Prime office rents in major cities globally rose 1.1% in the past year (Q1 2023 to Q1 2024) on average while tenants’ ‘all-in’ net effective costs increased by 2.4%, according to the latest data from Savills.
The company said office occupancy levels continued to increase globally in the past 12 months, with many companies encouraging their employees to return to the office by improving the quality of their workspace.
Office occupancy rates remain lower in Europe and North America compared with Asia Pacific locations, and this trend is mirrored in net effective costs (rent plus fit-out costs), which have risen the most in regions where occupancy rates are lowest and tenants are investing in upgrading office space to tempt employees back.
In London, net effective costs per square foot rose 4.2% to $283.57 per annum. In EMEA and North American markets, annual net effective costs have grown on average by 4.8% and 2% respectively year-on-year, while in Asia Pacific they have only risen 0.6%, although the picture varies quarterly on a city by city basis.
Savills said some of the increased cost to occupiers have been offset by landlord concessions and incentives. Since Q1 2019, the average landlord contribution to fit-out costs has increased by approximately 37.5% across the 35 markets Savills monitors.
Jeremy Bates, EMEA head of occupational markets at Savills, said: “Landlords are having to work harder to attract and retain tenants, but it’s clear that occupier demand for the best space remains strong even in markets where office utilisation rates may remain below pre-pandemic levels. In some cities, including New York, where supply of prime space remains tight, we’re even seeing landlord concessions beginning to decrease.”
Kelcie Sellers, associate director in Savills’ world research team, added: “The potential to achieve higher rents serves as a strong inducement to office landlords to invest and aligns with the projected upwards trend in prime rental growth, even if they have to initially offer incentives to tenants to help them reduce their fit-out costs. However, not all offices will be able to follow this trajectory.
“While our analysis here concentrates on trends in rents and net effective costs for prime offices, for lower-grade stock, retrofitting to new standards may be prohibitively expensive: offices in less desirable business locations may never attract the tenants – and therefore the rents – to justify the investment. In these cases, repurposing becomes the obvious or only approach, with the range of alternative uses growing around the world: housing, hotels, life sciences and education all feature highly.”
