Economic and demographic forces, such as GDP growth and employment, drive demand for commercial real estate. Although market drivers for office space can vary between markets, there are key industries (e.g. finance, business services, technology) which are pillars supporting demand across many markets.
Financial and business services (F&BS) has long been an important occupier segment. This sector – mainly comprising financial, insurance and real estate services, professional services (e.g. legal, accounting, etc.), plus administrative & support services – employs a total of 20 million persons across 20 AP metropolises. Outside of international financial centres such as Hong Kong, Singapore, Sydney and Tokyo, we have observed the rise of domestic financials as a major source of office demand in China, while increased pressure on cost savings has propelled growth of low-cost business services outsourcing destinations such as India and the Philippines.
In addition, the technology, media, and telecom (TMT) sector comprising of IT-related services, media and telecommunications has rapidly expanded to rival financial & business services as a demand source. JLL estimates that the IT industry currently accounts for around 50-60% of occupied Grade A office space in India’s Tier I cities. In China, government data shows that a total of 1.5 million persons engage in information transmission, software & IT-related jobs in Beijing, Shanghai and Guangzhou alone. In the Philippines, more online gaming companies are setting up operations amid a mild slowdown in the Business Process Outsourcing.
Despite the wide range, employment growth in these two dynamic sectors is expected to persist in the near term. Oxford forecasts 2.4 million additional F&BS industry employees in the 20 AP metropolises over the next three years, the majority in the Tier I cities of China and India as well as Manila. Employment growth in the TMT sector should closely match that of F&BS (although Oxford does not release forecasts for this sector). India’s IT-Business Process Management industry employed an estimated 3.9 million persons in 2016-17, which is forecast to double by 2025 (Nascomm). China’s new economy – internet-based business ranging from e-commerce to FinTech – will create a million new jobs every year until 2020, according to the Chinese Academy of Social Sciences, the country’s top think tank.
This will translate into increased demand for office space. Based on a rule of thumb of 10 sqm per person, the 20 AP gateway cities may need up to 40 million sqm of office space to meet requirements coming from employment growth over 2018-2020. Although not all office workers require prime space and employers increasing explore options such as flexible or co-working space, this still represents solid occupier demand for the office supply pipeline in the respective cities – estimated at 15 and 20 million sqm of Grade A space over the next three years. As such, we expect average vacancy rate to remain stable in the medium term and prime rental growth to average 3% in 2018.
Table 1: Office supply pipeline meets employment growth
Sources: Oxford Economics forecasts, 2018, JLL (Real Estate Intelligence Services), 1Q18
Note: Strong represents net supply addition over 1 million sqm (NLA basis).
Medium for net additions between 0.25 to 1 million sqm.
Limited for net additions below 0.25 million sqm.
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