Global Market Perspective - JLL
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May 2018 Global Market Perspective JLL Global Research
Global Market Perspective 3
Global real estate markets carry strong performance into 2018
Global Economy 7
Global economy remains resilient to new challenges
Global Real Estate Health Monitor 10
Sydney, Brussels and Singapore lead office rental performance
Real Estate Capital Markets 11
Investment activity at highest first quarter levels since 2008; full-year volumes set to soften slightly
Capital Values and Yields 17
Income growth underpins further office capital value appreciation; Europe leads capital growth
Corporate Occupiers 19
Competition for talent and high-quality space shape corporate location strategies
Office Markets 21
Leasing volumes at highest level for a decade; rental growth accelerates
Retail Markets 32
Omni-channel retailing continues to expand as e-commerce companies open new stores
Industrial Markets 34
Buoyant demand and historically low vacancy rates drive further rental growth
Hotels Markets 35
Transaction volumes on par with a year ago; rising cross-border purchasing activity targeting Europe
Residential Markets 37
Increased competition among landlords in U.S. multifamily market
Key Investment Transactions in Q1 2018 39
Tokyo leads global investment rankings
Illustrative Office Occupational Transactions in Q1 2018 45
Co-working operators a key source of leasing demand
2Real Estate Markets Carry Strong Performance into
2018
Resilient global economy supports continuation of 2017’s momentum
Global real estate markets have carried their strong performance from the latter stages of 2017
into the first few months of 2018, with investment and corporate occupier activity at their highest
levels for a decade. In the logistics sector, vacancy rates continue to set new lows with rental
growth expected to accelerate over the course of the year. Co-working operators were a key
source of office leasing demand in the first quarter, with volumes rising in all three global regions;
however, it will be difficult to match last year’s impressive total, while challenges in the U.S. tech
sector have the potential to impact on occupier demand. Global investment volumes are also set
to soften slightly in 2018 despite robust fundamentals, as investors look to new avenues to access
the sector.
Global Commercial Real Estate Market Prospects, 2018
Investment Capital values
4% Higher
-5-10% Lower
Leasing 2018 Rents
-0-5% Lower
prospects 3% Higher
Vacancy rate Development
Rising Peaking
Leasing, vacancy, development, rents and capital values relate to the office sector.
Source: JLL, April 2018
3Sustained demand for property boosts global activity
Global real estate transaction volumes for the first quarter of 2018 came in at US$165 billion, 15%
higher than the same period last year, with activity underpinned by favourable macro-economic
trends in the world’s major economies. Despite growing trade tensions and elevated stock market
volatility, investors have remained committed to global property, with first quarter activity
reaching its highest level since Q1 2007.
While fundamentals remain robust in key global markets, we expect global investment in
commercial real estate to soften by 5%-10% in 2018 to around US$650 billion as we continue to
see investors pursuing real estate through new avenues outside of traditional single-asset
acquisitions. The growing prominence of debt financing, M&A activity and alternative sectors all
demonstrate that while the way investors access the sector may be shifting, their appetite for real
estate has not diminished.
First-quarter office leasing volumes at highest levels since 2008
The strong leasing conditions that characterised the global office markets during the latter part of
2017 have continued into the first few months of 2018. At 10 million square metres (across 96
markets), Q1 2018 saw the highest first quarter leasing volumes since 2008, and 7% higher than a
year ago. Asia Pacific witnessed the sharpest rise in leasing activity, while the European and U.S.
office leasing markets were each 6% up on last year’s first quarter.
The positive Q1 results have put the global leasing market on track for another robust year,
although volumes are unlikely to exceed 2017’s impressive tally, with a modest 2% fall projected
for the full year.
A further unexpected fall in global office vacancy rates
Once again global office vacancy has defied expectations, with the aggregate vacancy rate
decreasing by another 20 bps during Q1 to stand at 11.7%, the tightest of the current cycle.
Moreover, in contrast to previous quarters, all three global regions registered a decline in vacancy
during Q1, despite a rise in new deliveries.
With the delivery of new offices forecast at a relatively elevated level during 2018, the global
vacancy rate is projected to edge up to over 12% by the end of the year.
Annual prime rental growth is close to 4%
Rental growth for prime offices across 30 major markets continues to accelerate and is now
running at 3.7% year-on-year, the strongest rate since Q2 2016. For the full-year 2018, rental
growth is expected to average close to 3%, with top performances anticipated in Singapore and
Sydney. Other stand-outs in 2018 are likely to include Toronto (which should be the strongest of
primary office markets in the Americas), Sao Paulo, Moscow and Berlin.
4Rental Growth for Prime Offices, 2010-2018
10
8.3%
8
7.2%
Rental change (y-o-y %)
6
3.9%
4 3.3% 3.3%
3.1% 3.0%
2.7% 2.7%
2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018F
Unweighted average of 30 markets
Source: JLL, April 2018
Omni-channel retail expanding as e-commerce companies increase physical footprint
The continuing growth of e-commerce and developments in technology are dominating the retail
trade agenda. A notable trend is the expansion of omni-channel retail networks, with growing
interest from e-commerce retailers and consumer goods manufacturers in opening physical
outlets to provide a more engaging in-store shopping experience to their customers.
The U.S. retail market continues to face substantial ongoing structural changes, with the majority
of national markets showing signs of deceleration as fundamentals plateau. Consumer confidence
remains at historically high levels in Europe, with prime shopping centre rents rising in several
markets. In Asia Pacific, omni-channel retail continues its ascent with major e-commerce
companies opening new outlets, although Q1 rental performance was mixed across the region.
Global logistics markets continue strong performance
Global logistics markets showed no signs of slowing at the start of 2018, with continued buoyant
demand levels pushing vacancy to new historic lows. Spurred by an increase in absorption,
vacancy in the U.S. industrial market declined to a new all-time low of 4.8%. In Europe the
regional vacancy rate is also well below 5%, helping drive a pick-up in rental growth over the first
quarter. Rents continued to edge higher in most markets across Asia Pacific, supported by the
recent uplift in trade performance. With increasing competition for quality space, we expect
further acceleration in rental growth over the remainder of 2018.
Robust economy fuels investors’ appetite for hotel real estate
Optimism on global economic growth, together with continued healthy hotel operating
performance and positive tourism trends, are providing a solid foundation for hotel investments.
Global hotel transaction volumes totalled US$13.9 billion in the first quarter of 2018, the same
level as last year. The flow of international capital shifted in the first three months of 2018 with an
increased level of purchasing activity from Middle Eastern capital targeting Europe, while
5mainland Chinese buyers have scaled back on overseas investments due to outbound capital
controls.
Increased competition among landlords in U.S. multifamily market
The U.S. multifamily rental market continued to feel the effects of newly built supply in the first
quarter of 2018. As an elevated rate of deliveries carried over into the new year, landlords saw
vacancy rates rise and rental growth moderate as competition for tenants heightened. With an
expected 370,000 units set to be delivered over the course of 2018, an environment of gradually
softening fundamentals is likely to persist for the next 12-18 months. Thereafter, we anticipate
that fundamentals for multifamily product will improve as deliveries slow and demand for housing
continues to be strong.
