• Look on the sunny side

• Quarterly highlights

• Market insights: The year in review

• Outlook for the year ahead

• Methodology
  
  

Look on the sunny side

The narrative around offices over the past year has been gloomy at best, but year-end data for the Prime Office Costs index shows that net effective costs to occupiers worldwide increased by 2.6% compared to year-end 2022, as occupancy rates are slowly improving, although not at the same pace across the world. Competition for top-quality accommodation continues to drive prime costs up. In the fourth quarter alone, costs to occupiers increased by 0.4%, belying the narrative that the office continues to be dead as the flight to prime continues.

For this issue, we asked researchers and tenant representation professionals across our 35 prime office cost markets to tell us the biggest trends in their markets from 2023 and what they expect to see driving their locations in the year ahead.

Quarterly highlights

Prime office markets globally are continuing to see increasing costs on average, with net effective costs across the 35 markets growing by 0.5% in Q4 2023. This rise is largely being driven by the ongoing increase of fit-out costs worldwide; as more occupiers choose to be located in top-quality office space, the costs to create these ever-more top-tier offices increase.

Across Asia Pacific, net effective costs were down marginally by -0.2% for the fourth quarter; however, they remained up 1.1% over the course of 2023. Annual gross rents fell -0.4% during Q4, with Shenzhen seeing the greatest falls of -2.7% on the quarter as the tech sector continued to be buffeted by the global tech turbulence.

At the other end of the spectrum for Asia Pacific was Mumbai. The market saw a surge of activity from occupiers within the Finance and Business Services sector, with many of these occupiers taking up large quantities of space in the highest-quality buildings.

EMEA markets saw positive cost increases over the fourth quarter. Average net effective costs to occupiers increased by 1.7%, largely driven by increasing fit-out costs. In many European locations, regulations around ESG are encouraging occupiers to move to prime, green-certified office spaces. Nowhere is this more evident than in the Dutch markets; occupiers are flocking to more sustainable and best-in-class office spaces, which are increasingly costly to fit out. Markets across EMEA saw flat or slightly positive levels of cost increases in Q4 and throughout the year, a sign of returning levels of confidence in the office sector by both landlords and occupiers.

American office markets continued to muddle through the ongoing volatility in the office sector. As seen in previous quarters, the prime markets remained much more insulated than the mainstream markets. Occupiers are continuing to seek best-in-class spaces to encourage staff to return to the office in larger numbers.

Market Insights: The Year in review

Over the past year, there have been several themes that have either emerged or solidified. These trends can be seen across the locations covered in the Prime Office Costs report.

The flight to quality has been the most prominent trend across our prime office cost locations throughout 2023 as companies prioritise obtaining more premium office spaces. Flight to prime and flight to quality has been seen across the global markets and is taking place almost regardless of sector, with businesses believing that the top-quality office will help them meet their sustainability, wellness, and people-focused goals. Flight to quality is being driven by several underlying factors, which have each become trends in their own right.

The focus on ESG and sustainability is contributing to the ongoing flight to prime. Occupiers are searching for the best quality, green-certified, most collaborative spaces in their chosen markets in part to meet their stated ESG and sustainability goals, which have been set at board level. As ESG goals often apply to global property portfolios, we witness this increasingly filtering through to corporate real estate strategies, further intensifying this trend. While this trend has been seen worldwide, teams in Europe report sustainability as the highest priority for their occupier clients.

With daily attendance rates in the United States hovering around an average of 50%, occupiers are choosing to locate in top-quality, well-connected office space in an effort to boost the return to office. The desire for better-designed office spaces aligned with health and wellness considerations is seen as part of the key requirements needed for bringing American workers back into the office.

Asia Pacific markets have reported more cost pressures, with occupiers seeking to boost efficiency and potentially downsize in an effort to minimise expenditures. From optimising office floorplates to increase occupancy and space usage to choosing smaller but higher quality office spaces, occupiers across Asia are looking to satisfy the needs of their employees whilst also watching their bottom lines.

Outlook for the year ahead

As landlords and occupiers look to the year ahead, many are wondering how pricing will change given the economic outlook for the year. Across the globe, a survey of the Savills network of tenant representation professionals and researchers has fed into our predictions for next year of flat to slightly positive rental growth. Across the markets included in our Prime Office Costs analysis, prime rents are predicted to rise by 0.3% for the year on average, though there is regional variation.

