Real Estate Global Market Perspective research 2016

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06/02/2016 Leave a comment

The occupational markets take the driving seat

Global Market Perspective has chronicled the journey of the world’s dominant real estate markets since the depths of the Great Recession in 2008, a journey that has been led throughout by strengthening investment markets as a huge weight of money targets real estate assets. But, as we move into 2016, the dynamics have started to shift, with the occupational markets now registering greater momentum.

Market fundamentals are improving across all major global regions and property sectors, and recent leasing activity has surprised on the upside. Geopolitical and economic headwinds will weigh on business activity over the coming months, but for now, corporate occupiers remain in growth mode which, combined with tightening supply, will support rental value growth during 2016 in most major markets.​​

Investment and occupational markets move into balance

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Investor activity slows in final quarter of 2015 as headwinds stiffen

Meanwhile, the pace of investment into commercial properties globally slowed slightly in the final quarter of 2015, alongside other asset classes. Full-year 2015 transaction volumes, at US$704 billion, were just shy of 2014 levels, but the strength of the U.S. dollar has underplayed the true level of market activity. At fixed exchange rates, full-year volumes would be US$765 billion, 8% ahead of 2014 and a new record, surpassing the previous peak of US$758 billion in 2007.

As we move into 2016, investor sentiment seems to be more cautious. However, there is certainly no sign of investors pulling back in any drastic way and yields continue to compress to new lows; rather we should expect growth from these levels to be more measured. It should be remembered that globally we are at near peak levels and it is only currency fluctuations holding the market back. With this backdrop we forecast 2016 volumes to be broadly in line with 2015 at between US$720-730 billion, with any potential upside (0%-5%) coming from the deployment of the significant capital from numerous sources still to be allocated to the sector.

Office leasing volumes exceed expectations

Global office leasing volumes in the final quarter of 2015 were 14% higher year-on-year and, as a result, full-year volumes exceeded expectations, registering 8% growth on 2014 levels. The Asia Pacific region has seen a strong rebound, with its full-year 2015 leasing volumes 19% higher. Leasing activity has also been notably robust in Europe, posting 13% growth in 2015. Meanwhile, the U.S. has maintained its robust leasing activity, with nearly half of volumes comprising expansion demand.

Notwithstanding the geopolitical concerns, there will continue to be progress towards expansion demand during 2016 as tenants move away from cost containment, consolidation and renewals. As a consequence, global office leasing volumes are projected to be around 5% higher than 2015, with Asia Pacific recording the strongest uplift over the year.

Tightening office supply supporting rental growth

Another 20 basis points were shaved off the global office vacancy rate in Q4, which stood at 12.1% at the end of 2015. A further fall is in prospect during 2016, particularly in the U.S. and Europe. With a modest increase in new deliveries expected in 2016 and 2017, the global vacancy rate is projected to settle at around 12% during the next two years.

Rental growth on prime office assets accelerated during the second half of 2015 as supply tightened and demand strengthened. Growth of 3.7% was recorded for the full-year (across 26 major markets), matching the levels of 2014. Further rental uplifts of 3%-4% across major markets are anticipated for 2016, with Boston and Tokyo vying for the top positions.

Consumer optimism boosts retail sales

Improved consumer confidence and healthy retail sales are fuelling optimism in the U.S., Europe and selectively in Asia Pacific. Several U.S. markets, primarily gateway cities, are now witnessing conditions typical of a peaking market as rents see assertive growth and vacancy continues to compress. Meanwhile, UK regional markets and Berlin experienced the strongest rental growth over the year’s final quarter in Europe, while increases were also recorded in the recovery markets of Italy and Spain. In Asia Pacific the demand picture remains varied, with the acceleration in retail spending in Australia contributing to leasing demand, although rental growth has been limited in most regional markets over the quarter.

Technology and realignment of logistics networks heightens demand

The ongoing robust growth in online sales and the wider impact of technology trends are driving the need for realignment of supply chain networks and boosting global warehousing demand. In the U.S., absorption is still outpacing new supply with continued velocity likely across nearly every market in 2016. Similarly, sustained strong occupier demand in Europe resulted in record take-up volumes in 2015. In Asia Pacific, third-party logistics companies and e-commerce retailers are bolstering rental levels in China and Tokyo.

Robust growth in global hotel investment

2015 marked the second-highest year on record for hotel transactions globally, with trades topping US$85 billion and posting 50% growth on 2014. With 2015 surpassing all expectations in terms of the amount of capital flowing into the hotel sector, we expect transaction volumes in 2016 to reach US$70 billion, marking the second-highest level of the cycle.

Unprecedented vitality in U.S. rental apartments

Rental apartments are still outperforming in the U.S., with rental growth accelerating to its highest pace this cycle and all major markets registering positive absorption. Institutional investment volumes continue to grow in Europe, with Germany achieving a record year for transaction volumes and the UK market expected to gather speed through 2016. Sales activity has continued to decline in Dubai, although falls in prices have been modest. In Asia, an accommodative policy stance, including a cut in interest rates, has provided support for high-end sales volumes in China.

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