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Leasing market remains subdued

Global Real Estate Perspective, May 2021

The effects of the pandemic continue to be felt across global office markets; however, there are now tentative signs of an improving outlook. Leasing activity in China, the earliest hit market, has returned to its previous activity level, with Q1 showing a generous improvement on last year. Although leasing volumes in Europe and the U.S. have yet to rebound, improving tour activity in the U.S., UK and Germany is a positive sign for later in the year.

Overall, first quarter global leasing volumes are 31% lower than in Q1 2020 – this is the fourth consecutive quarter of constrained activity. Leasing across all three regions was subdued, with the U.S. still the hardest hit, while Europe continues to show more resilience.

Decision-making processes remain slow, while the ongoing focus on renewals suggests corporate occupiers are pushing out decisions on future portfolio requirements. Global vacancy maintained its upward trajectory adding 70bps over the first quarter to 13.6%, the highest level since 2012.

Market restrictions and supply chain disruption caused delays to many construction projects throughout 2020. In most cases these restrictions have now eased and construction has ramped up. Development completions in 2021 are expected to be 41% up on 2020, the highest level of deliveries since 2008. This will add to the upward pressure on vacancy rates over the coming year.

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  • Short-term: The outlook for the rest of 2021 remains mixed and uneven, although a cautious optimism seems to be appearing in most markets. As the vaccination programs expand in Europe and the U.S., some pent-up demand is likely to be released. In Asia Pacific the variation is greater – Tier 1 markets in China have already recovered, Sydney in Australia is showing signs of improvement, while the recent surge in cases in India is holding back demand. The focus on cost management is likely to continue.
  • Long-term: As the macroeconomic recovery takes hold, many markets will still have to contend with residual vacancy, particularly from subleases brought on by pandemic-induced contraction and givebacks upon relocation to new supply. The inability of functionally obsolete stock to meet newer tenant preferences regarding wellness is also likely to lead to an increased rate of conversion to non-office use in the coming years, helping to offset elevated structural vacancy.