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World’s most expensive office markets get cheaper

BOSTON: More than 130 cities worldwide had declines in rent expenses in the year ended Sept 30, CB Richard Ellis Group Inc. said in a report today. Almost 50 cities reported declines of more than 10%. Rental costs fell about 30% in Midtown Manhattan, 53% in Singapore and 41% in central Hong Kong. Overall, rents fell an average 7.7% across 179 markets worldwide.

“The places that went up the fastest and highest also came down the fastest and at greater depth,” said Raymond Torto, Boston-based chief economist for CB Richard Ellis, the largest publicly traded broker. “You party Saturday night and you pay for it on Sunday morning. That’s true across the globe.”

The global recession and credit crisis are pushing down office rents as companies pare jobs. About 1.93 million job cuts have been announced worldwide this year, data compiled by Bloomberg show. In the US, the unemployment rate jumped to 10.2% in October, the highest level since 1983.

Singapore and Hong Kong are struggling to pull themselves up from recession, according to CB Richard Ellis. The pace of rent declines in Singapore eased in the third quarter, suggesting “an improvement in business confidence,” the report said. In Hong Kong, rents for top-quality space ended a yearlong decline in the third quarter for similar reasons, according to the survey.

West End costs

London’s West End district retained its position as the world’s most expensive office location, Los Angeles-based CB Richard Ellis said. Offices there cost $184.85 (RM663.61) a square foot. That’s down 26% from a year ago in US dollars or 18% in pounds.

With the exception of CB Richard Ellis’s May survey, when London was passed by inner central Tokyo, the broker estimates that the West End has held the title of the world’s most expensive office site since 2001.

West End rents have been pushed higher by the Mayfair and St James’s neighborhoods, home to Europe’s largest concentration of hedge funds. The cost of leasing space in the two locations may rise as the municipality lifts business property taxes by at least 70% over the next five years, CB Richard Ellis researcher Gary Martin said.

Tokyo rates

“None of the other main global office markets will have such an uplift,” said the London-based analyst.

Inner central Tokyo came in second in the CB Richard Ellis survey, while outer central Tokyo came in third. Central Hong Kong was fourth and Moscow was fifth. A year ago the order was the West End, Moscow, central Hong Kong, inner central Tokyo and Mumbai.

London and many Asian markets are showing signs of economic stability, Torto said. Most of the rent declines in those markets have probably already happened, he said.

“I would think that a year from now those markets will have sobered up,” he said.

New York City’s Midtown Manhattan came in 24th in the CB Richard Ellis survey, down from 15th last year. It remains the most expensive US office market.

In the Americas, Sao Paulo and Rio de Janeiro displaced Midtown as the most expensive markets for offices. Rio rose to 12th in the semi-annual survey from 37th a year ago, while Sao Paulo rose to 16th from 26th.

‘Changing world’

The rise in the two Brazilian cities is “part of the changing world,” with the country’s oil and sugar cane ethanol industries helping to push demand, Torto said. New York’s decline paralleled a drop in financial services employment, he said.

Offices in New York averaged $68.93 a square foot at the end of September, compared with $87.47 in Rio and $81.81 in Sao Paulo, South America’s biggest city.
Rio office costs increased 12.1%, the second biggest increase in the survey. Sao Paulo has about 115 million square feet of offices, about the size of Chicago’s office market, according to Torto.

“With the emerging economies, their office markets are much more volatile, and they have a much more limited supply of grade-A office space,” said Dan Fasulo, managing director of Real Capital Analytics Inc., a New York-based firm that tracks commercial property sales. “So when there’s an economic boom, there’s always a violent increase in occupancy costs due to constrained supply.”

Tishman Projects

Tishman Speyer Properties LP, the global real estate company whose office buildings include Manhattan’s Rockefeller Center and the MetLife Building, entered the Brazil market 13 years ago and has built or is building 21 office projects there. Eighteen are in Sao Paulo and three are in Rio, said Katherine Farley, a senior managing director who oversees the New York firm’s Brazilian operations.

The company has had success providing “international- quality” Class A offices in Brazilian cities where even the highest-quality buildings are mostly not air conditioned, she said.

“Because historically there has been no commercial lending, most of the projects that are built are built with equity,” she said. “What you saw happening in Brazil, they were one of the last economies hit by the global liquidity crisis, and one of the first to come back. We’re back to the levels before the crisis; you see a kind of V-shaped reaction.”

Brazil may grow 5% in 2010 after an expected 0.2% growth this year, according to the median forecast in a Nov 27 central bank survey of about 100 economists.
Rio was among 41 cities in the survey where costs rose. The biggest increase was in Aberdeen, Scotland, where office costs jumped 12.3%. Sao Paulo office costs were little changed.

CB Richard Ellis defines occupancy costs as a rental charges including taxes and service fees. -- Bloomberg

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