Global Office Rents on the Rise with No Relief In Sight
Written by Vandana Mohanchandran
Overview of steepest office rents in global cities
According to Commercial Real Estate Services (CBRE) Research’s semi-annual Global Prime Office Occupancy Costs survey, London (West End) continues to hold its #1 position as the most expensive office rental costs, at $267 per square foot per year. Furthermore, rents are expected to rise by 13.6% by 2018. Hong Kong, Beijing, New Delhi and Tokyo round out the Top 5 the list of most expensive office rent cities in the world.
In the US, New York City remains the most expensive Americas market and the 10th most expensive market in the world, with office rental costs at $127 per square foot per year.
The survey also found that the biggest increase in rental costs were found in Dublin, with a 26.1% increase from 2014 to 2015.
Other noteworthy cities include Bangalore and Mumbai, where demand for prime office spaces has reached double-digit growth, with high rental prices being driven by robust demand from startups and e-commerce.
What’s causing the increase in rent?
Overall economic growth is leading businesses to plan for expansion. In the US alone, businesses are renting more office space at a faster pace than in recent years. In 2015, businesses reserved 42.4 million square feet of extra office space in 2015, a 35% over 2014. This steep increase led occupancy rates to be slashed in half from 2014 to 2015.
The primary driver for the increase in office rent prices is the tight commercial real-estate market. As demand for office space increases, supply is barely keeping up. Despite construction projects being underway in many cities, demand is expected to continue to outpace supply through 2016 and into 2017.
The types of businesses seeking more office space typically require modern infrastructure to support their tech-heavy operations. This leads to a big preference for prime office space in class a markets, adding further pressure to this supply and demand story.
How are companies coping with increasing costs?
We expect this trend of rising rental rates to lead some companies to move away from class A cities and into class B and C cities. In certain cases, making direct investments in improving infrastructure of offices in these class B or C locations is more cost effective than staying put in a class A office.
Another alternative is for a company to segment its operations across both high- and low-cost locations, based on infrastructure requirements. For examples, the parts of a business that don’t require highly sophisticated infrastructure can be moved to class B or C cities, enabling the remaining fraction of the workforce to move into a smaller class A office space and enabling some cost savings.
If office rent prices continue to increase, businesses are likely to develop other, less conventional solutions such as allowing employees to work remotely.