Office Market Insights

May 26, 2024 / By  

Upgrades, relocation to quality space lift leasing momentum

Regional office leasing activity continued to recover in the first quarter, with a notable 12% increase in gross leasing volumes y-o-y. Occupiers are focusing on costeffective ways to upgrade their office, prioritising sustainability and overall quality. This flight-to-quality phenomenon is also supported by landlords taking an accommodative stance to shore up occupancy.

India continues to deliver strong leasing momentum dominated by flex space operators, banking & financial services, manufacturing/engineering firms and tech companies. Demand for office space is set to see sustained growth as prominent multinational corporations establish their global capability centres while domestic corporates benefit from India’s robust economic performance.

Soft sentiment prevailed in China despite an uptick in enquiries and inspections as tenant-favourable market conditions offered occupiers opportunities to upgrade to a higher quality space. With limited new demand and most deals stemming from renewals, increased competition pushed landlords to offer incentives to boost occupancy. Somewhat similarly in Hong Kong, pre-commitment levels remain modest in new completions. Leasing volumes grew relative to the same period a year ago, partly driven by several large new lettings led by financial services, retail and education.

Leasing volumes in Tokyo increased as domestic firms in Japan upgraded their office space to core locations in higher quality buildings. Limited supply in Seoul acted as a drag on deal activity although healthy take-up in the new completion in Yeouido, TP Tower, lifted leasing volumes significantly compared to a year before.

In Australia, leasing volumes contracted y-o-y in the first quarter. Sydney leasing activity was buoyed by the execution of delayed deals from previous quarters, however, volumes were still down relative to a year earlier.

Stabilised rents despite influx of new supply

Construction activity sustained healthy momentum regionally, as new completions exceeded 1 million sqm for the ninth consecutive quarter with five markets surpassing the 100,000 sqm mark. Despite additional supply entering in 1Q24, the regional vacancy rate edged lower to 15.3%.

The rental growth picture showcased growth as 16 of the major markets in Asia Pacific were in positive territory, supported by healthy leasing demand and tighter supply. India’s SBD markets showed healthy growth supported by strong occupier activity. Tokyo and Seoul both saw rising rents amidst firm market fundamentals. Singapore saw a shift in momentum as low vacancy levels coupled with competition from small and medium-sized occupiers to secure their preferred spaces pushed up rents in newer and better quality assets.

Despite an uptick in enquiries and inspections, landlords in Beijing and Shanghai CBDs maintained an accommodative rental stance amidst elevated vacancy pressure and weaker sentiment. Hong Kong also faces a similar downward trend as new completions propped up vacancy, providing tenants with cost-saving options to upgrade. In Australia, both Sydney and Melbourne CBDs saw incentives increase, weighing on effective rents.

Uptick in deal activity in developed markets upholds investment volumes

Asia Pacific office investment volumes held stable relative to a year earlier at USD 12.6 billion, with mainly domestic investors contributing to investment activity. Foreign capital remained guarded on the sector outlook as concerns about repricing and continued uncertainty towards monetary policy kept decision making slow.

Seoul saw capital values rise in line with rents. The city recorded high-profile transactions with robust occupier demand offering a stable income profile attracting domestic investors and corporates alike. Tokyo’s capital values saw growth, underpinned by rising rents as the most active market in APAC, with acquisitions led by domestic REITs and property companies. Singapore capital values increased marginally, as investment volumes remained modest with investors re-allocating capital to other sectors. Major cities in India saw rising capital values as investors took advantage of emerging trends to invest in more strategic opportunities like development projects and entity transactions.

Capital values declined again in Hong Kong, at a faster pace than rents, as investment sentiment remained subdued on the back of elevated interest rates. Sydney saw capital values decline primarily driven by softening of prime yields, although offshore and domestic capital are monitoring the opportunity to acquire high quality assets within its core office market, with several secondary grade assets being transacted over the quarter.

Workplace strategy centred on quality, sustainable space

We are optimistic about the outlook for leasing demand, as increased clarity around utilisation rates and prospects of improved economic conditions should empower companies to make more informed and longer-term decisions for their workplace strategies.

The trend towards high quality space and sustainability is here to stay, bolstered by a substantial pipeline of top-tier developments. Many markets will likely face higher vacancy pressure due to incoming supply, but we expect leasing demand to remain resilient as occupiers possess ample opportunities to upgrade office space.

With several major economies on the verge of reducing interest rates, investors should adopt a more confident approach in 2024 and actively seek out enticing opportunities. We anticipate investors will ramp up their decision-making processes, especially in developed markets with strong emphasis on well-located and top-notch buildings that can safeguard value over the long term and cater to the evolving requirements of occupiers.


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