Global prime office costs have seen an increase of 3.1% from last year as demand for prime office space remains high, while densification trends vary regionally
Densification and design
Ultra prime office markets have seen continued, but tempered, price growth over the last quarter as best-in-class space remains in high demand worldwide. Ultra prime global average net effective cost to occupiers rose by 0.3% in the third quarter of 2024. Rising rents in many markets offset declines in some locations, and fit-out costs also grew modestly overall.
In an ever-changing leasing environment, occupiers are continually reassessing their real estate footprints and may opt to change their current levels of densification. Both before and after the pandemic, these strategies have been changing with the promotion of increased collaboration and optimal space allocations in the office. Our analysis compares how different global regions have adapted to new ways of working.
Quarterly highlights
Of all the 35 markets we monitor, 16 saw increases in net effective costs to occupiers, which was sufficient to keep growth positive quarter-on-quarter. These increases are driven by both slight fit-out and gross rental growth, though the increases rarely occur in the same market at the same time.
In Asia Pacific, net effective costs saw slightly positive growth this quarter, with a 0.3% increase. This average hides differing performance across the region. In China, costs have fallen an average of -3.6% from last quarter across the four markets we track. By contrast, in Kuala Lumpur, costs rose 8.5% over the quarter, which may reflect companies looking to expand and diversify their operations beyond Singapore, where it is comparatively more expensive to lease space. In Ho Chi Minh City, costs have risen as a result of several new ultra-prime building deliveries this quarter, causing costs to rise.
EMEA similarly saw minimal changes, with a 0.1% change in net effective costs to occupiers from the previous quarter. Individual market swings in this region tend to be lower than their Asian counterparts, and that remains true. In Paris, occupier costs increased 2.3% over the quarter, supported by strong rental growth. Germany saw both rising and falling occupier costs, with increases in Berlin and declines in Frankfurt. Berlin saw moderate rental growth, and Frankfurt saw falls in rent of a similar magnitude, which may indicate some occupiers are favouring the German capital.
North America experienced modest quarterly net effective cost growth of 0.4% this quarter. This quarter, the net effective cost growth was driven by increasing fit-out costs in several markets, which amounted to an overall regional 1% increase from last quarter. Uniquely, the region saw small decreases in gross rents from last quarter, amounting to a -0.9% decline, which was driven by performance in several east coast markets. In New York Downtown, rents fell by -4.3% this quarter due to leasing in this area failing to accelerate as quickly as it has in Midtown, along with a slightly longer term length on most deals. However, on a YoY basis, rents are still up by 6% across the continent. In Canada, Toronto remains a unique case where both fit-out costs and gross rents increased, which led to 5.3% quarterly growth.
Market Insights – Densification and workspace planning
In the post-pandemic world, many occupiers are faced with changing workplace dynamics, such as hybrid working and evolving generational preferences as younger people enter the workforce. Office real estate strategies are key to adapting to these challenges, including office design and densification planning.
Densification has traditionally been measured by space afforded to each worker; however, with recent changes to hybrid working and hot-desking, some tenants are choosing to measure space per workstation instead. As the flight to quality continues, the cost of leasing ultra-prime space remains high globally, putting additional pressure on occupiers to ensure they are adopting the best strategy when it comes to their global office footprints.
Across Asia, we have seen little change in densification, possibly due to the fact that workplaces were already quite densely populated pre-pandemic. Asia Pacific markets tend to feature higher concentrations of new office buildings compared to more mature western markets. The combination of newer building stock and existing prevalence of open-plan working culture has limited the need for further densification. As a result, the region has not as frequently seen moves from cellular to open-plan spaces, which tend to increase density as we have seen elsewhere.
Throughout the EMEA region, the picture is more diverse. In some markets, such as Paris and Milan, there have been drives to build more collaborative space to support larger open-plan offices. As a result, this has led to a decline in space for individual workstations. However, in some markets such as Dublin, occupiers are trending towards leasing less space overall, assuming only a portion of employees are in the office at any given time. This trend ultimately has a minimal effect on densification, despite a reduction in footprint.
In North America, a continued focus on returning to office has led to many occupiers allocating more space to employees in an effort to make the office a more attractive environment for everyone. Pre-pandemic, many offices were focused on increased densification, and the period between 2010-19 was marked by less space per workstation across many industries and markets in the region. This trend has now reversed slightly, with space per employee being higher now compared to 2010. North America is seeing a similar trend to EMEA where occupiers are having to plan around larger swings in attendance with remote working. However, unlike in Dublin where occupiers are taking less space overall as a result, in the United States a surge of employees working in office towards the middle of the week has resulted in occupiers needing to take more space overall to accommodate this large swing in usage.
Fit-out costs are consistently a barrier to occupiers who wish to revitalise their current space, or optimise their new space to best suit their needs. For the first time since the end of the pandemic, we have seen consistent global slowdown in the growth of these costs across all three regions. If this slowdown continues, it is likely to play a role in workplace planning.
Slower cost growth and greater certainty in pricing will allow occupiers to consider layouts that best suit their needs. While the decision ultimately depends on business preferences, open-plan has become the dominant layout for most tenants globally, and generally allows for greater flexibility for occupiers when it comes to meeting the demand for evolving levels of densification.
Layout preferences are often determined by the type of occupier taking space, but even sectors that traditionally favour individual offices are trending towards open plan. For example, many law firms are opting for more open-plan layouts with private rooms for focused work and client meetings. Advances in acoustic office design are helping this trend.
Outlook for the remainder of the year
Looking towards the final quarter of 2024, flight to quality and competition for talent will continue to drive companies to seek prime office spaces. As fit-out costs settle for the first time in recent history alongside the general fall in inflation, occupiers may begin to see stagnation or declines in net effective occupancy costs in the future. Despite broad economic uncertainty continuing to affect long-term decision-making, prime office space continues to be a coveted asset for businesses globally.
METHODOLOGY
The Global Occupier Markets: Prime Office Costs 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).