Leasing activity mixed, quarterly volumes down sharply y-o-y

Asia Pacific leasing activity picked up over the quarter (+1.4%); however, leasing volumes were 30.8% lower than the same quarter in 2021. Net absorption also pointed to softer occupier demand as 735,000 sqm of net absorption was recorded in Asia Pacific in 2022, down 43% compared to 4Q21.

Macroeconomic headwinds dampened leasing activity across the region and occupiers, particularly those headquartered in the US and Europe, were seen bracing for a recession and so took a more cautious approach to leasing decisions. This was particularly true of Australian markets where quarterly leasing activity declined nearly 60% y-o-y.

India remained resilient with volumes up 4% y-o-y. While tech companies’ share of leasing activity has been steadily declining, they are still the main driver of take-up in India. The popularity of managed offices with end users underpinned leasing from flexible space operators.

Supported by a diverse range of occupiers, Tokyo leasing activity strengthened q-o-q. COVID-19 and containment measures were less disruptive and companies returned staff to the office. Seoul leasing activity was again constrained by tight vacancy.

In Mainland China, COVID-19 controls and an outbreak weighed heavily on leasing activity there as occupiers continued to take a wait-and-see approach to leasing decisions. Activity in China is now expected to pick up as restrictions have been lifted and a recovery in the economy is underway.

Flight to quality remains a key theme and is driving a bifurcation in office markets across the region. Take-up has been strongest in newer, high-quality buildings and rents in these buildings outperformed those of lower quality buildings again in 4Q22.

Rent declines slow despite soft occupier demand

Nearly 1.4 million sqm of new supply was delivered in Asia Pacific in 4Q22, with about 44% of that completed in India. Quarterly net absorption significantly lagged supply volumes and so the regional vacancy rate rose to 14.3%. But despite occupier-favourable conditions, Asia Pacific rents declined only 0.1% q-o-q in aggregate as demand for space in high-quality buildings helped shore up rents.

Seoul CBD again recorded the strongest rent growth as strong demand and a declining vacancy rate emboldened landlords to continue raising face rents and slashing incentives. Kuala Lumpur City Centre net effective rents increased with support coming from improving occupier demand and occupancy rates. Growth in Brisbane CBD rents was driven by tenants seeking high-quality spaces in buildings with exceptional amenities.

Hong Kong Central recorded the steepest rent declines of the major markets as leasing demand remained weak amidst a sluggish economy. Tokyo 5 Kus rents declined despite a recovery in demand as landlords remained accommodative in the face of an elevated supply pipeline. Shanghai CBD rents declined due to a slow recovery from the COVID-19 outbreak; landlords of buildings with elevated vacancy rates are becoming increasingly flexible.

Gap in buyer-seller expectations weighs on capital values

Transaction volumes remained weak due to the wide gap in pricing expectations, limiting evidence of changes in pricing; however, signs pointed to mixed capital value growth in Q4. Tightening monetary policy continued to drive declines in Singapore, Hong Kong and Seoul. While select markets bucked this trend and saw conditions support capital value growth, Asia Pacific capital values declined 0.3% q-o-q in aggregate.

Despite an unexpected increase in late December, the Bank of Japan’s monetary policy remained relatively loose and sustained investor demand pushed up Tokyo capital values. While investors were generally cautious in Australia, Brisbane activity was robust with market conditions supporting capital value growth.

COVID-19 and economic uncertainty weighed on investor demand for Beijing offices, leading to the emergence of a buyer’s market and a decline in capital values. Investor appetite in Sydney and Melbourne remained largely diminished in 4Q22 with buyers increasingly selective, and when prices do not meet seller expectations, assets are withdrawn from the market. As such, capital values declined in these two markets. Similarly, investor demand was again generally subdued in Hong Kong in 4Q22, causing capital values to trend downward.

Moderate rent and capital value declines in 2023

Mainland China saw leasing volumes decline sharply in 2022 and the easing of COVID-19 controls is forecast to provide uplift to office occupier demand there. A recovery in China is expected to be gradual with activity in the leasing market gathering pace in the second half of the year. Demand from MNCs, particularly those headquartered in the US and EMEA, is expected to remain tepid over the first half of the year as occupiers seek more clarity around the economic outlook before making leasing decisions. A record volume of supply, some 8 million sqm, is now scheduled for 2023, and as such we expect to see the regional vacancy rate rise, further tilting conditions in favour of occupiers. In aggregate, Asia Pacific rents are expected to decline 0.4% y-o-y in 2023.

There are signs that inflation is moderating in key markets including the US; however, monetary policy is likely to remain tight through 2023. As such the gap between buyer and seller expectations is unlikely to close in 2023, with exceptions in select markets. Our current forecast calls for capital values to decline 0.7% in aggregate in 2023.