The big story in global commercial real estate markets today is the disconnect between real estate investment and office leasing markets around the world. Investment volumes are up; leasing volumes are down. Investment prices are generally up; rents are static.
Investments continue to surge. Transaction volumes for the first half of the year were the highest since 2008. At $225 billion, that’s 12% up on last year. We see full-year volumes getting close to $500 billion, 10% higher than 2012, and the fourth straight year of growth.
Leasing data paints a much different picture. Gross absorption – total space leased without accounting for vacated space – fell 5% globally in the second quarter compared with Q2 a year ago. We think leasing markets will pick up a bit in the second half but be flat for the full year: zero to 5% up in the U.S., flat in Europe and 10 to 15% down in Asia Pacific.
What’s different between investment and leasing markets?
Investment markets are humming along because investors from all parts of the world are directing lots of money to the safety of real estate. Debt financing is also easier to obtain. All that capital is more than offsetting worries about monetary policy and interest rates. In fact, rising interest rates could expand the investment market, with investors searching for higher returns getting more comfortable with real estate investments outside of “safe” city centers. Evidence for this is building, with investors looking at top-quality properties in secondary cities and at “value-added” opportunities in the top markets. We also think that the market value of assets will increase by 3 to 4% this year, another sign of a strong market.
The big corporate occupiers who lease much of the world’s office space don’t share this confidence and optimism. Many are struggling with slow revenue growth, and that makes them cautious. So they’re delaying occupancy decisions and focusing on productivity and cost cutting. Some momentum is building in the U.S., but European and now also Asia Pacific leasing markets are generally subdued.
The good news is that there’s good reason for greater optimism next year. Economists say the recovery in the global economy will gather steam in 2014. Business and consumer confidence should improve, and strong corporate balance sheets will support new capital expenditures.
Gains in leasing volumes will vary from one part of the world to another, as different regional economic and market conditions encourage – or constrain – growth. More to come on that topic in my next post.
If you’re interested, the latest edition of our Global Market Perspective contains much more detail and discussion about conditions in real estate markets globally.