London, Tokyo, New York office rents fall first time since 2002

Source : Bloomberg - 25 Nov 2008

Office rents in London’s West End, midtown Manhattan and Tokyo fell in the third quarter for the first time in almost seven years as the global financial crisis cut demand, CB Richard Ellis Group Inc. said.

The total office occupancy cost in the West End was 139.50 pounds ($248.66) per square foot a year in the 12 months ended Sept. 30, down 5.1 percent from a year earlier, Los Angeles-based CB Richard Ellis said today in its semiannual global-office survey. Rents in London, midtown Manhattan and central Tokyo last fell from a year earlier in January 2002, during the last recession.

Rents fell in the three cities as the economic crisis dampened demand for space among banks and investment companies. Rents worldwide are likely to fall for the rest of this year and the first quarter of 2009 as the financial crisis spreads throughout the world’s economies, Raymond Torto, CB Richard Ellis’s global chief economist, said in an interview.

“London’s West End or places that are showing declines right now are the leading edge of what’s going to happen the next six months, obviously,” Torto said.

Even as financial centers showed declines, office costs in the 172 markets CB Richard Ellis tracks increased 8 percent on average in the past year, almost double the global inflation rate. Three of the five fastest-growing cities were in the Middle East, with costs up the most in Abu Dhabi, with a 95 percent rise.

“You’ve got a lot of places that are not feeling the effects of the financial crisis,” Torto said. “Not every place is a financial center.”

Tokyo, Manhattan

Total office occupancy costs dropped 5.3 percent to $184.26 per square foot annually in central Tokyo, and 9.9 percent to $151.69 in outlying wards of Tokyo, said CB Richard Ellis, the world’s largest commercial real estate brokerage.

In midtown Manhattan, they dropped 2.7 percent to $98.08. Total office occupancy costs are rents plus other service charges by landlords.

Even with the rent decline, London’s West End remained the world’s most expensive office market in the third quarter, CB Richard Ellis said. It was followed by Moscow, where office costs rose 30 percent to $234.73 a square foot, and Hong Kong’s central business district, where they rose 29 percent to $231.59.

Tokyo Gains

Central Tokyo was the fourth most expensive office market in the third quarter, followed by Mumbai’s central business district, with annual occupancy costs of $170.85 a square foot; Dubai, at $156.53; Tokyo’s outer wards; London; Singapore, at $135.13; Hong Kong’s prime districts, at $132.97; and Abu Dhabi.

Among the 50 office markets with the fastest-growing office costs, only nine were in North America in the third quarter, down from 15 when CB Richard Ellis last reported rankings six months ago. “The slowing economic situation in North America has started to dampen occupancy cost growth rates,” CB Richard Ellis said in today’s report.

The Asia Pacific region had the fastest growth in office costs in the third quarter, with an average increase of 26 percent, CB Richard Ellis said. Ho Chi Minh City, Vietnam, had the fastest growth in rents worldwide after Abu Dhabi, with total occupancy costs rising 51 percent to $92.83 in the third quarter, the brokerage said.

“Places like Abu Dhabi or Ho Chi Minh City, there is a theme to why they’re at the top of the list,” Torto said. “The theme is that they’re new places for financial markets. They don’t have a lot of quality space, and the little bit that there is, is wildly bid up.”