Asia Pacific prime office rents continue downward trend in Q1 2024
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The Asia Pacific prime office market registered its seventh consecutive quarterly decline in Q1 2024, with average prime rents dropping 3.2% year-on-year. This marks a quicker pace of decline compared with the 2.4% year-on-year fall in Q4 2023.
15 of the 23 cities tracked by Knight Frank reported stable or increasing rents year-on-year in Q1 2024, up from 13 cities in Q4 2023. Ho Chi Minh City and Phnom Penh arrested their rental declines during the quarter. However, the strength of this uptick is unlikely to be sustained, given the ample construction pipeline in these markets.
Chinese Mainland markets drag on the region with sharper rental declines
Weak fundamentals in Chinese Mainland cities were the main factor behind the regional rental decline. Average prime office rents in Chinese Mainland's first-tier cities fell faster quarter-on-quarter, registering a 3.4% drop.
Bright Spots in Tokyo, Seoul and Taipei
In contrast to the Chinese cities, prime office rents showed an uptrend in some other major Asia Pacific markets.
Tokyo halted two consecutive quarters of rental decline as new office completions attracted tenants amid recovering office attendance levels. Similarly, office rents in Seoul and Taipei increased as constricted new supply favoured landlords in these tight markets.
Office vacancies hit new highs across Asia-Pacific
The office market in Asia-Pacific is facing a double whammy of rising vacancies and an influx of new supply. According to the latest data, prime office vacancies ticked up again in Q1 2024 to 14.9% across the region. This continues an upward trend that has seen vacancies breach record levels since late 2022.
The culprit? A combination of hybrid work policies that have reduced office occupancy needs and economic headwinds impacting business expansion plans. With more companies embracing remote flexibility, demand for office space has taken a hit.
Bracing for a wave of new supply
Even as vacancies climb, a wave of new prime office supply will hit the Asia-Pacific market. A substantial 12 million square meters of new Grade A office stock is scheduled to be completed in 2024 alone.
China is leading the charge, with nearly 60% of this new supply concentrated in Chinese Mainland markets such as Beijing, Shanghai and Shenzhen. However, other cities are not spared - Ho Chi Minh City and Bangkok are bracing for double-digit increases in prime office inventory this year.
A tenant's market in 2024
With supply outstripping demand, 2024 is shaping to be a prime tenant's market across Asia Pacific's office hubs. As vacancies increase, tenants will gain more leverage in lease negotiations and relocation decisions.
We already see a "flight to quality" trend as occupiers take advantage of competitive market conditions. Companies gravitate towards premium, well-amenitised office spaces that enhance workplace experience and talent attraction.
Hence, while the office market faces short-term headwinds, savvy tenants have an opportunity to secure high-quality spaces at favourable terms.
Asia-Pacific's other markets: mixed conditions
The office markets across Australia and New Zealand remained largely stable in Q1 2024, with prime rents and vacancies holding steady quarter-over-quarter. However, the flight-to-quality trend persisted as occupiers gravitated towards premium assets in core locations.
Brisbane stood out as the only Australian city to register rental growth, with prime rents rising 2% amid zero new supply for the fourth consecutive quarter. Incentives in Brisbane also shrank year-over-year, reflecting robust demand conditions.
Supply-constrained Auckland mirrored these dynamics. Prime rents climbed 1.6% over the previous quarter, while incentives plummeted to just one month from around four months a year ago.
Southeast Asia sees rental growth despite high vacancies
Despite elevated vacancies of close to 25% in Southeast Asia's emerging markets, prime office rents rose by an average of over 2% quarter-on-quarter, mainly driven by Manila's strong performance.
The Philippine capital saw vacancies tighten by nearly four percentage points during Q4 2023 to around 12.4%, down from 16.4% in the previous quarter. A year ago, vacancies were threatening to breach 20%. However, the country's outsourcing sector has staged a large recovery in the latter half of 2023, leading to rapid space take-up, especially from existing tenants expanding in top-rated buildings.
Manila wasn't the only bright spot - prime rents in Ho Chi Minh City also increased as demand for the city's Grade A offices grew. Several large lease deals were inked during the quarter as foreign businesses relocated and expanded their footprints in the market.
Even Singapore's prime office market remained resilient, with rents rising a marginal 0.6% quarter-on-quarter, supported by positive rental reversions. However, this upward momentum is expected to lose steam and potentially flatline in the second half of 2024 as the tech and financial sectors restructure operations.
India's office hubs sustain leasing momentum
India's three largest office markets - Bengaluru, Delhi-NCR and Mumbai - witnessed healthy leasing activity in Q1 2024. Total transactions across these cities rose 14% year-over-year, sustaining the strong occupier sentiments that drove leasing volumes in 2023 to their highest levels since 2019.
Domestic businesses and global capability centers (GCCs) remained the driving force, accounting for the bulk of the leasing activity. Their transactions reflected a long-term strategic interest in India's consumer markets and high-quality talent pool.
Bengaluru reinforced its position as the country's leading offshoring hub, with GCCs involved in 51% of the leasing deals closed during the quarter.
As confidence in India's economic prospects grows, occupiers increasingly opt for long-term lease commitments. Over the past year, absorption levels have outpaced new supply, leading to a drop in vacancies and supporting rental growth across these markets.
An in-depth view of the report can be found here.