How does office demand correlate with gdp growth?

August 17, 2012 / By


Last year was a record in terms of take-up of Grade A office space across Asia Pacific. Given the more uncertain global economic environment over the last six months, it was not surprising that leasing levels slowed in the first half of this year. In aggregate, net take-up totaled 2.1 million sqm in 1H 2012, or about 30% less than the same period last year. However, 2Q saw somewhat of a bounce back, with levels only 10% below those of the same time last year.

The more subdued demand across the region is partly due to corporate caution coupled with slower economic growth. One can always build sophisticated statistical models to forecast property market trends, yet in this case, simple techniques such as correlation analysis can be useful in illustrating the important relationship between net take-up of office space and GDP growth. In aggregate, annual net take-up across regional office markets has been significantly and positively correlated with regional real GDP growth in the 2004-2011 period, or roughly over the duration of the last 1-2 office market cycles (see table below).

In particular, CBD take-up in the financial centres of Hong Kong and Singapore is highly correlated with both domestic and regional/world GDP growth, as these two small economies are highly exposed to the ebbs and flows in the global economy. CBD take-up in other regional centres such as Sydney, and to a less extent Tokyo, also seems significantly correlated with regional and world growth. This may be partly due to the activity of international occupiers (e.g. MNCs, financial services firms), whose real estate strategy and space requirements are sensitive to fluctuations in the external economic environment.

Of course, spacial demand in emerging markets such as China and India, stemming from both MNCs and domestic firms, also ultimately hinges on economic conditions. However, physical take-up in these emerging markets, which generally lacked quality space until quite recently, also highly corresponds with supply additions in the current and/or past year. This is especially the case for Beijing and some Indian cities, which have just undergone or are still undergoing a major construction cycle.

As most regional economies are expected to see slower growth (e.g. China, India, Singapore, Hong Kong), office leasing demand is expected to weaken moderately this year. In 2H, take-up of space is expected to slow in the major financial centres compared to the same time last year, remain largely stable in China and emerging South East Asia, but increase in India (due to more completions).

Correlation coefficients (2004-2011)

Source: Jones Lang LaSalle 2Q12, IHS Global Insight, July 2012
Note: calculations based on annual data from 2004-2011


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