Global prime office markets remain open for business as occupiers search for top-quality spaces in cities around the world
Meet the new markets
Global prime office markets remain open for business as occupiers search for top-quality spaces in cities around the world. While this flight to prime has created bifurcated office markets in many locations, landlords of top-tier office spaces remain cautiously optimistic. Higher costs are being offset by rising concessions in many locations as landlords look to retain existing tenants and attract new occupiers.
For this issue of Savills Prime Office Cost (SPOC) insights, we spoke with researchers and tenant representation professionals in our five new markets – Melbourne, Milan, Miami, Seattle, and Zurich – to understand the key trends from their local office markets and what occupiers looking at these locations can expect.
Quarterly highlights
Prime office markets globally are continuing to see increasing costs on average, with net effective costs across the SPOC markets increasing by 0.8% in Q3 2023. This average figure is largely being driven by rising fit-out costs in the United States and hides significant amounts of regional variation. On average, fit-out costs increased by 3.2%, with changes in the US accounting for the majority of the increase. Annual gross rents, on the other hand, have remained in positive territory, increasing by 0.9% over the quarter as occupiers continue to favour best-in-class prime office space.
US office markets continue to see rising costs and rising vacancy rates, with average availability rates increasing by 90 bps since year-end 2022. Across the region, total net effective costs to occupiers have declined by -0.7% during the third quarter. Fit-out costs remain elevated across the country, but rising concessions mitigate increasing costs in most markets. Miami stands in contrast, experiencing strong demand coupled with limited new supply, resulting in a cost increase of 10.7% in Q3 2023. Here, office fit-out costs have surged due to a shortage of materials and labour in South Florida. Average gross rents across North America are also still rising, up 0.5% in the past six months for prime stock, but fierce competition for tenants and a reluctance to reduce rents is driving concessions higher. The ongoing flight to quality is also helping to support the top end of the market.
Tenant demand in Europe is being supported by the professional and business services sector, offsetting some of the decline from tech tenants and keeping vacancy rates steady on average. Across the EMEA region, net effective costs rose by an average of 2.1% for the third quarter, driven by the flight to prime and desire for occupiers to take up green-certified office spaces. Annual gross rents have increased by 1.1% on the quarter, largely driven by rises in Milan, Frankfurt, and Madrid. Dubai is also continuing to see new companies register to open offices in the city, with rising demand contributing to annual gross rents and net effective cost increases of 1.2% and 2.0%, respectively, in the third quarter.
Office markets in Asia Pacific are continuing to remain the most stable of the regional occupational markets. However, total net effective costs are down -0.1% on the quarter for the region as a whole. The majority of the falls are being driven by declines in net effective costs in China and Hong Kong, where rising vacancy rates, up 120 bps and 60 bps, respectively, as a result of new supply are putting downward pressure on rents, which are down -0.7% on the quarter and -1.4% for the year.
Methodology
The Savills Prime Office Cost (SPOC) Index presents a quarterly snapshot of occupancy costs for prime office space throughout the world, as provided by our expert, local tenant representation professionals and researchers.
The adjusted annual all-in occupancy cost represents real-time transaction terms for 20,000 sq ft (2,000 sq m) of usable space based on a basket of top 5 most expensive properties to calculate the ultra-prime average. The North American markets use a sample of very high rent threshold buildings (leasing occurring at the highest end of the market).
All costs are reported in a standardised format of USD per sq ft of usable space per annum at a fixed exchange rate to account for variations in currency, reflect local payment protocols, and adjust for measurement practices across the globe. We have also factored in the credit value to the tenant generated from abated rent and the cost associated with fitting out the premises in order to provide an ’all in’ total occupancy cost in USD per usable square foot.
The fit-out costs were gathered from local Savills teams assuming the leasing scenario described above, plus the following: i) 30% cellularisation with the remainder of space open plan, ii) construction and cabling only (no furniture or professional fees).
Market insights: Meet the new locations
Savills Prime Office Costs (SPOC) is expanding from 30 to 35 markets this quarter. We have spoken to the local teams to provide insights into their markets and what makes them stand out from the rest.
Melbourne – Commentary from Chris Naughtin, Savills Australia
- What are the major sectors/industries that take prime office space in your market?
Financial services, professional services, and public administration are the major industries that occupy office space in the Melbourne CBD, typically accounting for over 80% of total take-up. - Who are the key occupiers?
Major tenants include Australia’s largest banks such as ANZ and NAB, the four big accounting firms, major industry superannuation funds like AustralianSuper, and state and federal government agencies. - What are the key trends you’ve seen in the office market this year / since the pandemic?
Like other major office markets in Australia and globally, the Melbourne CBD has seen a flight to quality in the wake of the pandemic. Demand for prime office space in well-located areas has been relatively strong while take-up of secondary space has declined sharply. Melbourne has been slower to emerge from the pandemic, with the recovery in daily office occupancy lagging other Australian cities, reflecting the city’s long-lasting Covid restrictions. - What is one fact that occupiers looking at moving into your market should know?
