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Despite a pickup, demand remains subdued

Global Real Estate Perspective, November 2020

Following an unprecedented stoppage in market activity during the second quarter, the global office market is struggling to fully recover. Global leasing activity in Q3 was down 46% from a year earlier – while this is an improvement from Q2, demand remains subdued. Asia Pacific, as the region where COVID-19 first emerged, seems to be the bright spot, with Q3 activity only down 5% year-on-year, whereas Europe declined 52% and the U.S. 55%.

Source: JLL, 2020

Tenants across the globe remain cost conscious and in many markets are maintaining a ‘wait and see’ attitude – particularly in light of the potential for new workplace strategies in the future. Renewals continue to be a larger part of the market, while the amount of sublease space coming to the market in Europe and the U.S. is on the increase. The global vacancy rate jumped 90bps in Q3 to 12.1%.

In general, landlords have continued to take a much more accommodative stance in lease negotiations and are prioritizing occupancy levels and stable income streams over achievable rents. As such, tenant incentives have increased across the board, while face rents are also under pressure in many markets. On average, global rental levels declined by 1.7% on the previous quarter during Q3.

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The final quarter of the year usually provides a boost for leasing activity as companies rush to get deals signed before year end. A pickup in transactions is expected in Q4, though not to the same magnitude of recent years, and a subdued end to the year seems likely given the continued focus around cost savings as tenants seek to navigate through uncertain times.

The outlook for 2021 remains opaque as factors such as a vaccination schedule, case numbers and government support packages are all difficult to predict. A rebound in deal activity in areas experiencing a second wave is likely to be delayed further into the second half of 2021.

A longer-term perspective: Offices evolving but here to stay

The longer-term structural changes to corporate portfolios are still largely unknown, but it is increasingly likely that the physical office will continue to play a major, albeit evolving, role in post-COVID scenarios. Concerns over productivity losses and threats to collaboration, innovation and workplace culture affirm the broader need for office space.