Institutional investors remain active in continental Europe with a robust start to the year in several
markets, including the second-highest first quarter volumes on record in Germany. The UK
institutional investment market also registered a solid first quarter, with a marked increase in
investment activity outside of London.
In Asia Pacific, limited new supply has led to a decline in transaction volumes in Shanghai and
Beijing. In Hong Kong, newly-launched projects continued to be well received, often selling out in
less than two weeks, while the collective sales market in Singapore gathered momentum.
6Global Economy
The global economy remains resilient in the face of new challenges
The tone of economic data released at the start of the year points to a continuation of 2017’s
momentum. Despite this, important new risks have emerged in recent weeks. The first has been
equity market instability, with Q1 showing the worst performance on global bourses in over two
years. As economic sentiment remains favourable, this movement seems to be driven by other
factors. In the U.S., there has been a re-evaluation of the so-called FANGs, as scandals over data
misuse and fears of increased tax and regulation dented the prospects of tech’s high-flyers.
Markets have been further spooked by a potentially even more serious concern, the ramping up of
protectionist rhetoric. In March, President Trump abruptly announced unilateral tariffs on metal
imports. After much negotiation the dispute focused on China with measures covering about 30%
of its exports to the U.S., leading to retaliatory measures. Overall, the estimated GDP impact is
modest (less than 0.5 percentage points), but there are concerns of rising downside if further tit-
for-tat exchanges escalate, jeopardising the still-fragile recovery in world trade.
Despite these new rumblings, the economic outlook remains at its most robust for several years.
In the U.S., a slow start to 2018 has not been enough to prevent more upbeat forecasts for the year
as a whole. Sentiment is still strong and domestic demand is set to be boosted by the tax stimulus,
pushing growth rates back the mid-2% range for the first time since 2015.
In Europe, the most recent figures have been more equivocal, due to a number of one-offs –
including the unexpectedly harsh weather. Eurozone growth hit a post-GFC high last year and only
a slight dip is in prospect for 2018 according to the latest views. Germany is expected to maintain
its above-trend momentum, while forecasts for France are unchanged. In the UK, progress in
Phase 2 of the Brexit negotiations may have helped to secure an upward revision in prospects,
though at 1.8% this rate continues to trail Europe’s other large economies.
There were fewer changes to the outlook in Asia. China’s growth has held up well in recent
quarters and the outlook for this year is unaltered, though there are more concerns about the
downside after the recent trade spat with the U.S. India has underachieved, but expectations for
the next 12 months remain significantly above-trend and would push it to the top of the regional
ranking. Japan has seen resilient performance on the back of supportive policy and healthy
investment. It continues to be, however, the most sluggish of the larger developed economies.
GDP Projections for 2018 in Major Economies – Recent Movements
Australia China France Germany India Japan UK U.S.
January 2018 2.5 6.4 1.8 2.5 7.4 1.7 1.5 2.7
April 2018 (Latest) 2.7 6.4 1.8 2.4 7.3 1.5 1.8 2.9
Change (bps) +20 0 0 -10 -10 -20 +30 +20
Source: Oxford Economics, April 2018
7Central banks continue to plot the path back to ‘normal’
It was another relatively quiet quarter for monetary policy. The most important change was a 25
bps hike by the U.S. Federal Reserve under new Chair Powell announced during March. This move
was widely anticipated and is the sixth such increase since late-2015, taking the Fed Fund rates to
a decade high of 1.5%-1.75%. The Fed’s forward guidance was slightly more hawkish than before
and most now expect that this is the first of at least three increases during 2018.
Other central banks continue to watch the Fed’s lead with a view to following. The UK is now
closest, as the uncertainties of Brexit seem to have made the Bank of England more determined to
raise rates. Its latest MPC minutes point strongly to a rate rise in May 2018 despite easing headline
inflation and softer growth, with further tightening in prospect later this year and beyond.
While upward movements in policy rates look several quarters away, the ECB is paving the way in
the Eurozone by announcing a tapering of its asset purchase scheme. The expectations are that
QE will be unwound completely by late-2018, and so it will be 2019 or possibly even the following
year before interest rates could rise again.
Global optimism rising, but slowly
The latest data and sentiment indicate upside to the current growth profile, and the latest view is
that the global expansion will be sustained at a rate of over 3.5% a year. This is above subdued
2012-2016 levels, but not especially strong compared with the past and certainly well below the
pace of previous late-cycle expansions. Given the long slow recovery from the GFC, it is probably
not surprising that commentators remain cautious about prospects beyond this year.
Most are looking to the U.S. to invigorate the global upturn. The fiscal stimulus is expected to push
up activity in the short term and is a major contribution to this year’s momentum. But there are
also headwinds including tightening interest rates, and the broad opinion is that activity will dip
again in 2019. This implies a solid performance, though not quite the lift-off that has been
expected by some. These cautious views are further reinforced by rising trade risks.
One challenge for the global upturn has been the fitful performance of emerging markets.
Developing world growth rates look relatively impressive at almost 5% a year. But factors such as
weaker commodity prices, rising U.S. interest rates and geopolitical volatility have prevented
these dynamic economies regaining their previous momentum. These influences will not
disappear and may even worsen if the protectionist push continues, leaving the outlook for the
emerging world stable at a slightly below-par rate.
Asia has the world’s largest emerging markets and remains the fastest-growing region. Active
policy prevented the feared slowdown in China last year, and although its GDP growth is expected
to drift down towards 6% over the next two years, this is in line with a rebalancing of economic
activity towards consumers. Debt levels are still a potential weakness, but the central view is of
benign transition and gradual deceleration. India is predicted to take on China’s lead in Asia with
growth rising above 7% in 2018-19, provided reform efforts stay on track. By contrast, Asia’s most
important developed economy, Japan, has been in a low-growth rut since its financial crisis in the
late 1980s. In the near term, the country’s prospects are brighter, but growth is expected to fizzle
out next year.
8The European recovery has presented a rare source of upside over recent quarters. Low interest
rates, reviving domestic demand and job creation continue to underpin activity, though growth
rates are likely to dip slightly this year and next. German growth is set to trend moderately slower
after peaking in 2017, while France stabilises at sub-2%. Brexit casts a shadow over UK
performance, with growth falling well behind its neighbours. Although the UK slowdown has been
relatively mild, activity is set to languish until 2020, though downside potential from a cliff-edge
has been eased by the recent transition deal.
