Year-to-date global leasing volumes are down by 5% on H1 2018, according to JLL data, a rate of decline that we predict will play out during the rest of the year as demand begins to soften.
Defying forecasts once again, the global office vacancy rate fell further in Q2 to 10.8%. JLL reports that this represents the first time the rate has dropped below 11% since 2009. Vacancy decreased in both Europe (to 5.8%) and the U.S. (to 14.5%) but was stable in Asia Pacific (at 10.3%). New office deliveries are anticipated to peak this year at over 18 million square metres, with a further 17 million square metres due for completion in 2020, comparable to levels at the height of the last office construction cycle in 2008-2009.
With completions in 2019 likely to be one-third higher than in 2018, the global office vacancy rate is expected to start to edge up during the second half of 2019 to finish the year at around 11.3%, says JLL.
Rental growth for prime office space has remained remarkably consistent over the past two years, trending at an annualised average of 3.5% to 4% across 30 global cities.
Boston tops the global ranking with rents rising at an annual rate of more than 20%, according to JLL, with Berlin and Singapore also recording double-digit growth. Aggregate rental growth for prime offices is forecast to stay positive for the rest of 2019, although slowing marginally to around 3% as supply options increase. Boston, Singapore and Berlin are on track to be the top rental performers in 2019.
The retail sector continues to evolve, with landlords and developers retooling centres through redevelopment into mixed-use and via diversification of the tenant mix.
Jeremy Kelly, Director, Global Research at JLL, explains:
“In the US, structural changes are impacting demand with ongoing retailer bankruptcies and the restructuring of store portfolios. Net absorption declined by approximately 45% year-on-year over the second quarter, hampered by the closure of 4,500 retail shops, although the national vacancy rate remains sub-5%.
“Retail subtypes in the US continue to fare differently, with malls experiencing the most negative impact from store closures. Europe is being similarly impacted by these trends with prime high street shops proving to be the most resilient. A tighter labour market and expected pick-up in wage growth should help to boost demand.
“In Asia Pacific markets, experienced landlords are trying to differentiate themselves from the competition through unique products and services and targeting niche consumer segments, and there has been generally modest rental growth across the region.”
The challenges to bricks and mortar retail from online were identified long ago, says Andrew Burrell, Chief Property Economist, at Capital Economics. He writes:
“For the UK, this structural shift has been exacerbated by other factors, including CVAs, higher business rates and rising wage costs. The correction in retail property will undermine UK all-property returns over the next 2-3 years and remains a risk elsewhere.
“For European property, the picture has been brighter with the region having some of the top performers globally last year. But there may be more clouds ahead. Euro-zone markets will be undermined by faltering demand thanks to the economic slowdown, and rental growth is expected to slow.”
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