New completions of some prime buildings across Asia Pacific, notably in China and Hong Kong, will have the potential effect of decreasing rents across these markets as a result of the surge of new supply. With the flight to prime and top quality, sustainable buildings in short supply across EMEA, it is likely that rents will continue their upward trajectory over 2024. Across the American markets, the wait-and-see approach from landlords is likely to keep rents flat across most markets, with only the top of the top tier assets seeing any increase in pricing.

While costs do matter to clients, the trends seen over the last year demonstrate that there are other factors at play in terms of occupier priorities for 2024 beyond the perennial question of costs. Looking ahead to the coming year, teams across the Savills network expect the trends which defined 2023 to continue. From the ongoing flight to quality to the strong focus on ESG (environmental, social, and governance) considerations, sustainability, and flexible office solutions to accommodate hybrid working. Employee well-being and the need for quality spaces are prevalent trends globally. However, the specific challenges, market dynamics, and priorities vary, underlining the necessity of adapting occupier strategies to local conditions through the coming year and into the future.

Across the Asia Pacific region, Australian markets are likely to continue to prioritise tenants securing quality, centrally located spaces with amenities to attract talent. Hybrid working has made lease flexibility crucial, while landlords aim to shift from non-core to core assets to fund development.

In Mumbai, return to office dynamics, connectivity, commute time, infrastructure, and ESG are priorities. Tokyo sees a rising demand for turnkey office spaces, with a focus on adaptable features and employee well-being. Kuala Lumpur and Singapore will see ESG-compliant office buildings and flexible leasing options to accommodate companies ‘right-sizing’. In Seoul, employee well-being takes precedence, driving preferences for spacious, creative, and diverse workspaces.

In Chinese markets, occupiers will continue to focus on balancing revenue generation and costs, prompting landlords to negotiate renewals well in advance. Landlords are adjusting leasing strategies, prioritising occupancy rates over rents and offering discounts to address tenant concerns about costs. Notably, ESG considerations are becoming more key to both occupiers’ and landlords’ strategies. Hong Kong occupiers are also higher quality spaces with lower rents or flexible lease terms, especially considering the city’s economic outlook.

Moving to the EMEA region, ESG remains the name of the game, with companies seeking less but better-quality space. Top locations, technology integration, and flexible spaces will be key for occupiers across the region. Paris, Frankfurt, Berlin, Amsterdam and Milan all see the surge in sustainability requirements as key drivers for their occupiers over 2024. Sustainability and ESG is now gaining an increasing foothold for Dubai prime office occupiers, with the demand for LEED-certified, quality Grade-A and above spaces across the market.

Size reductions and maximising space efficiency will be key for occupiers across the region as well, with occupiers prioritising cost reductions at a time when increased office attendance rates mean that offsetting costs by reducing space is becoming less feasible. This is especially felt in Paris and Madrid.

And in the Americas, the United States places a continued emphasis on the return to office, with employers focussing on office space design for health and wellness, and incentivising in-office attendance. For many occupiers, the increased space and amenities in higher quality buildings across the key markets is a concerted effort to ‘earn back the commute’ with these new offices often in well-connected, easier-access locations to minimise the friction of the travel time for employees.

METHODOLOGY

The Savills Prime Office Cost (SPOC) Index presents a quarterly snapshot of occupancy costs for prime office space throughout the world, as provided by our expert, local tenant representation professionals and researchers.

The adjusted annual all-in occupancy cost represents real-time transaction terms for 20,000 sq ft (2,000 sq m) of usable space based on a basket of the top five most expensive properties to calculate ultra-prime average. The North American markets use a sample of very high rent threshold buildings (leasing occurring at the highest end of market).

All costs are reported in an annual, standardised format of USD per sq ft of usable space to account for variations in currency, reflect local payment protocols, and adjust for measurement practices across the globe. We have also factored in the credit value to the tenant generated from abated rent and the cost associated with fitting out the premises in order to provide an ’all in‘ total occupancy cost in USD per usable square foot.

The fit-out costs were gathered from local Savills teams assuming the leasing scenario described above, plus the following:

i) 30% cellularisation with the remainder of space open plan,

ii) construction and cabling only (no furniture or professional fees).