Contrasting Aussie Fortunes

Average global occupancy costs increase by just 1% to US$7,495 per workstation during 2012

SYDNEY: DTZ, a UGL company, has released its annual ‘Global Occupancy Costs - Offices’ (GOCO) survey analysing the cost for companies to provide office space for their workers across the globe. North Asia was identified as the fastest growing region in the report, with occupancy costs increasing 6.3% during 2012, outstripping the global average increase of 1%. This result was driven largely by cost growth in Chinese cities.

The 16th annual GOCO report highlights significant regional differences – while some markets saw sustained growth, others such as the US experienced weaker levels of demand due to economic and political uncertainty.

DTZ’s report analyses the main components of occupancy costs per workstation across 126 business districts in 49 countries across the globe, ranking each location based on costs per workstation per annum. It includes rents and outgoings, such as maintenance costs and property tax, and takes into account variability of space utilisation standards by measuring costs on a per workstation basis rather than just per square metre.

In Australia, Perth (10%) and Brisbane (5.6%) showed an increase in rental costs over 2012, well above the 2.7% average for the South-Asia region. In contrast, rental growth in the financial services oriented cities of Sydney and Melbourne was much more muted. These two markets, however, both exceeded peers Singapore and Hong Kong, where rental costs decreased by 4.1% and 12% respectively over the year.

Dominic Brown, head of South Asia Research said the impact of the multi-speed economy on the cost of office rental growth in Australia was clear, with the resources-based cities of Brisbane and Perth experiencing greater increases in occupancy costs than financial services orientated cities Sydney and Melbourne.

“Looking forward, opportunities to reduce rental costs are limited, with all Australian markets forecast to show rental increases over the next two years. Melbourne is currently experiencing a period of weaker tenant demand at a time of strong supply, and therefore is forecast to experience the smallest increase in rental costs at 2.3% per annum over 2012-14. Perth on the other hand is expected to witness stronger rental growth over the forecast period as the result of extremely limited near-term supply,” Mr Brown said.

The Global Market

Globally, the United States offered occupiers the greatest opportunities to reduce their overheads in 2012, with occupancy costs per workstation falling by 10.9%. This was driven by an 11.8% decrease in space utilisation – the amount of space each worker is allocated – with the biggest decreases recorded in Washington DC (-17%) and Los Angeles (-14%). Even with the move to greater space efficiency, the US still has the most space per employee on average.

While growth was recorded in Central & South America (0.6%), Europe (0.9%) and Middle East & Africa (1.4%), this remained below the global inflation rate of 3.2%. In contrast North Asia (at 6.3%) and South Asia (3.7%) witnessed growth above the global inflation rate, due primarily to strong domestic consumption and activity from non-financial sectors eager to tap into the region’s brighter growth prospects. Increases in these regions were driven by Beijing and Jakarta (at 17.7% and 20.7% respectively).

Karine Woodford, head of Occupier Research at DTZ, said the US was undoubtedly one of the stories of the year, with occupancy costs per workstation falling in every city.

“Demand for space was low, reflecting a sluggish labour market and weak corporate sentiment, but the biggest reason for the decline was a trend across the board for greater space efficiency. We do however expect US occupancy costs to increase over the next two years, albeit at a muted rate compared to elsewhere in the world,” Ms Woodford said.

“Elsewhere, there will be opportunities in the next two years for occupiers seeking to establish Asian operations in Kuala Lumpur and Singapore, where we anticipate costs to fall by 1.3% and 0.7% respectively. However, it should be noted that vacancy rates in Singapore are currently at their lowest level since 2008, and we expect costs to rise steadily over the longer term.”

Growth in North Asia wasn’t without exception as costs decreased by 12% in Hong Kong Central (from US$25,160 in 2011 down to US$22,190 in 2012). This was due to rental declines, where occupiers sought to reduce operating costs through downsizing or moving outside the core.

This resulted in Hong Kong, 2011’s most expensive business base, being overtaken by London West End as the least affordable market globally. Occupiers in London West End had to pay US$23,500 per workstation per annum which is more than three times the global average. The most affodable office market is Surabaya (US$1,610), as it was in 2011, followed by Hyderabad and Chongqing.

As well as prime office space, DTZ also analysed occupancy costs per workstation for average-grade buildings in 14 major centres in Europe and Asia. Driven by increased demand from cost-conscious occupiers, secondary occupancy costs rose by 4.2% year-on-year – above global inflation and four times the rate for prime. The difference in occupancy costs between secondary and prime office space also varied hugely across the different markets, with prime anything from 17.5% more expensive (Stockholm) to 131% more (Shanghai).

Ms Woodford said that in the current economic climate, occupiers were increasingly looking at alternatives to prime office space.
“The biggest differences can be seen in Shanghai and Moscow, where occupying prime costs over 100% more than taking space in an average grade building. In markets such as Stockholm, London City and Sydney the difference in cost in occupying prime compared to secondary is less pronounced, although cost savings of at least 20% can be achieved. London West End is the least affordable location in the world for occupying both prime and secondary office space.”

The GOCO report also looks ahead at occupancy costs for the next two years under three different scenarios: base case (policy makers do enough to avoid a deep recession), downside (based on a multiple Eurozone exit) and upside (a global corporate reawakening). Under the base case scenario, global occupancy costs are expected to increase by 2.3% over the next two years, with occupiers in North Asia witnessing the highest growth rate – at levels above the global inflation average in both 2013 and 2014.

Under the downside scenario, European markets show a sustained period of rental decline, offering cost savings for tenants. In Asia Pacific, the impact is felt more dramatically with costs rising by 1% instead of 5% under base case which provides a window of opportunity for occupiers to re-negotiate leases before rental growth accelerates. However, under the upside scenario, Asia Pacific is the region which shows the largest increase (8%) in rents, whilst both Europe and the US are expected to experience more muted growth.