Savills: global shift to quality offices continues into 2024

The structural global trend towards seeking high quality premium office space is continuing into 2024, according to new Savills research. Prime office rents in major cities around the world have risen 1.1% in the past year while tenants’ net effective costs (rent plus fit-out costs) have risen 2.4%. 

Source: Savills

“Landlords are having to work harder to attract and retain tenants”, said Jeremy Bates, EMEA Head of Occupational Markets, Savills. “But it’s clear that occupier demand for the best space remains strong even in markets where office utilisation rates may remain below pre-pandemic levels.”

Office occupancy levels have continued to climb as many companies look to encourage employees’ return to the office by investing in increasing in the quality of the space available to staff. Office utilisation rates have continued to rise in all the key major regions, although there is still a large divide between Asia Pacific locations, which have consistently maintained a strong in-office culture, and Europe and North America, where more flexible working practices have taken root.

This trend is mirrored in costs to prime office occupiers: net effective costs have risen the most in regions where occupancy rates are lowest, as tenants lean towards investing in prime office space to attract employees back and also to meet sustainability requirements.

Kelcie Sellers, Associate Director, Savills World Research Team

In EMEA and North American markets annual net effective costs have grown on average 4.8% and 2% respectively year-on-year, reflecting the higher cost of fitting-out buildings in these locations, while in Asia Pacific they have only risen 0.6%, although the picture varies quarterly city-by-city.

Some of the increased cost to occupiers has been off-set by landlord concessions and incentives, according to Savills: general landlord contributions to fit-out costs (excluding turn-key space) are increasing in North American and Europe. Since the first quarter of 2019, the average landlord contribution to fit-out costs has increased by approximately 37.5% across the 35 markets Savills monitors.

“The potential to achieve higher rents serves as a strong inducement to office landlords to invest and aligns with the projected upwards trend in prime rental growth, even if they have to initially offer incentives to tenants to help them reduce their fit-out costs”, said Kelcie Sellers, Associate Director, Savills World Research Team.

However, not all offices will be able to follow this trajectory, Sellers warned: “For lower-grade stock, retrofitting to new standards may be prohibitively expensive: offices in less desirable business locations may never attract the tenants – and therefore the rents — to justify the investment. In these cases, repurposing becomes the obvious or only approach, with the range of alternative uses growing around the world: housing, hotels, life sciences and education all feature highly.”