Demand for office space is recovering quickly, but occupiers are increasingly focused on higher-quality assets offering strong flexibility, technology and wellness features.
Top of Mind
There is a lingering worry that setbacks on virus control, more highly transmissible variants and vaccination progress may delay the expected H2 recovery in some markets.
In the medium term, economic growth will support office-using employment growth, which will boost leasing demand across all three regions. CBRE expects office vacancy rates to rise further this year before dropping in 2022. Rents will continue to fall before a return of positive net absorption at the end of 2022. In EMEA and the U.S., occupiers are targeting Q3 2021 to return to the office. In Asia-Pacific, many markets have resumed office-based working, but some are being hit by a new wave of COVID infections that is impacting return-to-work plans.
After a 35% drop in global leasing activity last year, there are early signs of improvement in all regions. APAC and EMEA are expected to rebound the fastest, where key markets across Mainland China and parts of Germany have seen a slight pick-up in leasing activity since Q1 2021. The U.S. lags, as the impact of the recession and remote working continues to hang over some of the larger markets. CBRE expects approximately 10% year-over-year growth in global office leasing activity this year.
The technology sector, a primary driver of office demand, will return to high levels of activity this year. Early signs of this are evident in the San Francisco Bay Area. In the U.S. and EMEA, office demand will be primarily driven by the life sciences, manufacturing, energy and technology sectors into 2022. In APAC, fintech and insurance companies are emerging as strong drivers of expansion demand, while the technology sector continues to grow.
CBRE is closely watching the impact of more flexible working patterns. Strong office-using employment growth is expected, but its relationship to office demand is changing in terms of the quantity and type of space required as occupiers determine their future working practices.
The U.S. office vacancy rate is forecast to rise by more than 2 percentage points to a high of 18.5% by mid-2022. Vacancy rates across most of EMEA and APAC are expected to peak this year before dropping by up to 1 percentage point in 2022.
Overall vacancy rates conceal marked differences between city submarkets, where high availability of lower-quality space contrasts with limited availability of prime space. In Shanghai, for example, the CBD office vacancy rate is 11.5 percentage points lower than the overall vacancy rate. Much of this difference is the direct result of occupiers reconfiguring their office footprints by disposing of lower-quality space that no longer meets strategic needs.
New development completions eased in 2020 but are expected to rebound this year. A total of 214.7 million sq. ft. is scheduled for completion globally, representing a year-over-year increase of 43%. Most of the space scheduled for completion over the next two years is pre-committed. In EMEA alone, 53% of the expected completions total in 2021 and 2022 is already preleased.
Figure 8: Office Development Completions
Source: CBRE Research, Q2 2021.
Moderate decreases in global rents are continuing. CBRE’s Global Office Rent Index is 1.6% lower than a year ago. However, global prime rents have remained relatively resilient, with very few markets recording falling prime rents since Q4 2020. Occupiers are targeting high-quality assets in prime locations, thereby accelerating the divergence between prime- and secondary-asset rents.
In the U.S., a surge in pre-COVID completions and short-term negative demand are driving rents lower and concessions higher, particularly in downtown submarkets. The U.S. average asking rent fell by 3.1% year-over-year in Q1 2021 and is expected to continue falling through mid-2022. Rents across Europe will stabilize in 2021 before growth resumes in 2022; there are areas of relative strength, particularly regional German cities that are expected to see up to 4% rent growth in 2021. In Asia-Pacific, recovery of rents remains uneven given resurgences of COVID-19 in certain countries. Nevertheless, the decline in overall Asia-Pacific rents is diminishing. Taipei and Seoul are among the stronger markets, where rent has been stable despite the pandemic.
Figure 9: Forecast Rent Growth, 2021 & 2022
Source: CBRE Research, Q2 2021.
CBRE expects the following occupier trends for the rest of 2021:
- Protocols will be established for a return to office-based work, including employee wellness support.
- While there will be less dependence on the office, the prospective scale of office footprint reductions is diminishing in line with an increase in the desire of employees to return to office-based work.
- In Asia-Pacific, however, 66% of occupiers want to increase their office portfolio in the next three years, while 60% of EMEA occupiers expect their footprints to at least remain the same, according to a recent survey conducted by CBRE Research.
- Demand for flexible office space will increase substantially to allow for penalty-free contraction/expansion.
- Office space will be reconfigured to support the changing needs of employees for a more collaborative environment and increased use of technology.
Figure 10: Occupier Survey: Which of the following best describes your long-term expectations for the total size of your portfolio over the next three years?
Source: CBRE Research, April 2021.
Note: Results are based on respondents with 10,000+ employees globally.
LIFE SCIENCES INDUSTRY POISED FOR EXPLOSIVE GROWTH
The life sciences industry’s momentous growth over the past several years intensified during the COVID-19 pandemic, with increased demand for laboratory/R&D space that is expected to continue over the next year.
In the U.S., public and private funding to the life sciences industry continues to grow. Venture capital investments skyrocketed in Q1 2021 and employment rebounded to new records. Consequently, lab rents and demand for space are at their highest levels in nearly all U.S. life sciences clusters. Trends in the premier markets of Boston-Cambridge, the San Francisco Bay Area and San Diego remain decidedly favorable, and growth is spreading to new emerging clusters.
There is also significant momentum in APAC and EMEA. Life sciences clusters across Western Europe are growing, fueled by a combination of high levels of government health spending, strong capital-raising by biotech companies, strengthening links between academic institutions and commercial entrepreneurs and a continuing shift toward high-contact urban life sciences clusters. Existing strong clusters in London, Paris and Munich are expected to see further growth, with smaller clusters in Oslo and Geneva also benefitting.
Many Asia-Pacific countries have identified life sciences as strategically important and introduced government policies to facilitate more development. China’s 14th five-year plan and its “Healthy China 2030” initiative both identified life sciences as one of seven strategic growth industries.