Across the markets tracked for the quarterly Savills Prime Office Costs report, total costs for occupiers increased by 0.3% in the second quarter, continuing a trend from the first quarter and showing signs of the emergence of a degree of cautious optimism among landlords in some locations. Across the 30 markets covered in the SPOC report, average vacancy rates stand at 15.2%, up 1.1 percentage points from the previous quarter.
Rents have risen marginally while fit-out costs continue to increase. Fit-out cost rises were much lower than in recent quarters at 1.2%, as constraints across global supply chains and other construction bottlenecks ease.
Trends vary by region. In Asia Pacific, hybrid working trends have not become an intrinsic working pattern as in other locations, so there have been higher utilisation rates, an average of over 90% compared to an average of 65% for EMEA and the US. This steadiness has carried over to the pricing for prime office space, with most of the markets seeing 0% – 1% growth in overall costs during the quarter. European markets and the Americas locations have seen lower levels of change in the second quarter, with most markets recording marginal levels of cost growth. Across American markets, rental costs are largely flat, though flagship buildings in the most prime locations are beginning to see marginal increases in rents as the flight to quality continues to gather steam. At a city level, the highest cost increases across the 30 markets that we monitor were noted in Ho Chi Min City (4.6%), Paris (3.7%) and Dubai (2.7%). Costs dropped in only four markets Frankfurt (-4.8%), Berlin (-3.4%), Sydney (-0.8%) and Shanghai (-0.4%).
Focus on the US
The US is often described as a monolith, with all trends affecting all locations equally. However, the country can see wide varieties of effects from different global trends across and between regions, and even cities. Across the country, the flight to quality trend still prevails with many deep-pocketed occupiers seeking out the best quality spaces with the latest and greatest amenities to attract and retain top talent.
The preference among occupiers for trophy space in the United States is continuing to push asking rents in that market segment. Average asking rents overall are up modestly, with Midtown Manhattan Class A rents up 1.7% quarter-over-quarter. Other classes are seeing lower levels of rental growth. However, there is an abundance of space to suit all needs.
At the same time as rents are beginning to tick up, there are many markets which are experiencing growing amounts of available space, which is putting upward pressure on concession packages and downward pressure on taking rents in what is a historically tenant-favourable market. Office availability across the US is at record levels in most markets. For New York in particular, the office availability rate is at a record 19.7% and the vacancy rate stands at 15.6%. Some of the space is being let, while other spaces have begun the conversion process from office to residential, where the floorplates and locations make it possible.
Prime Office Vacancy Rate – Q2 2023
US availability rates lead global office vacancy
Source: Savills Research
Note: North America uses availability rates rather than vacancy rates. Availability rate includes office spaces that are occupied but available for rent
For occupiers that are looking to change their office spaces, a large number are choosing to wait until the end of their lease terms to make the move, especially given the overall level of uncertainty around the economy. Depending on occupiers and their specific needs, tenants across the United States are not all downsizing – a significant segment of occupiers are upsizing or moving into similarly large spaces in different locations, with renewals and expansions accounting for 49% of transactions.
In the near term, occupiers are taking a ‘wait and see’ approach to their office space moves, and it is likely that the majority of transactions will be at lease expiry. There is optimism in the market though; according to Marisha Clinton, Senior Director, Northeast Regional Research, Savills US, “it is a great time to be an occupier and tenant, as the markets remain highly tenant-favourable for all industries where landlords are still generous in their concessions and are offering great deals. And while it is building and landlord specific, the overall picture is very positive for tenants.”
Click here to read the Q2 2023 Savills Prime Office Costs report
