Office leasing volumes are on track to exceed 42 million square metres across 2018, to reach their highest level since 2007. Year-to-date volumes are 8% higher than 2017, although activity softened during the third quarter, a trend that is expected to continue to the end of the year. In the context of slowing economic growth in major markets, 2019 volumes will struggle to match the elevated levels seen in 2017 and 2018, although will remain around 10% above the ten-year average.
The Asia Pacific region has seen the most impressive activity of 2018, with year-to-date volumes 24% higher than a year ago and the 2018 total expected to be at least 15% higher than 2017. Volumes have been boosted by stronger leasing activity in China, India and the Philippines, with the technology, financial and flexible space sectors driving demand. Bengaluru, Delhi and Manila have been the standout cities, while availability of space is constraining lettings in Beijing, Tokyo, Sydney and Melbourne.
Europe has maintained its steady growth, with year-to-date volumes up 5% on 2017. The third quarter total was the highest on record at 3.3 million square metres, driven by uplifts in CEE and Southern Europe. A lack of supply is denting leasing activity in Amsterdam, Berlin and Hamburg, while Paris also saw Q3 take-up fall year-on-year. Standout performers include Barcelona, Milan, Stockholm, Madrid and Warsaw. Full year leasing volumes are expected to reach 13.2 million square metres, well above the ten-year average.
In the U.S., year-to-date volumes were also up 5%, with flexible space operators as the largest driver of demand in Q3. However, net absorption continues to fall as companies face challenges to expansion, due to talent shortfalls experienced in many markets where unemployment falls to cyclical lows. Tech-driven secondary markets report the most consistent net absorption, with Denver, Phoenix, Austin, Pittsburgh and Orlando among the beneficiaries.
The global office vacancy rate has dropped to a new cyclical low of 11.5%, as rates in Europe and Asia Pacific dropped 30-40 bps during Q3. The rate is expected to rise to above 12% over the next 12-18 months, as elevated new deliveries will drive activity to around 20-25% above the ten-year average over the next two years.
Rental growth for prime offices is set to continue at a healthy pace, at around 3.9% across 2018. This would represent the strongest annual growth since 2011. Singapore, Berlin, Madrid, Amsterdam and San Francisco are among the major markets registering double-digit office rental growth over the past twelve months, with only Jakarta and Dubai seeing notable declines. Average global office rental growth is set to moderate to around 2.6% in 2019.
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