Subdued overall demand for office space, coupled with a large increase in supply in recent years have seen Melbourne’s vacancy rate rise sharply. The overall CBD vacancy rate has increased from 3.2% at the end of 2019 to 15.0% currently, the third highest of the major Australian CBD markets, and above the national CBD average of 12.8%. A key driver of the rise in vacancy was a wave of new supply in 2020 and 2021 (equivalent to 11% of total office stock), the highest level since the early 1990s.
.jpg)
Melbourne
Miami – Commentary from Michael Soto, Savills US
- What are the major sectors/industries that take prime office space in your market?
The key sectors in Miami tend to be from financial services, professional services, legal firms, Technology, Advertising, Media & Information (TAMI), and the government sector. - Who are the key occupiers?
The biggest occupiers tend to be large national banks, AmLaw 100 law firms, Big 4 accounting firms, government agencies - What are the key trends you’ve seen in the office market this year / since the pandemic?
In South Florida, the office market has been booming in submarkets such as Brickell as New York City-based financial services and law firms have opened new offices recently. On the other hand, construction and labour costs have increased dramatically and it costs more than ever to build out office space in the Miami area. Across the US, we have seen high availability levels, high landlord concessions, lower leasing activity, and a pullback in the technology sector. - What is one fact that occupiers looking at moving into your market should know?
Higher-quality spaces have been in high demand from occupiers as they try to encourage employees back into the office. There is an abundance of office space available; however, pricing remains very high at the top end of the office market as occupiers view their spaces as a forum for collaboration and mentorship.
.jpg)
Miami
Milan – Commentary from Elena Zanlorenzi, Savills Italy
- What are the major sectors/industries that take prime office space in your market?
The first semester of 2023 showed professional and business services as the heavier occupiers of the Milanese market with a 26% share, while banking, insurance and finance picked up after last semester’s stall, adding up to a 22% share of leased space so far. - Who are the key occupiers?
The biggest transaction so far took place in the Citylife district, where Nexi secured some 30,000 sq m (circa 320,000 sq ft) in the new Citywave building, a solid 17% on total take-up for the first semester of 2023. Doctolib came second best, with more than 6,000 sq m (circa 65,000 sq ft) in CBD Porta Nuova, weighting 4% on total take-up. - What are the key trends you’ve seen in the office market this year / since the pandemic?
Since the pandemic, an increased number of occupiers are choosing to sublet unused spaces in their offices, and as a result, sublease activity has gone up steadily since 2020. This year has already broken the record for sublet space, with more than 27,000 sq m (circa 290,000 sq ft) sublet in the first six months alone. This trend goes hand in hand with a reduction in average size of offices: with hybrid and remote working being increasingly used as a benefit for talent retention. With energy costs on the rise again, rationalising office spaces to cut costs seems to be a trending strategy among occupiers, with the share of spaces above 1,000 sq m (circa 11,000 sq ft) progressively decreasing on total take-up since 2019. Grade A and certified green buildings are gaining increasing traction on total take-up, accounting for a solid 73% in the first half of 2023. - What is one fact that occupiers looking at moving into your market should know?
Availability in both CBDs is currently very low for every grade: the market moves very fast, especially for Grade A assets, and demands high rents. With fewer spaces available, we’ve been seeing a rise in pre-lets and sub-leases, and time to rent is getting shorter.
.jpg)
Milan
Seattle – Commentary from Michael Soto, Savills US
- What are the major sectors/industries that take prime office space in your market?
Seattle sees a large presence of Technology, Advertising, Media & Information (TAMI), as well as from financial services, professional services, legal firms, and government offices. - Who are the key occupiers?
There are quite a few TAMI firms, such as Amazon, as well as AmLaw 100 law firms, large national banks, and Big 4 accounting firms, along with local, state, and federal agencies occupying space in Seattle. - What are the key trends you’ve seen in the office market this year / since the pandemic?
The Seattle/Puget Sound office leasing has slowed due to the pullback from the technology sector over the past 18–24 months. Due to concerns about a decline in safety and the quality of life in Seattle proper, we expect to see more office occupier migration eastwards across Lake Washington into Bellevue and to a lesser extent, Redmond and Kirkland. - What is one fact that occupiers looking at moving into your market should know?
There is an abundance of office space available; however, pricing remains very high at the top end of the office market. With lower demand, landlords have continued to increase concessions to historic highs to attract and retain tenants.
.jpg)
Seattle
Zurich – Commentary from Andrea Kull, H&B Real Estate AG
- What are the major sectors/industries that take prime office space in your market?
The major sectors that take prime office space in the CBD of Zurich are financial industry (banking, insurance, wealth management), family offices, legal advisors, IT, education and co-working spaces. - Who are the key occupiers?
The key occupiers of the above-mentioned sectors are UBS, ZKB, private banks, Zurich Versicherung (Zurich Insurance), Swiss Life, Swiss Re, Google and international law companies. - What are the key trends you’ve seen in the office market this year / since the pandemic?
From our point of view, the three most noticeable trends are slightly increased rents and demand, a strong expansion of co-working spaces and general uncertainty due to take over of Credit Suisse by UBS. - What is one fact that occupiers looking at moving into your market should know? The CBD in Zurich attracts with its excellent micro and macro qualities. Foreign tenants who want to rent in Zurich can assume a high political stability and a strong currency and stable outlook.
.jpg)
Zurich