Office leasing momentum stays on a positive track

The recovery in regional office leasing activity carried on in the fourth quarter, with gross leasing volumes rising 12% compared to a year earlier. India was once again the frontrunner in APAC, achieving record leasing volumes for the quarter and full year. Upgrading into higher quality space to meet sustainability needs and to provide the best workspace for employees were key motives underpinning decision making.

India’s bright prospects continue to serve as a magnet for international firms, with multinational companies investing heavily in the country while many domestic firms also embarked on expansion. Office demand was buoyed by manufacturing and financial services industries, often for the establishment of R&D and global capability centres, as well as flexible space operators.

Mainland China’s leasing demand, while overall still sluggish, did see some positive cues with enquiry levels picking up. Occupiers were nonetheless still cost sensitive and measured when making decisions. Although renewals remained the default choice for many firms, some used the tenant-favourable situation to move up the quality ladder. Overall sentiment in Hong Kong was subdued but the flight to quality trend prevailed as tenants consolidated office space and relocated to premium buildings given the availability of high-quality stock in fringe locations.

Leasing volumes in Tokyo declined in part due to a smaller supply pipeline in 2024 which contributed to the pre-commitment deal flow slowing. Despite tight market conditions persisting in Seoul, several high-profile deals at a new completion supported leasing volumes.

In Australia, strong performances by Brisbane and Perth bolstered the national leasing volumes total. However, activity levels in Melbourne and Sydney CBDs were less favourable comparatively. Melbourne saw larger tenants add sublease space to the market while Sydney witnessed a contraction in activity from big tenants.

New supply coming onstream at a brisk pace

Close to 1.8 million sqm of new supply entered the Asia Pacific region during 4Q23, causing regional vacancy to edge higher to 15.3%. Despite some projects being delayed, the full-year total reached 6.4 million sqm, just shy of the record high.

Rental performance expectedly remained diverse. India’s SBD rents trended higher due to a healthy leasing environment, while Seoul, with its strong market fundamentals, witnessed rising rents across its major submarkets. In Australia, Melbourne CBD saw a decrease in net effective rents as incentives rose amid elevated vacancy while Sydney CBD experienced marginal increases in rents.

Despite some demand for expansion from local corporates in Tokyo, landlords generally maintained accommodative rental stances. Cautious sentiment, new supply, and a decentralisation trend saw rents in Beijing and Shanghai CBDs sustain a downward trend. Somewhat similar factors pulled Hong Kong Central rents down further, while vacancy pressure contributed to a slight dip in Singapore CBD rents.

End-users provide support to the investment market

Office investment volumes in APAC experienced moderate contraction (13% y-o-y) to USD 13.7 billion in 4Q23 as many investors remained guarded about the outlook for the sector given uncertainties about occupancy as well as interest rates and pricing. End users were the most active purchaser type, taking advantage of the softer market conditions to secure buildings for long-term usage—with most of this activity taking place in Greater China and South Korea.

Hong Kong recorded another contraction in capital values despite two sizeable owner-occupier deals. Sydney and Melbourne also saw capital values drop amidst softening prime yields, although offshore capital showed interest in high-quality assets with access to future income growth. Meanwhile, capital values in Tokyo trended lower in line with rents as yields held firm.

Seoul saw capital values drop in most submarkets, albeit marginally, despite positive rental growth as sentiment about the sector remains soft amongst global core investors. A number of transactions were recorded in Singapore and re-pricing pressures eased to an extent. India’s major cities on the other hand saw capital values rise as investors sought to capitalise on emerging trends and deploy capital in more opportunistic strategies, including development and entity deals.

Higher quality space to remain in focus

We are cautiously optimistic about the outlook for leasing demand as greater clarity about utilisation rates, along with an expectation of improving economic conditions on the horizon, will enable more companies to make longer-term decisions on their workplace plans.

The movement to quality, with an eye on sustainability, will endure and be supported by an ample pipeline of high-quality developments. Of course, this is likely to mean that many markets will continue to face vacancy pressures and on aggregate, rents should hold relatively stable. With many major economies poised to cut interest rates, investors are expected to begin to adopt a firmer stance in 2024 and start to look for opportunities. The spotlight will be on well-located, quality buildings as investors look for future-proofed assets that best preserve value and meet occupier requirements.