In research, the devil is always in the detail. Take Hong Kong for example. In the overall market we’ve seen Net Absorption falling continuously over the last three quarters. But, this belies the leasing trend we’ve observed.
Why? Well in short, you’re only getting half the picture from Net Absorption. It’s defined as the change in Occupied Stock. This largely tracks the aggregate new office space physically occupied (or surrendered) during a given quarter. It’s a very useful indicator, but one which may not capture the volume of leasing deals signed over the same quarter.
To add more detail around the demand story, we’ve launched a new indicator to our REIS clients: Gross Leasing Volume (GLV). GLV captures the actual contracts signed in the market during a given quarter irrespective of when that lease commences. If you take Hong Kong as an example, the 1Q16 GLV number is three times higher than net absorption, 834,000 sq ft versus 278,000 sq ft. Thus leasing activity is somewhat more resilient than you might first expect.
What we’ve observed is that as vacancy rates in markets reach frictional levels, GLV becomes increasingly important as net absorption is often restricted by tight vacancy conditions. That applies here in Hong Kong, where vacancy rates are at near historical lows. In order to move or expand, tenants have increasingly needed to secure a space before it is physically surrendered to the landlord. Take the Stock Exchange of Hong Kong (SEHK) lease as an example. SEHK leased three floors in One Exchange Square. The deal was signed in 1Q16 but SEHK will not move in until later this year! This space would not show up in the net absorption numbers for some time, but GLV helps us capture this.
Source: JLL Research
It’s not just in Hong Kong where GLV is proving useful. The story in Tokyo is similar. In 1Q16, net absorption slowed significantly for Grade A office space, due to tight vacancy in the 5-kus. Tenants there increasingly have to be forward looking and proactive in securing space. And in this instance the situation has been compounded by landlords’ strategies as they hold out to fill the remaining physically available space with trophy tenants to give their assets broader appeal.
Source: JLL Research
I’m not saying that net absorption is not a very important indicator, it is. In fact Net Absorption and GLV are complementary demand indicators. Net Absorption provides a picture of past and present demand while GLV complements the view of present demand levels and offers insight into the near term demand outlook. However, at REIS we are always looking at new ways to improve our product and to add more colour to our reporting, and GLV is just one such new step in keeping our clients better informed.
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