Global Outlook, GDP Change, 2017-2019
2017 2018 2019
Global 3.7 3.9 3.7
Asia Pacific 5.5 5.5 5.2
Australia 2.3 2.7 2.6
China 6.9 6.4 6.0
India 6.4 7.3 7.0
Japan 1.7 1.5 0.9
Americas 2.0 2.6 2.6
U.S. 2.3 2.9 2.5
MENA 1.9 3.2 3.7
Europe 3.0 2.6 2.1
France 2.0 1.8 1.9
Germany 2.5 2.4 1.8
UK 1.7 1.8 1.6
Source: Oxford Economics, April 2018
9Global Real Estate Health Monitor
Economy Real Estate Investment Markets Office Occupier Markets
City
Metro City Investment Capital
Area Investment Volumes Value Prime Yield Rental Net Vacancy Supply
GDP Volumes Change Change Yield Gap Change Absorption Rate Pipeline
Amsterdam 2.6% 4.6 24% 23.6% 3.5% 298 8.1% -0.8% 6.4% 4.0%
Beijing 7.0% 3.6 -49% 2.6% 6.2% 240 0.9% 6.5% 4.3% 18.1%
Berlin 2.8% 7.0 80% 14.5% 2.9% 240 10.7% 0.2% 3.4% 3.8%
Boston 3.0% 8.3 -25% -1.8% 4.1% 136 0.6% 1.1% 13.2% 1.9%
Brussels 1.5% 3.1 37% 28.0% 4.3% 349 14.5% 0.5% 8.3% 2.4%
Chicago 2.7% 10.0 -3% 0.7% 5.4% 266 4.6% 0.1% 16.4% 2.0%
Delhi 8.8% 1.6 3316% 1.3% 8.9% 137 1.3% 7.0% 29.2% 17.6%
Dubai 3.5% 0.5 -44% 0.0% 7.5% na 0.0% na 9.0% 5.6%
Frankfurt 2.7% 6.5 16% 10.6% 3.3% 275 2.7% 0.3% 7.4% 2.7%
Hong Kong 3.1% 18.4 90% 23.4% 2.7% 69 4.6% 1.7% 4.6% 4.7%
Jakarta 6.1% 0.1 -75% -8.4% 7.9% 80 -7.8% 14.7% 33.6% 35.6%
London 1.8% 30.3 15% 0.0% 3.5% 211 0.0% -0.1% 4.8% 6.1%
Los Angeles 2.8% 23.5 14% 4.4% 4.4% 166 4.4% 0.9% 14.2% 0.9%
Madrid 3.4% 3.6 -24% 8.5% 3.8% 259 8.5% -0.6% 10.8% 1.6%
Mexico City 2.4% 0.0 -96% -6.3% 7.6% 27 -3.7% 6.4% 14.0% 16.6%
Milan 1.9% 3.6 31% 21.3% 3.6% 181 10.6% 0.1% 13.2% 2.4%
Moscow 2.6% 3.0 8% 2.6% 9.8% 270 0.0% 0.9% 13.0% 3.6%
Mumbai 8.0% 0.7 -11% 2.2% 9.6% 203 1.4% 7.6% 17.2% 12.5%
New York 2.8% 26.2 -23% 1.6% 3.6% 86 1.6% 1.0% 8.5% 3.1%
Paris 1.8% 22.0 -6% -0.7% 3.0% 240 -0.7% 1.1% 6.6% 3.6%
San Francisco 2.9% 3.5 -60% 2.3% 3.8% 106 2.3% -0.3% 9.1% 7.4%
Sao Paulo 2.1% 1.1 82% 17.1% 9.0% 410 2.8% 1.9% 25.5% 3.7%
Seoul 2.3% 14.4 2% -2.5% 4.4% 181 -2.5% -1.2% 13.8% 6.2%
Shanghai 6.6% 18.0 7% 0.5% 5.6% 177 -2.1% 13.1% 17.7% 26.0%
Singapore 3.1% 10.4 -3% 14.5% 3.6% 131 14.5% 5.1% 8.1% 2.6%
Stockholm 3.5% 2.2 -39% 20.5% 3.5% 281 12.5% 0.1% 6.1% 2.4%
Sydney 2.5% 10.4 56% 14.5% 4.8% 223 17.4% 0.7% 6.0% 2.7%
Tokyo 1.4% 20.0 29% 1.2% 2.9% 287 1.2% 3.2% 2.7% 12.5%
Toronto 2.3% 9.5 36% 3.5% 4.3% 233 3.5% 1.5% 8.6% 1.2%
Washington DC 2.4% 11.9 -6% 0.4% 4.5% 176 0.4% 0.4% 16.2% 3.7%
Real estate data as at end Q1 2018.
See page 46 for definitions and sources.
10Real Estate Capital Markets
Investment Volumes
Sustained demand for property boosts global activity
Global real estate transaction volumes for the first quarter of 2018 came in at US$165 billion, 15%
higher than the same period last year, with activity underpinned by favourable macro-economic
trends in the world’s major economies. Despite growing trade tensions and elevated stock market
volatility, investors have remained committed to global property with first quarter activity
reaching its highest level since Q1 2007.
U.S. shrugs off last year’s declines to start 2018 on a strong footing
After four successive quarters of declines, the Americas reversed its losing streak as year-on-year
investment activity in Q1 rose by 18% to US$68.8 billion. Driving this uptick is the U.S., where
volumes are up by 23% to US$62.8 billion, the highest first quarter volume since 2015. Elsewhere
in the Americas, Brazil continues to see elevated levels of liquidity despite ongoing political
concerns, as transactions surpassed the US$1.0 billion mark for the third successive quarter. While
Q1 volumes are down by 28% in Canada compared to an especially active Q1 2017, investment
activity is still notably higher than the historic first quarter average.
Core markets drive growth in Europe
The European market started off 2018 on a steady footing as first quarter volumes were level with
Q1 2017 at US$56.3 billion, 18% higher than the long-run first quarter average. Driving this growth
are the region’s two largest markets, the UK and Germany, where volumes are up by 10% and 13%
respectively. Activity in the UK is normalising as investors continue to shrug off concerns around
Brexit and seek exposure to the London market. In Germany, robust economic and employment
growth has attracted domestic and cross-border investors alike. While first quarter volumes were
down in France (-3%), Italy (-3%), Spain (-30%) and Sweden (-53%), the market observed growth in
Denmark (3%), Switzerland (74%) and Portugal (138%). Rounding off the strong performance for
the region was Poland, where Q1 investment activity surpassed the US$2 billion mark as investors
continue to look favourably upon rising growth prospects.
Asia Pacific continues to shatter records
Following the record-breaking performance in the fourth quarter of 2017, Asia Pacific broke yet
another record to kick off 2018. Year-on-year investment activity is up 34% with Q1 volumes of
US$40.0 billion, 22% better than the previous record set in 2008. Healthy demand across many of
the region’s biggest markets continues to underpin growth. While first quarter investment activity
was up strongly in Japan (23%), Hong Kong (72%), Australia (87%) and China (93%), South Korea
(-18%) and Singapore (-39%) were the biggest markets in the region to see declines. In India
volumes reached their second-highest Q1 level ever at US$872 million, as a greater number of
offshore investors seek to gain exposure to one of the world’s fastest-growing economies.
