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Office Market Insights

November 29, 2022 / By ,

Leasing volumes lopsided as occupier caution grows

Against a backdrop of intensifying global macroeconomic headwinds, Asia Pacific quarterly leasing volumes declined 4% y-o-y in aggregate despite another strong performance from Indian markets. Delayed decision making in many markets, COVID-19 controls in China and tight vacancy in some markets constrained leasing activity.

After the strict lockdown imposed in 2Q22 was lifted, Shanghai saw leasing activity improve with support coming from financials and professional services firms; however, 3Q activity was still subdued compared to previous years. Beijing volumes were down y-o-y due to base effects as well as measures imposed ahead of the October party congress. In aggregate, China volumes were down 60% y-o-y as the threat of future lockdowns and economic uncertainty weighed on leasing demand.

Although India volumes declined q-o-q, 3Q volumes were up 80% y-o-y in aggregate as occupiers from a wide range of industries expanded their footprint to accommodate staff returning to the office. Mumbai volumes rose a remarkable 150% y-o-y with support coming from financials, while Delhi volumes were up 70%.

Australia quarterly volumes were down 8% y-o-y as corporates remained cautious in the face of perceived economic headwinds. However, in Melbourne that weakness was offset by demand from the small tenant cohort, although volumes were down over 50% y-o-y. Sydney volumes were down about 20% y-o-y with some consolidation in the financial and tech sectors.

Seoul leasing was down 80% y-o-y in 3Q22, with volumes sharply curtailed by a lack of available space in the market. The Seoul citywide vacancy rate stood at only 2.5% at quarter end. Tokyo quarterly leasing volumes declined y-o-y due to seasonal factors, but are performing well in a year-to-date context.

Rents decline due to softer occupier market conditions

In aggregate 1.5 million sqm of new supply was delivered in Asia Pacific markets in 3Q22 with half a million sqm each delivered in Greater China and India. Although quarterly net absorption improved slightly, only 900,000 sqm was recorded, pushing up the regional vacancy rate to 14.1%. In this context, Asia Pacific rents declined 0.4% q-o-q, erasing growth recorded in the first half of the year.

The Seoul CBD returned another quarter of solid rent growth as tightening vacancy rates gave landlords the confidence to further slash incentives. Driven by sustained tailwinds resulting from the reopening of the Singapore economy, vacancy rates continued trending down and landlords increased rents for the sixth consecutive quarter. The Sydney CBD recorded healthy rent growth as occupier demand remained strong for space in higher-quality buildings.

Tokyo rents continued to slide as new supply and rising vacancy exerted downward pressure on rents. Three completions in Hong Kong led to an uptick in net absorption and vacancy rates, and as such, rents declined in 3Q. In Shanghai, the lingering effects of the spring COVID-19 outbreak caused landlords to become more negotiable on rents to achieve better occupancy.

Capital values decline as policy rate changes bite

Asia Pacific capital markets remained divided in terms of monetary policy, with some central banks following the US Fed rate path and others following their own monetary path. As a result there is a growing gap in price expectations which is weighing on capital values. In aggregate, Asia Pacific capital values declined 0.7% q-o-q in 3Q.

Seoul capital values increased despite widening yields, with support coming from favourable supply-demand dynamics and rent growth. Investor appetite for Mumbai product was strong with investors eagerly looking to acquire marquee commercial assets with good sustainability ratings. Manila capital values increased moderately on the back of healthy demand for a limited supply of assets for sale.

Hong Kong capital values declined as investor sentiment towards office assets was relatively subdued, particularly compared to other sectors. Increasing cost of debt and uncertainty in the global economic outlook saw Sydney CBD capital values decline despite growth in market rents. Tokyo capital values declined in line with rents due to tenant-favourable occupier market conditions.

Rents up marginally in 2023, capital values flat

Going forward we expect to see growth in leasing volumes slow. Zero-COVID policies are likely to weigh on leasing activity in China through the first half of 2023 and intensifying global economic headwinds are likely to give occupiers pause in many parts of the region, leading to delayed decisions and circumscribing leasing activity. As such, we expect leasing volumes to be flat in 2023. A large volume of supply is expected to push the regional vacancy rate up further. Despite these headwinds, we expect rents to increase marginally in 2023; however, we believe risks to our rent forecast are primarily to the downside.

All eyes are on the Fed and where its terminal rate will peak as the ramifications of its efforts to tackle inflation are felt globally. Rate hikes and the subsequent rising cost of debt has led to a growing gap in buyer-seller price expectations. Our current forecast calls for capital values to remain flat in aggregate in 2023; however, here too we believe risks are more to the downside.

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