In the landscape of global prime office markets, opportunities are abound as businesses seek out top-tier spaces in cities worldwide. This surge toward prime has, in many places, led to a split in office markets, leading landlords of premium office spaces to maintain a cautious optimism.
The global prime office markets are witnessing a consistent rise in costs, with net effective costs across the SPOC markets ticking up by 0.8% in Q3 2023. This average is primarily steered by a 3.2% increase in fit-out costs in the United States, contributing significantly to the overall uptick. Annual gross rents have supported this growth as well, experiencing a 0.9% increase in the quarter as occupiers continue to favour top-notch prime office spaces. Despite escalating costs, landlords are countering the challenge by offering increased concessions to retain existing tenants and attract fresh occupiers.
Savills Prime Office Costs
Source: Savills Research as at 1 October 2023
Note: Quarterly change is based on a fixed exchange rate to USD
In the US, office markets grapple with escalating costs and heightened vacancy rates, with average availability rates surging by 90 basis points since the end of 2022. In response, total net effective costs for occupiers have seen a slight decline of -0.7% in the third quarter. While fit-out costs remain elevated nationwide, rising concessions are mitigating the overall cost increase in most markets. Notably, Miami stands out with robust demand and limited new supply, resulting in a substantial 10.7% cost increase in Q3 2023. The surge in office fit-out costs in South Florida is attributed to shortages in materials and labour. Across North America, average gross rents for prime stock continue to rise, increasing by 0.5% in the past six months. However, fierce competition for tenants and a reluctance to reduce rents are driving concessions higher, supported by the ongoing flight to quality.
In Europe, the professional and business services sector is bolstering tenant demand, offsetting some of the decline from tech tenants and maintaining steady vacancy rates on average. The EMEA region saw the strongest growth with an average rise of 2.1% in net effective costs for the third quarter, driven by the flight to prime spaces and the preference for green-certified offices. Annual gross rents have also increased by 1.1%, with Milan, Frankfurt, and Madrid playing pivotal roles. Dubai continues to attract new companies, contributing to annual gross rent and net effective cost increases of 1.2% and 2.0%, respectively, in the third quarter.
In the Asia Pacific, office markets remain the most stable among regional occupational markets. However, total net effective costs have seen a marginal decrease of -0.1% for the region as a whole. Declines in net effective costs in China and Hong Kong, driven by rising vacancy rates due to new supply, are exerting downward pressure on rents, down -0.7% in the quarter and -1.4% for the year.
Office vacancy rates
Source: Savills Research as at 1 October 2023
Note: Figures are based on market averages for all grades, not just prime. US figures are based on availability
To read the full spotlight report, click here.