11Despite a robust first quarter, full-year transaction activity expected to soften slightly
Investors have faced no shortage of surprises through the first quarter of 2018 between rising trade
tensions, prospects for a hard Brexit and elevated equity market volatility. Moreover, despite
growing signals from central banks that the shift from quantitative easing to quantitative
tightening is on the horizon, disinflation in the EU and stagnant prices in Japan make it unlikely
that we will see monetary policy convergence between the Federal Reserve, ECB and Bank of
Japan in the coming year. Instead, investors must contend with policy divergence as U.S. interest
rates continue to rise.
Notwithstanding these factors, global property markets continue to perform well and investor
demand remains robust. Fundamentals are still strong in key global markets and despite the
strong first quarter, we expect global investment in commercial real estate to soften by 5%-10% in
2018, to around US$650 billion, as we continue to see investors pursuing real estate through new
avenues outside of traditional single-asset acquisitions. The growing prominence of debt
financing, M&A activity, and alternative sectors all demonstrate that while the way investors
access the sector may be shifting, their appetite for real estate has not diminished.
Direct Commercial Real Estate Investment, 2006-2018
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (F)
800
US$ billions
-5-10%
700
600
500
400
-12% -10%
300
200 ~0%
100
0
Americas EMEA Asia Pacific Global
xx% Projected change 2017-2018
Source: JLL, April 2018
12Direct Commercial Real Estate Investment – Regional Volumes, 2016-2018
% change % change % change
US$ billions Q4 2017 Q1 2018 Q4 17-Q1 18 Q1 2017 Q1 17-Q1 18 FY 2016 FY 2017 FY 16-FY 17
Americas 66 69 5% 58 18% 285 249 -13%
EMEA 117 56 -52% 56 0% 245 307 25%
Asia Pacific 52 40 -23% 30 34% 131 149 13%
Total 235 165 -30% 144 15% 661 705 7%
Source: JLL, April 2018
Direct Commercial Real Estate Investment – Largest Markets, 2016-2018
% change % change % change
US$ billions Q4 2017 Q1 2018 Q4 17-Q1 18 Q1 2017 Q1 17-Q1 18 FY 2016 FY 2017 FY 16-FY 17
U.S. 59.8 62.8 5% 51.2 23% 266.2 224.3 -16%
UK 30.7 16.0 -48% 14.6 10% 91.9 57.9 -37%
Japan 10.5 13.9 32% 11.3 23% 34.0 33.7 -1%
Germany 23.0 13.7 -41% 12.1 13% 50.0 55.5 11%
China 15.5 8.5 -45% 4.4 93% 27.7 34.6 25%
Hong Kong 7.5 5.0 -33% 2.9 72% 12.0 10.4 -13%
France 18.6 4.9 -74% 5.0 -3% 31.5 28.9 -8%
Australia 7.2 4.7 -35% 2.5 87% 21.4 18.7 -13%
South Korea 6.3 4.1 -35% 5.0 -18% 8.0 16.0 99%
Canada 3.9 3.8 -3% 5.3 -28% 14.9 14.1 -5%
Netherlands 7.0 2.7 -61% 2.9 -7% 9.4 11.1 17%
Poland 3.0 2.4 -20% 0.5 421% 3.7 5.1 39%
Finland 3.4 2.3 -31% 0.9 165% 3.9 4.9 26%
Spain 4.2 1.9 -54% 2.8 -30% 9.7 10.5 8%
Italy 5.1 1.9 -63% 2.0 -3% 8.2 10.1 24%
Belgium 1.0 1.9 81% 0.6 238% 4.8 4.0 -16%
Sweden 3.9 1.8 -53% 2.8 -34% 11.1 12.5 13%
Brazil 1.5 1.6 9% 0.6 180% 2.5 1.5 -40%
Singapore 1.9 1.2 -37% 2.0 -39% 7.0 9.4 35%
Ireland 1.3 1.0 -19% 0.4 141% 4.1 5.4 34%
Source: JLL, April 2018
13Regions in focus
Solid first quarter investment activity in the Americas
Americas sales transaction volumes reversed course during Q1 2018, increasing 18% year-on-year
to US$69 billion. The regional outperformance was driven entirely by the U.S. market, as
investment levels reached US$63 billion in the first quarter, a 23% increase on Q1 2017.
Notwithstanding the unexpectedly strong start to the year, a number of factors including
increased investor selectivity, higher interest rates, lower returns and product supply constraints
will impact the market during 2018. As a result, overall Americas volumes for the full year are still
anticipated to be lower than in 2017.
The large number of assets that have already traded in recent years, declining returns as the yield
compression cycle ends, as well as caution and selectivity on the part of many domestic
institutional investors, are in large part behind the deceleration in U.S. transaction activity from
the cycle’s peak in 2015. These forces all continue to play a role in the capital markets, but are also
leading to a sustained push for alternative strategies on the part of many investors. There remains
a focus on higher-yielding debt strategies, as traditional balance sheet lenders maintain a
disciplined stance, opening up opportunities for debt funds and other participants. Furthermore,
platform level and other large portfolio investments are expected to remain in-demand this year in
light of the still very elevated levels of dry powder looking for placement and the advantages of
doing so at significant scale.
Elsewhere in the region, investment activity was much more mixed as 2018 commenced. In
Canada, transaction volumes for the quarter totalled US$3.8 billion, a decline of 28% from the
opening period of 2017. However, fundamental drivers in the country still point to stable or
increasing activity over the course of the full year. Brazil, meanwhile, continues to garner
meaningful gains in investor interest, as market participants anticipate a further recovery in the
country’s economy. Investment volumes reached US$1.6 billion in Q1, nearly tripling the activity
in the year-earlier quarter. Finally, in Mexico, investment activity was decidedly light to begin the
year, and down significantly from Q1 2017. Two areas of caution for investors are trade policy
concerns with respect to potential NAFTA renegotiation and uncertainty related to this summer’s
presidential election.
EMEA investment market pausing for breath
EMEA investment volumes came in at US$56.3 billion in Q1 2018, level with the first quarter of 2017
in USD terms, although 12% lower in local currency terms. Looking ahead to the full-year 2018, the
number of one-off large transactions seen in 2017 is unlikely to be replicated, with a 10% fall in
total annual volumes predicted.
Together, the three largest regional markets held their ground, with collective volumes amounting
to US$34.5 billion, representing a 9% increase. The main driver was the UK, which continued its
post-Brexit recovery and saw activity rise by 10%. Meanwhile German activity is in line with the
expected plateauing of transactions with volumes reaching US$13.7 billion, an increase of 13% in
US dollar terms but largely flat (-2%) in euro terms. France on the other hand experienced a slower
start to the year with volumes down 3% to US$4.9 billion.
