Most office markets weathering the storm. For now.

As financial markets around the world experience one of the worst down years in recent history, office real estate continues to hold up reasonably well.

Job layoffs in the financial services and tech sectors continue to act as a drag on the overall demand for office space, but tight supply constraints have left most leasing markets in satisfactory shape. Sluggish growth, however, in the world’s major economies, could derail an otherwise stable market.

With Japan and Germany, the world’s second and third largest economies poised to stage only marginal growth and the U.S., the largest economy still limping along, the outlook for office space markets is far from certain as we enter the second half of the year and look into 2003.

Almost all of Europe’s major office markets registered higher vacancy levels amidst a sluggish regional economy. Most of Germany’s office markets saw vacancy levels increase with Frankfurt being the only exception. Significant increases were registered in Amsterdam, Brussels, Copenhagen, London/Docklands and Moscow. Major office markets such as London and Paris witnessed moderately rising vacancy levels with London/West End at 5.6%, London/City at 7.0% and Paris at 3.3%.

London remained the most expense location in Europe for office space with Class A occupancy costs of $105.76 per square foot. Office leasing markets across North America endured another sluggish period with rising vacancy levels and falling rents. With the U.S economy posting anemic growth in the second quarter and more accounting scandals surfacing by the week, corporate America was only interested in shedding space not taking on more. This was reflected in almost all regions of the country with the vast majority of cities surveyed posting higher vacancy levels. Major markets including New York, Chicago, San Francisco, Dallas and Toronto all recorded appreciably higher vacancy rates.

The weakness of the office market continued to be evident during the second quarter of 2002 with an increase of office space availability in most major markets across Latin America. Slowing economic growth, socio-politic uncertainty and the dampening effect of the upcoming presidential elections in Brazil and Argentina, are all acting to weaken demand for office space. Furthermore, with the current levels of office space under construction and slow demand, most markets have reported an increase in vacancy rates and in some markets a decrease in rental rates.

Vacancy levels remained largely unchanged across the Asia Pacific region despite the global economic slowdown, and more importantly the high level of new supply coming on in many of the region’s major markets. Shanghai and Beijing together in particular have nearly 15.0 million square feet currently under construction and due for completion in the next 12 to 24 months. Tokyo is also another major market that has a considerable amount of the new construction with 13.7 million square feet of new office development under construction.

(source: Colliers International - Global Highlights)

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