Prime office rents in major cities around the world have risen 3% in the past year, while significant premiums have emerged for top-tier space over the wider Grade A market.
Top-tier prime office markets have seen prices increase over the last quarter as best-in-class space remains in high demand for businesses across the globe. Rising rents and fit-out costs in a majority of markets have offset declines in some specific locations, and as a result, the global average net effective cost to occupiers rose by 0.8% in the second quarter of 2024.
Prime offices, of the type measured here, are a trophy asset desired by tenants and carry a premium over broader Grade A office markets. Our new analysis examines how those premiums vary across the world, and what they tell us about differing local market dynamics.
Quarterly highlights
Just over half of all the 35 markets we monitor saw an increase in net effective costs to occupiers this quarter, which contributed to the average rise in costs of 0.8% from the first quarter. Costs are growing due to a slight increase in both rents and fit-out costs globally.
In Asia Pacific, net effective costs this quarter remained flat, at 0%. This is primarily due to several major Chinese markets recording significant cost declines this quarter. Shenzhen has seen the largest decline of -4.4%, as many occupiers in China focus on reducing operational costs, putting downward pressure on rents. Outside of these markets, the region is seeing strong net effective cost growth, with Seoul in particular seeing growth of 5.7% this quarter driven by strong demand and limited new supply pipeline.
EMEA saw net effective costs rise by 0.9% in Q2, as several markets saw higher growth while others recorded minimal increases over the quarter. Some markets, such as Dubai and Frankfurt, saw rising costs due to rents increasing; however, London City’s cost increase was due to growing fit-out costs. These fit-out costs have continued to drive increases in the region over the past year, with an average rise of 2.4% in the second quarter contributing to the overall 12.9% YoY increase. This growth is higher than the annual fit-out cost increases in APAC and North America which have risen by 7.4% and 4.9%, respectively. A continued tenant-led emphasis on green-certified and best-in-class buildings is supporting the rising fit-out costs and rents across the world, but Europe continues to lead the market in net zero building design.
North American prime office markets have seen the largest cost growth of any region this quarter, up 1.8% from the first quarter. Downtown New York, Los Angeles and Seattle each saw significant climbs, mostly as a product of rising rents. Across the region, rents grew by an average of 2%, with a YoY change of 8.8%. Strength in the prime segment, as measured here, is in contrast to the rest of the US office market. This is reflected in a 62.5% average price premium on Grade A space, the highest of any region.
In North America, this premium stands at 62.5%, the highest of any region, and demonstrates the intense bifurcation in the commercial real estate market in the United States and Canada. Prime buildings have seen intense occupier demand for limited stocks, despite high overall availability in Grade A buildings across North American markets more broadly.
High availability and a slower return to office continue to affect North America’s lower-quality office stock, while high-quality prime space remains very desirable with increasing rents as seen below. If these trends were to continue, it is likely that this price premium will continue to grow as the gap between these two types of office stock widens.
In APAC, the prime premium stands at 33.7%. The premium is lowest in Sydney and Seoul, with premiums of 13.5% and 20%, respectively. In these markets, offices in high-quality downtown buildings are already comparatively higher cost, and prime stock may not differentiate itself enough through sufficient amenities or prestige to warrant high premiums.
In contrast, price premiums in some Chinese markets exceed 70%. Despite the overall reduction of ultra-prime costs in markets such as Shenzhen and Beijing, top-tier offices remain highly desirable for occupiers. However, gross rents have declined in prime locations in China over recent quarters, and should the trend continue, we could see this high premium begin to erode.
The EMEA region has the lowest regional price premium for prime offices, at 17.9%. EMEA has seen steadily increasing average gross rents over the past couple of years, which, combined with the lowest average premiums, means that the prices of broader Grade A markets are already comparatively high. The premium in Europe may be smaller than seen in other regions as a result of core business districts tending to be more land-constrained and Grade A office markets holding up better in terms of lower availability and higher rents.
Outlook for the year ahead
Looking to the second half of 2024, we expect a continued flight to prime and prime office spaces. However, increased fit-out costs and macroeconomic uncertainty continue to loom in the background of real estate decisions for businesses and are likely to persist for the foreseeable future. Landlord concessions are likely to continue to favour tenants in markets where availability remains high, but in supply-constrained markets, we expect concessions to begin dropping and rents to rise.
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).