14CEE and Benelux continue to climb higher
Central and Eastern European (CEE) markets had a good start to the year with investment volumes
totalling US$3.8 billion, a 36% increase. This was driven by Poland, the largest market, where
volumes rose more than fourfold to US$2.4 billion. Investment levels also climbed higher in the
Benelux, to US$4.7 billion, a rise of 24% year-on-year. The star performer was Belgium, where
volumes more than tripled to a record US$2.4 billion. The Netherlands, on the other hand, which
witnessed very strong growth in 2017, saw volumes decline by 7% to US$2.7 billion.
Tokyo leads global rankings in Q1
Tokyo claimed top position as the world’s most active city for the first time in four years during Q1
2018, as volumes more than doubled from the previous year to US$9.1 billion. New York also saw
transaction volumes rise sharply (+141%) from a quiet start to 2017 to return to second place.
While a 25% decline in volumes saw London slip to third, it continued to attract the largest amount
of cross-border investment globally during the quarter. All other markets in the Top 20 witnessed
an increase in activity, with particularly steep rises in cities from the Asia Pacific region, where
every city besides Tokyo registered record first quarter volumes.
Direct Commercial Real Estate Investment, Top 20 Cities, Q1 2018
Tokyo
New York
London
Hong Kong
Los Angeles
Shanghai
Washington DC
Chicago
Paris
Seoul
Munich
Silicon Valley
Toronto
Sydney
Seattle
Melbourne
Frankfurt Americas
EMEA
Phoenix
Asia Pacific
Atlanta
Dallas US$ billions
0 1 2 3 4 5 6 7 8 9 10
Source: JLL, April 2018
Investment activity at new first quarter record in Asia Pacific
Investment activity across the Asia Pacific region surprised on the upside in the first quarter of
2018, establishing a new record of US$40 billion, up 34% on the same quarter of 2017.
Cross-border investment activity accounted for 34% of total transaction volumes, with cross-
border investors remaining net purchasers during the quarter.
Foreign investors remain active in Japan
Transaction volumes in Japan reached US$13.9 billion in Q1 2018, up 23% year-on-year.
Investment activity was concentrated in Tokyo, with the prefecture accounting for 65% of the
national total and the greater Tokyo region comprising 85%.
15Investor activity in Australia concentrated in Sydney and Melbourne
Investment volumes in Australia came in at US$4.7 billion in Q1 2018, up 87% on the unusually
quiet Q1 2017. Capital continues to focus on the prime end of the market; however, there remains
limited opportunity to deploy in this segment of the market, leaving a lot of unsatisfied capital.
Activity was heavily concentrated in Sydney and Melbourne during the quarter, representing 86%
of total national investment volumes. Cross-border investors remain active on both the buy and
sell side, accounting for 33% of disposals and 36% of acquisitions.
More records for Greater China in Q1
Transaction volumes in mainland China amounted to US$8.5 billion in Q1 2018, up significantly
(+93%) on the same quarter last year and establishing a new Q1 record. The retail sector was
active throughout the quarter, representing 34% of total volumes. Portfolios accounted for 23% of
activity off the back of several large transactions.
Investment volumes in Hong Kong grew by 72% year-on-year in Q1 2018, to US$5.0 billion. Activity
levels were supported by several record-breaking en bloc office transactions outside of Central.
Notably, 18 King Wah Road in North Point was reportedly sold by Henderson Land to a PRC joint
venture consisting of China Create Capital and China Taiping for US$1.27 billion (or US$3,854 per
square foot), a record high in terms of the lump sum and unit price in Hong Kong East. In Central,
strata-titled offices continued to exchange hands at a record-breaking unit price as investors
remained upbeat about the core office submarket.
Direct Commercial Real Estate Investment – Quarterly Trends, 2007-2018
US$ billions
240 228 232
211 210 207
210 205 204
190
171 171
180 174 168
162 168 166
159 163
155 157
153
150 146 144
143 136
124
120 118 119
120 113 110 107 110 100 108
100 100
91
90
73
66 66 66 69
60
41 43
35
30
0
Q207
Q108
Q209
Q110
Q410
Q112
Q412
Q313
Q414
Q315
Q416
Q317
Q107
Q307
Q407
Q208
Q308
Q408
Q109
Q309
Q409
Q210
Q310
Q111
Q211
Q311
Q411
Q212
Q312
Q113
Q213
Q413
Q114
Q214
Q314
Q115
Q215
Q415
Q116
Q216
Q316
Q117
Q217
Q417
Q118
Americas EMEA Asia Pacific Rolling Four-Quarter Average
Source: JLL, April 2018
16Capital Values and Yields
Europe leads capital growth
Income growth continues to underpin capital appreciation, which grew by 6.7% from the previous
year for prime office assets across 30 major office markets.
Capital value growth has been strongest in Europe, led by the Benelux cities of Brussels (+28%) and
Amsterdam (+23.6%) where yield compression and robust rental growth has boosted capital
appreciation. Milan (+21.3%), Stockholm (+20.5%) and Berlin (+14.5%) have also registered
exceptional performances.
Capital growth for prime office assets in 2018 is expected to slow to around 4% for the full year, as
rental growth moderates and yields flatten.
Prime Office Yield Shift, Q1 2017–Q1 2018
Amsterdam Q4 2017 - Q1 2018
Berlin
Brussels Q1 2017 - Q4 2017
Europe
Frankfurt
London
Madrid
Milan
Moscow
Paris
Stockholm
Boston
Chicago
Americas
Los Angeles
New York
San Francisco
Toronto
Washington DC
Sao Paulo
Mexico City
Beijing
Delhi
Asia Pacific
Jakarta
Hong Kong
Mumbai
Seoul
Shanghai
Singapore
Sydney
Tokyo Basis point change
-125 -100 -75 -50 -25 0 25
Source: JLL, April 2018
17Prime Offices - Projected Change in Values, 2018
Rental Values Capital Values
10 - 20% Singapore Moscow, Amsterdam, Sao Paulo
Hong Kong, Brussels, Singapore
Sydney, Toronto, Sao Paulo, Hong Kong Milan, Sydney, Toronto, Berlin, Madrid
5 - 10% Moscow, Berlin, Amsterdam, Madrid
Brussels, Milan, Stockholm Shanghai, Stockholm, Dubai, Boston
Frankfurt, Dubai, Boston, Chicago, Los Angeles Chicago, Los Angeles, New York
0 - 5% New York, San Francisco, Washington DC San Francisco, Washington DC, Paris, Tokyo
Tokyo, Seoul, Paris, Shanghai, Delhi, London Seoul, Delhi, Frankfurt, Mumbai, London
0 - 5% Mumbai, Beijing, Mexico City Beijing, Mexico City
5 - 10% Jakarta Jakarta
New York – Midtown, London – West End, Paris – CBD, Dubai – DIFC. Nominal rates in local currency.
