NYC Remains The Most Expensive U.S. Office Market. Can You Guess The Others?
If there are ramifications from escalating tariff talks around the world, you can’t tell from the global prime office market. The sector is performing well across all regions, a first in the current economic cycle.
The global economy ended the first quarter with above average growth of 2.4%, compared to 1.9% the year prior. The economic lift is spreading into the prime office market, where leasing is notably robust in the Asia-Pacific and European, Middle East and African regions. Even in the Americas, where leasing was down 0.4%, occupancy costs were the highest in the world at 3.2%, according to CBRE’s June “Global Prime Office Occupancy Costs” report.
“The standout figure was the consistency of global growth,” CBRE Global Chief Economist Richard Barkham said. “Despite a lot of geopolitical noise, there is actually quite a lot of leasing going on with prime space and good demand.”
Finance and technology firms were among the leading drivers of higher rents in global markets. Hong Kong Central, with occupancy costs averaging $306.57/SF, is the most expensive office market in the world for the third year in a row. Finance and banking demand from mainland China, as well as active coworking space operators, kept costs high in Hong Kong.
London’s West End submarket is the second-most-expensive prime office market in the world. The remaining top five markets belong to Asian cities: Beijing (Finance Street), Hong Kong (Kowloon) and Beijing (CBD), respectively. As China transitions from a manufacturing-based economy to a service economy, Barkham expects even more lift in the Asian markets. International interest is also expected to grow thanks to Chinese financial reform.
“The level of take-up by Chinese financial institutions has really surprised us on the upside,” Barkham said. “The only thing that might dent this is if a trade war spirals out of control, but we don’t expect that to happen.”
Not all is down and out in the U.S. The slight decrease in leasing activity is attributed to an imbalance as numerous newly completed buildings have hit the market in some of the country’s top markets, including New York, where subleasing is at levels not seen since 2010.
Any reduced costs from a flood of supply are typically short-term matters and present a valuable opportunity if companies act quickly enough. The passing of new U.S. tax laws at the end of 2017 is also expected to help drive office activity.
“One thing we’ve seen this particular cycle is that it has not been overburdened with development,” Barkham said. “There’s a pipeline of development in U.S. gateway cities, but I think with the fiscal stimulus and high level of economic activity it’s generating, there is an ability to absorb that supply.”
New York still had two submarkets rank within the top 10 prime office markets in the world.
Midtown Manhattan ranked sixth in the world with an average $183.78/SF operating cost. Seventh place went to Manhattan Midtown-South, with an average $171.56/SF operating cost. Midtown South moved up a spot since last year, and its 9.8% rise in occupancy costs is among the highest increases in the global prime office market.
Other notable U.S. markets included downtown San Francisco, which ranked No. 13 with $113.84/SF occupancy costs, and downtown Boston, which ranked No. 17 with $103.75/SF. San Francisco’s Peninsula submarket came close behind at No. 18 with an average $103.22/SF. Downtown Manhattan was the last U.S. market to make the top 20, at No. 19 with a $102.49 occupancy cost.
While there has been some shuffling in the pack over the years, Barkham said top markets typically remain the same and weather most storms. It is simply a matter of what region has the strongest demand conditions in a given year.
“Usually there’s a lot of continuity in the top 10 or 15 markets,” Barkham said. “It’s very difficult to dislodge them in the long term. That’s why investors like them.”