Average Global Net Effective Costs For Prime Office Occupiers Increased By 2.6% Since End Of 2022

Savills’ latest Global Prime Office Costs (SPOC) analysis has revealed that average net effective costs for occupiers taking top quality office space in key cities around the world rose 0.8% in Q3 2023, bringing the cumulative average increase in net effective costs since the end of 2022 to 2.6%.

This is reflective of the ongoing flight of occupiers to top spec office space, which led to annual gross rents increasing by 0.9% across the quarter among the cities it samples, but the more significant proportion of the increase is attributable to the rising expense of fitting-out space across many cities, especially those in the US, which drove up fit-out costs by an average of 3.2% in Q3.

Asian cities, which have tended to see lower adoption of hybrid working models, have continued to see relatively stable occupational markets, although an excess of office development in China and Hong Kong has led to vacancy rates climbing in these markets, contributing to regional net effective costs decreasing 0.1% in Q3, as average rents fell 0.7% in the quarter.

Singapore has seen its office vacancy rates surged from end 2022 at 5.6% to 7.4% in Q3 2023 while its net effective cost to occupiers (annual psf) remained stable at USD$144.25.

Alan Cheong, Executive Director, Research & Consultancy, Savills Singapore: “Singapore’s Grade A CBD office market is at this juncture (Q3/2023) still rising, albeit just marginally. However, as greater supply in 2024 comes online, and with economic and political uncertainties challenging markets around the world, it may be a tall order for rents to continue rising in 2024. Tenants are therefore inclined to right size their office footprint while waiting for the storm to blow over. Having said that, landlords still have strong holding power and any rental adjustments in the coming quarters would be mild.”

Ashley Swan, Executive Director, Commercial Leasing, Savills Singapore: “The Singapore office market has remained largely flat throughout 2023 and Q3 has been no different with rents remaining mostly unchanged from the previous quarter and fit out cost stabilising. Economic headwinds continue to be in the forefront of occupier decisions which has led to a decline in leasing activity across the market. While overall vacancies have crept up in 2023, we do not expect occupier costs to change significantly for the remainder of the year as the lack of new supply persist.”

The rising fit-out costs in the US have been mitigated by landlords increasing concessions, leading to total net effective costs to occupiers in its SPOC markets declining 0.7% in Q3, even as average gross rents have risen 0.5% in the past six months. Miami, which is including in SPOC for the first time, is an outlier, however, with net effective costs rising 10.7% across as limited supply and strong demand push rents up for prime space and limit concessions.

Across EMEA (Europe, Middle East and Africa) SPOC cities, net effective costs rose by an average of 2.1% in Q3, with annual gross rents increasing by 1.1% on the quarter, largely driven by rises in Milan, Frankfurt, and Madrid. Dubai, with new company registrations increasing demand, saw annual gross rents increase 1.2% and net effective costs increase 2.0% in the third quarter.

Christina Sigliano, head of EMEA occupier services at Savills: “Whilst even the best spaces aren’t immune to average vacancy rates creeping up this year, the landlords of top-tier offices in many of our SPOC markets have reasons to remain cautiously optimistic. Where rising fit-out costs in some locations could deter some occupiers, landlords have responded by increasing concessions to retain or attract tenants, thereby keeping the markets resilient and prices high. Of course, there are also some exceptional markets such as Miami and Dubai where strong demand and limited supply mean concessions are less of a factor as the structural imbalance has allowed landlords to continue to increase gross rents.”

Kelcie Sellers, analyst in Savills World Research team: “It’s clear that occupiers continue to search for top quality spaces, supporting prime office markets worldwide. For the first time we’ve included Melbourne, Milan, Miami, Seattle, and Zurich in SPOC – all cities that may attract some of the world’s biggest occupiers, but are at different stages of their cycles – to provide an even more nuanced picture of the current state of the top end of the market.”

Click here to view Office Vacancy Rates Graph.

Click here  to view Net Effective Cost to Occupier Graph.