Source: JLL, April 2018
Prime Offices – Capital Value Change, Q1 2017–Q1 2018
Brussels
Amsterdam
Hong Kong
Milan
Stockholm
Sao Paulo
Berlin
Singapore
Sydney
Frankfurt
Madrid
Los Angeles
Toronto
Beijing
Moscow
San Francisco
Mumbai
New York
Delhi
Tokyo
Chicago
Shanghai
Washington DC
London
Dubai
Paris Americas
Boston EMEA
Seoul Asia Pacific
Mexico City
Jakarta % change
-10 -5 0 5 10 15 20 25 30
Notional capital values based on rents and yields for Grade A space in CBD or equivalent. In local currency.
Source: JLL, April 2018
18Corporate Occupiers
Global corporate occupier activity registered a strong start to 2018, despite signs of slowing
absorption in the U.S. Corporate location expansions and the accelerating co-working sector
accounted for much of the activity across the globe, and corporate sentiment remains positive
moving into the second quarter as firms continue to battle for top talent and high-quality space.
Corporate occupiers sharpen their focus on location strategy as talent availability
tightens
The tight availability of labour is influencing corporate occupiers’ location strategies. In the U.S.,
Amazon and dozens of other firms are considering major moves and expansions in markets with
affordable but high-quality talent. However, while tech firms are engaged in notable site selection
and expansion activity in select markets, the U.S. recorded its lowest first quarter of net absorption
since 2010, at 3.7 million square feet, as talent shortages become more acute. Technology firms in
Asia Pacific are also continuing to expand, with many shifting toward multiple operations hubs in
lieu of a heavy concentration in one market as they seek talent and space. Aggregate leasing
volumes for the top three tier one cities in Mainland China were up 60% in Q1 2018, with the
technology sector propping up much of the demand in Beijing in particular.
Co-working activity accelerates as the world of work changes
Employee attraction and retention are increasingly playing a key role in corporate occupiers’ site
selection. This requires firms to accommodate their employees’ work and life preferences to
improve productivity and well-being, with office and building amenities reaching a higher level of
quality than in prior cycles. A primary driver for this phenomenon is the acceleration of co-working
and shared space. In Asia Pacific, leasing volumes from co-working operators rose some 50% year-
on-year in the first quarter, boosted by WeWork’s recent acquisition of Naked Hub, one of the
region’s largest co-working operators. In the U.S., WeWork executed 33 leases during Q1, while
Spaces signed 34 leases totalling 1.3 million square feet in the same period.
In addition to the growth seen in the U.S. and Asia Pacific, the co-working and flexible office space
sector continues to grow in Europe. The new and dynamic workforce and alternative models of
employment associated with the ‘gig’ economy account for 30% of the workforce in some
European markets, and these trends are expected to continue throughout 2018 as firms adopt co-
working space in their real estate strategies to compete for talent.
19Global Office Market Conditions Matrix*, 2018-2020
2018 2019 2020 2018 2019 2020 2018 2019 2020
Chicago Brussels Beijing
Los Angeles Frankfurt Hong Kong
New York London Mumbai
(West End)
San Francisco Madrid Shanghai
Toronto Moscow Singapore
(CBD Overall)
Washington DC Paris Sydney
Mexico City Stockholm Tokyo
(CBD 5-kus)
Tenant Favourable
Sao Paulo Dubai
Neutral Market
Landlord Favourable
*Relates to conditions in the overall office market of a city. Conditions for prime CBD space may differ from the above.
Source: JLL, April 2018
20Office Markets
Office Demand Dynamics
Q1 leasing volumes at highest level since 2008
The strong leasing conditions that characterised the global office markets during the latter part of
2017 have continued into the first few months of 2018. At 10 million square metres (across 96
markets), Q1 2018 saw the highest first quarter leasing volumes since 2008, and 7% higher than a
year ago.
• Asia Pacific experienced the sharpest rise in leasing activity, registering one of the highest
quarterly volumes on record.
• The European office leasing markets have gone from strength to strength, with volumes
increasing 6% from a year ago.
• In the U.S., leasing activity is solid but occupancy growth was soft to begin the year.
The positive Q1 results put the global leasing market on track for another robust year, although
volumes are unlikely to exceed last year’s impressive tally, with a modest 2% fall projected for the
full year.
Flexible workspace operators were key sources of demand in Asia Pacific
Overall leasing volumes increased 12% year-on-year in Asia Pacific in Q1 2018. Healthy, broad-
based occupational demand was reported in most markets. Delhi remained atop the regional
leasing volumes table, while sizeable volumes were also recorded in Bengaluru, Hong Kong and
Beijing:
• Aggregate gross leasing for the three China Tier 1 cities was up 60% year-on-year, driven by
increased activity in Beijing where recent completions relieved pent-up demand. In
Shanghai, co-working operators and financial companies were key sources of demand.
• Strong performances by Japanese corporates and a tight labour market supported healthy
demand in Tokyo; however, leasing volumes were down from a year earlier due to lower
availability in upcoming supply.
• Gross leasing for the four India Tier 1 cities was generally stable. Demand for Mumbai
offices was driven by financials and professional services, while technology firms were
active in Delhi and Bengaluru.
• In Australia, gross leasing volumes declined by 8% year-on-year. Despite firm demand in
Melbourne, low vacancy is continuing to limit opportunities for occupiers and, in turn, deal
flow. Demand for CBD offices in Sydney remains strong, despite fast rental growth.
• New leasing was up more than 50% year-on-year in Hong Kong. Decentralisation
continues to be a mainstay of leasing activity, with several large MNCs relocating and
consolidating operations in Hong Kong East and Kowloon East.
21• A wide range of industries drove an improvement in Singapore’s leasing market, including
technology and professional services.
JLL is upbeat that the positive economic prospects for the Asia Pacific region will continue to
underpin healthy leasing volumes during 2018. Traditional occupier segments such as financial
services and technology will remain key pillars of demand, and flexible space operators will be
increasingly active.
Europe registers strongest Q1 leasing volume since 2007
European office take-up totalled 3.1 million square metres in Q1 2018, a 6% increase year-on-year
and 23% above the 10-year Q1 average. This robust performance follows a record Q4 2017 and
full-year 2017, underlining the strength of the European office occupier market:
• The strong sentiment witnessed in Paris over the past 18 months continued at the start of
the year, with occupier activity reaching 742,000 square metres (+13%) - the highest Q1
volume since 2006.
• London continued to outperform expectations, with take-up increasing by 8% year-on-
year in Q1. While there was a slight drop in the City sub-market (-4%), the West End
submarket posted another solid result (+10%), underpinned by key deals in the technology
and professional services sectors.
• In Germany, the Big 5 office markets saw more subdued demand compared to the robust
Q1 2017, with take-up falling by 16% in Q1 2018. While demand in Frankfurt goes from
strength to strength (+31%), occupier activity in Berlin (-17%), Dusseldorf (-34%), Hamburg
(-41%) and Munich (-12%) tailed off due to the lack of suitable supply.
