vacancy rates across Europe with the highest in Dublin (21.9%), some central and eastern European markets (Budapest at 20.7%, Moscow at 18.6%), and the lowest in France (Paris at 7%, Lyon at 6.4%) and London (7.5%).

JLL expects further increases in the overall European vacancy rates, peaking at just over 11% by year-end.

In the US, vacancy rates have surpassed a record high in 4Q2009 at 18.5% and are projected to continue to increase over the course of 2010, likely peaking by mid-2011.

From mid-2011, the supply pipeline will be virtually non-existent. This should coincide with an accelerating recovery of demand, thereby hastening the market rebound, said JLL.

Over the next two years, overall office completions will amount to a modest 5% of total stocks across 23 major markets globally with particularly low stocks in the US and Europe.

Also, with a relative lack of new developments post credit crisis, many markets will face a shortage of Grade A supply over the next two years despite expectations of weak growth in leasing activity.

Some prime sub-markets of Hong Kong and Singapore are already experiencing shortages of Grade A supply with medium to large occupiers finding it difficult to secure space.

There may also be mispricing where current negative sentiment due to weak occupier demand belies the potential for supply scarcity. Nevertheless, development appraisals are strengthening in some markets, with falling tender prices and better rental expectation now making speculative development more economically viable, said JLL.
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