Across the globe, an unprecedented office building boom is underway with more than 700 million square feet (MSF) of space under construction that will deliver between now and the end of 2019, Cushman & Wakefield’s Global Office Forecast reports. That’s the equivalent of recreating five cities worth of office inventory – Washington, DC, Dallas, London, Singapore and Shanghai – over the next three years.
The development boom will be led by Asia Pacific, particularly Greater China. In fact, nearly 60% of the world’s new construction will be concentrated in the Asia Pacific region. While nearly 150 MSF of new office projects are slated for completion across 25 major cities in the region this year, new supply is concentrated in a handful of markets: Beijing, Shenzhen, Shanghai, Manila and Bangalore.
Indeed, those five markets account for 55% of construction taking place in Asia Pacific and over one-third of construction worldwide. Much like the supply side, the demand side of the equation is strongest in Asia Pacific. Beijing will have the distinction of leading the world in both supply and demand growth.
The Americas region is also in the midst of a robust construction cycle, peaking in 2017 and tapering offer somewhat in 2018 and 2019. . Still, the U.S., Canada and Latin America will all build more space than they will absorb over the next few years. Again, it varies greatly from one city to the next, and the bulk of new space is concentrated in the largest cities, many of which arguably need it the most.
The development pipeline also is ramping up throughout Europe, but not nearly to the same degree. Some European cities, such as Paris, Vienna, London and Brussels, will hit a cyclical high in terms of new construction over the next two years, while Madrid will show steady growth amidst global deceleration of rental-rate growth. Then again, those same cities report vacancy rates that are lower than pre-recession levels.
“Broadly speaking, supply and demand seem to be the most balanced in Europe relative to the other global regions,” said Kevin Thorpe, Cushman & Wakefield Global Chief Economist.
A shift towards tenant-favorable conditions
Expect a shift towards tenant-favorable conditions in most APAC markets. However, the growing obsolescence of office stock in gateway cities like Singapore, Melbourne and Tokyo means new projects remain attractive to tenants looking for efficiency and modern facilities. Sydney will have the lowest vacancy rate in the world by 2019, at 2.4%.
In the past 12 months through May 2017, the banking and financial services sector was the biggest driver of leasing in APAC. Co-working, meanwhile, continues to gain traction in the region, accounting for 10% of leasing activity over the last 12 months.
Shenzhen and Guangzhou expect impressive job growth due to the rise of fin-tech and eCommerce. In India, the introduction of the long-awaited goods and services tax (GST), along with other reforms, will continue to enhance the investment climate. Hyderabad will lead the world in office rent growth over the next 3 years.
“Developers are certainly placing some big bets on new product, but the bulk of it is concentrated in the major global cities, which is precisely where the greatest appetite is for these shiny new buildings,” said Kevin Thorpe, Cushman & Wakefield Global Chief Economist. “I’m less concerned about the new space leasing up, because in a sense, that is supply rushing to meet demand. It’s giving tenants exactly what they are asking for. I’m more concerned about what this wave of supply means for lower-grade product, which I suspect will have a difficult time competing.”