• Central and Eastern Europe recorded an active Q1 (+73%), led by strong results in Moscow
(+122%), Prague (+53%), Warsaw (+45%) and Budapest (+19%).
• Other notable Q1 performances included Dublin (+65%) and Madrid (+24%).
Demand across Europe continues to build, and we have increased our full-year 2018 take-up
forecast to around 13 million square metres - below the record 2017 result but still 16% above the
10-year average.
U.S. absorption off to a slow start in 2018
The U.S. office market demonstrated further signs of movement into a more balanced, slower-
growth phase of the real estate cycle in the first quarter of 2018. Both new construction and
second-generation space options are expanding, giving tenants across a variety of industries,
geographies and price ranges newfound opportunities.
As the market remains near peak employment and talent shortages become even more acute in an
environment of rising supply, occupancy growth continues to cool. During Q1, net absorption
nationally totalled just 340,000 square metres annualised. This rate of absorption, if maintained
through the remainder of the year, would result in the slowest year of the expansionary cycle since
2010.
22Absorption should recover to a degree as net new demand from creative and knowledge-intensive
tenants pre-leasing new space moves into delivered assets, but it will remain below previous
years.
Shift to balanced U.S. office market over next year
Despite a relatively slow first quarter in terms of occupancy growth, U.S. fundamentals remain
highly positive looking ahead to the rest of 2018. New supply will enable tenants to be more active
and flexible after years of constraints, while a short-term boost in rental growth will be countered
by more balanced leverage dynamics and an emphasis on landlord-led action.
Global Office Demand – Annual Gross Leasing Volumes, 2007-2018
45
millions sq m
42
39
Projection
36
33
30
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
24 markets in Europe; 50 markets in the U.S.; 22 markets in Asia Pacific
Source: JLL, April 2018
23Office Supply Trends
A further unexpected fall in global office vacancy rates
Once again, global office vacancy has defied expectations, with the aggregate vacancy rate falling
by another 20 bps during Q1 to stand at 11.7%, the tightest of the current cycle. Moreover, in
contrast to previous quarters, all three global regions registered a decline in vacancy during Q1,
despite a rise in new deliveries.
Peak in global development cycle
The global office development cycle will peak this year at 17.2 million square metres, but there are
marked differences by region:
• The U.S. market has already passed its peak development, with new completions expected
to decline progressively through to 2020.
• In Asia Pacific, development will peak this year, with high levels of completions projected
in Shanghai, Delhi, Bengaluru, Mumbai and Tokyo.
• In Europe, development is now gearing up, with completions likely to peak in 2020.
With the delivery of new offices expected at a relatively elevated level during 2018, vacancy is
forecast to edge up to over 12% by the end of the year.
European office vacancy tightens further
Robust leasing volumes continue to put pressure on available space, with the European office
vacancy rate in Q1 2018 tightening by 30 bps to 7.0% - the lowest level since Q2 2008.
• The largest falls were recorded in Stockholm (-160 bps to 6.1%), Warsaw (-90 bps to 10.8%)
and Dublin (-80 bps to 7.1%).
• Supply conditions (with vacancy rates below 5%) tightened further in most German office
markets. Stuttgart now has the lowest vacancy rate in Europe at just 2.4%, followed by
Berlin and Munich at 3.4%.
• London West End and City reported further declines to 4.0% and 4.7% respectively in Q1
2018.
Looking ahead, we expect vacancy to stabilise as development picks up in 2018 and 2019. At 5.1
million square metres in 2018, development activity will be more extensive this year than in 2017,
with the lion’s share of the increase centred on Paris, London, Berlin, Munich and Dublin.
Nevertheless, the pipeline remains subdued compared to previous cycles, and completions of
around 5.1 million square metres and 6.0 million square metres in 2018 and 2019 respectively are
unlikely to address the supply shortages in many markets.
24U.S. vacancy didn’t budge in Q1, but set to rise steadily
At 14.8%, the U.S. vacancy rate showed no meaningful change during the first quarter, but it
remains on an upward trend with the delivery of new product set to accelerate through year-end
2018 and the first half of 2019.
However, this lack of change masks underlying shifts in performance at the asset class and
geography level:
• CBD Class A vacancy, dropped by 20 bps to 11.9%, due to continued demand from tenants
and with higher levels of pre-leasing for new supply.
• Suburban Class A vacancy rose by 20 bps to 16.6%.
U.S. construction activity will decline as developers and lenders stay cautious
Construction jumped back above the 100 million square foot mark during the first quarter as a
result of a select few large starts. Development activity, however, is highly concentrated in a few
cities: New York, Washington DC and Chicago account for one-third of all construction underway in
the United States despite only representing roughly one-quarter of national office space. Further
large-scale deliveries will exacerbate potential oversupply in these markets, which are dominated
by rightsizing and consolidating industries.
In primary markets outside of Boston, Los Angeles and Seattle, where non pre-leased speculative
construction remains muted, a slew of new supply will open up blocks in commodity Class A
product from relocating tenants, leading to a cascading ‘flight to quality’ and a downward
movement in net effective rents for cost-conscious tenants in lower-quality space.
Markets pause in Canada at outset of 2018
In Canada, the office market is positioned advantageously relative to the U.S. as deliveries have
wound down and the general trend in absorption has been strong. However, conditions were flat
to begin the year with national net absorption slightly negative in Q1, as Calgary, Ottawa and
Montreal all recorded occupancy losses. Toronto and Vancouver, however, performed well during
the quarter. Toronto has been one of the strongest major markets in the region, with a total
overall vacancy rate below 9% - and still falling. Meanwhile, new supply growth is set to remain at
low levels in the near term with a combined 2018-2019 new inventory addition of little more than
1% of total stock.
New deliveries in Asia Pacific rise by 15% year-on-year
High levels of completions in Q1, notably in Shanghai, Mumbai and Jakarta, have contributed to a
15% growth in new deliveries compared to a year ago.
The regional vacancy rate continued to edge down to 10.9%, despite elevated completions.
Beijing, Singapore and Melbourne saw among the largest drops over the quarter. With a healthy
level of new supply projected especially in 2018, regional vacancy is anticipated to increase
marginally, led by higher rates in markets such as Shanghai, Manila and Jakarta which are
expecting new waves of supply.
25Global Office Completions, 2000-2020
U.S. Europe Asia Pacific
millions sq m
20
15 Average
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(F) (F) (F)
24 markets in Europe; 25 markets in Asia Pacific; 50 markets in the U.S. Asia relates to Grade A only.
