Local and regional trends impacting global office occupier market

These trends are driven by a combination of factors. These include current buzzwords such as - inflationary pressures, supply constraints, supply growth, falling and strengthening demand, heightening and falling vacancy rates as well stabilisation.

London prime offices 

In London, prime offices in the West End Core again commanded the highest rents of any global market in our scope. The elevated prime rent figure reported is due to the supply-constrained Mayfair and St James’s submarket, which typically caters to an exclusive set of niche financial occupiers. The broader West End market is characterised by relatively new business districts with an expanding stock of high-quality, flexible office space and significantly lower occupancy costs.

The West End Core’s Q2 2023 prime rent rate indicates significant growth, not only year-on-year (13.7%) but quarter-on-quarter (6.8%). Inflationary pressures and ongoing supply constraints are key contributors to a trend that, including service charges and local taxes, has made the total occupancy cost of renting prime space in the West End Core almost 55% more expensive than anywhere else in the world.

America office market

However, we should note that the widening of this chasm is in part due to trends in Asia-Pacific’s leading prime office market. In Hong Kong, the second most expensive prime office market in our scope, rents declined 2.0% quarter-on-quarter and 11.0% year-on-year. This reflects reduced spatial demand and increased vacancy rates amid a surge in supply.

US office market

Elsewhere, occupancy costs have remained stable in the United States. Of the 20 US office markets in our scope, only San Francisco saw a quarterly change in prime rent worth more than a dollar. Indeed, on average, the prime rents across our 20 US markets have only increased by 1.0% since Q2 2022, which is indicative of a significant post-COVID stabilisation of the country’s downtown and CBD markets over the course of the past year.

Europe office market

In Continental Europe, prime rent rates have increased across the board. Since Q2 2022, the biggest changes have been witnessed in key gateway office markets. Persistently low and falling CBD vacancy rates, reflecting a supply shortage, and the increased strength of the euro against the dollar, have contributed to a year-on-year prime rent rise of $6.87 in Paris.

However, the largest proportional increase in prime rent was in Munich: with a 12.7% rise since Q2 2022, surpassing Berlin as Germany’s most expensive prime office market. This result comes despite vacancy rates in the city reaching a nine-year high, once again due to constrained supply in central locations.

Middle East and Africa

The Middle East and Africa has witnessed a mix of stable results and strong upticks in prime rent. Riyadh in Saudi Arabia is a standout example. With the Regional Headquarters (RHQ) programme driving demand from multinational corporates looking to establish their Middle Eastern bases in the Kingdom, the total cost of occupying prime space in the capital has shot up 25.0% within a year.

It is still important to remember how, with the way we translate global cost figures to US dollars to aid market-level comparisons, year-on-year and quarter-on-quarter comparisons will be coloured by foreign exchange trends.

For instance, 4.4% of the annual increase and 2.9% of the quarterly increase in West End prime rent can be attributed to foreign exchange rates, with the rising value of the pound against the US dollar. Similarly, the 4.2% increase in the euro value against the dollar between the ends of Q2 2022 and Q2 2023 has inflated the comparable cost changes across the eurozone markets in our scope.

This is not the case universally, with Hong Kong and Saudi Arabia witnessing negligible changes in the value of their local currencies against the US dollar over the past 12 months.