Source: JLL, April 2018
Office Supply Pipeline – Major Markets, 2018-2019
Jakarta
Shanghai
Beijing
Delhi
Mexico City
Mumbai
Tokyo
San Francisco
Seoul
London
Dubai
Hong Kong
Amsterdam
Berlin
Sao Paulo
Washington DC
Paris
Moscow
New York
Frankfurt
Sydney
Singapore
Stockholm
Brussels
Milan
Chicago
Boston 2018 2019
Madrid
Toronto Completions as % of existing stock
Los Angeles
0 5 10 15 20 25 30 35 40
Covers all office submarkets in each city. Tokyo – CBD - 5 kus
Source: JLL, April 2018
26Office Vacancy Rates in Major Markets, Q1 2018
Global
11.7%
40% Quarterly movement
Americas Europe Asia Pacific Increased
35% 14.8% 7.0% 10.9% Decreased
Stable
30%
25%
20%
15%
10%
5%
0%
Mexico City
Hong Kong
Milan
Paris
Delhi
Seoul
Berlin
Amsterdam
Madrid
Tokyo
Los Angeles
London
Toronto
Boston
Beijing
Sydney
Jakarta
Mumbai
Chicago
Moscow
Frankfurt
New York
Washington DC
Shanghai
Brussels
San Francisco
Sao Paulo
Singapore
Stockholm
Regional vacancy rates based on 62 markets in the Americas, 24 markets in Europe and 25 markets in Asia Pacific.
Covers all office submarkets in each city. All grades except Asia and Latin America (Grade A only). Tokyo relates to CBD – 5 kus.
Source: JLL, April 2018
Global and Regional Office Vacancy Rates, 2009-2018
Vacancy Rate (%)
19
17.9%
17
15 14.4% 14.8% Americas
13
11.9%
11.7% GLOBAL
11 10.9% Asia Pacific
10.3%
9
7.0% Europe
7
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
62 markets in the Americas; 24 markets in Europe; 25 markets in Asia Pacific. All grades except Asia and Latin America (Grade A only).
Source: JLL, April 2018
27Office Rental Trends
Annual prime rental growth is close to 4%
Rental growth for prime offices across 30 major markets continues to accelerate and is now
running at 3.8% year-on-year, the strongest rate since Q2 2016.
While the highest rental growth among the major office markets has been recorded in Sydney
(+17.4%) and Singapore (+14.5%), most of the world’s top rental performers are clustered in
Continental Europe, with Brussels (+14.5%), Stockholm (+12.5%), Berlin (+10.7%), Milan (+10.6%),
Madrid (+8.5%) and Amsterdam (+8.1%) leading the pack.
For the full-year 2018, rental growth is projected to average close to 3%, with top performances
anticipated in Singapore and Sydney. Other stand-outs in 2018 are likely to include Toronto
(which should be the strongest of primary office markets in the Americas), Sao Paulo, Moscow and
Berlin.
European office rents continue to accelerate
The European Office Rental Index increased by 1.0% quarter-on-quarter in Q1 2018. In Western
Europe, rental growth reached 4.7% year-on-year, reflecting the supply-demand imbalances which
persist in many markets across the region:
• Brussels (+5.0% quarter-on-quarter) led the way in Q1, having benefitted from robust
occupier demand.
• In Southern Europe, Milan (+4.5%), Barcelona (+3.2%) and Madrid (+2.4%) posted strong
rental growth in the first quarter as a result of tightening supply and solid demand,
particularly at the Grade A end of the market.
• In London, prime rents again were unchanged in Q1 as the occupier market stabilises. In
the West End submarket, we forecast prime rents to increase in 2019, although we predict
a slight drop in the City submarket next year.
• In Paris, prime rents held firm at the start of 2018 and the immediate outlook is for rental
growth of around 1.9% in 2018.
• In Central and Eastern Europe (CEE), prime rents were unchanged in Q1 following increases
in Prague and Budapest in 2017. In Warsaw and Moscow, prime rents appear to have now
bottomed out after steadily falling over the past few years.
At 2.5%, 2018 European office rental growth should outstrip the five-year average (2.2%).
However, there is potential for above-average supply-led rental growth in Europe’s tightest
markets, including Amsterdam, Berlin, Munich, Stuttgart, Stockholm and Prague.
28Rental growth in U.S. to be strong throughout 2018, before stabilising and correcting
New supply, coupled with persistent demand in key asset classes and submarkets, is leading
average U.S. asking rents higher. Direct asking rents posted overall annual gains of 1.6% in the
first quarter.
• Suburban rents rose by a strong 2.7%, where the lower level of pre-leasing in speculative
developments and larger volume of completions are disproportionately boosting rents.
• On the other hand, CBD asking rents registered a slight decrease of 0.2% in Q1. Top-tier
blocks are being taken off the market and commodity blocks coming back on, in many
cases as discounted sublease space. As a result of changing supply-and-demand
dynamics, landlords across the board are raising concessions at or faster than asking rent
growth, in many cases leading to flat or even declining effective rents.
Rents recovering in Brazil, but under pressure in Mexico
Brazil should begin to see more improvement to its office sector over the course of 2018 as the
economic expansion becomes more solidified, and confidence among tenants deepens. Rental
growth has already returned to the Sao Paulo market, and this is set to continue and likely
accelerate through 2018 as tenant demand for space increases.
Meanwhile, the supply pipeline in Mexico City will continue to be a challenge going forward as it
remains at historically high levels. As a result, vacancy is expected to once again edge upwards
with modest declines in rental rates anticipated in 2018.
Asia Pacific rents advance further
Asia Pacific rents advanced 1.4% quarter-on-quarter in Q1:
• Robust demand saw Melbourne and Sydney CBD rents increase further.
• Rental trends in China were mixed again with tight vacancy supporting rental uplifts in
Hong Kong. Tech demand helped drive Beijing rental growth, while supply pressure held
Shanghai rents flat.
• Tight vacancy and high-quality supply contributed to moderate growth in Tokyo rents.
• Singapore rents, helped by improved business sentiment and confidence among
landlords, continued to increase, albeit at a more moderate pace than Q4 2017.
• In Jakarta, rents remain under pressure despite stronger demand as new supply volumes
continued to outpace absorption.
29Prime Offices – Rental Change, Q1 2017-Q1 2018
Sydney
Brussels
Singapore
Stockholm
Berlin
Milan
Madrid
Amsterdam
Chicago
Hong Kong
Los Angeles
Toronto
Sao Paulo
Frankfurt
San Francisco
New York
Mumbai
Delhi
Tokyo
Beijing
Boston
Washington DC
London
Dubai
Moscow
Paris Americas
Shanghai EMEA
Seoul Asia Pacific
Mexico City
Jakarta % change
-10 -5 0 5 10 15 20
Based on rents for Grade A space in CBD or equivalent. In local currency.
Source: JLL, April 2018
Prime Offices – Rental Change, 2010-2018
10
8.3%
8
7.2%
Rental change (y-o-y %)
6
3.9%
4 3.3% 3.3%
3.1% 3.0%
2.7% 2.7%
2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018F
Prime office rental growth: unweighted average of 30 major markets.
Source: JLL, April 2018
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