At 43 million square metres (across 96 markets), gross leasing volumes over the past year were 5% higher than the buoyant levels of 2017, reaching their highest total of the current cycle. There was some evidence in the final quarter that demand is softening, with global volumes down 6% year-on-year. This trend is likely to continue with full-year 2019 volumes unlikely to match the peak levels of 2017-2018.
Asia Pacific continued to be the standout region with leasing levels up an impressive 21% in 2018, although growth in the last three months of the year slowed compared to the very robust first three quarters. Flexible space operators are still a notable source of leasing activity as they continue to expand in many markets. The outlook for leasing in Asia Pacific continues to be bright and 2019 volumes should match 2018 levels, with occupational demand set to be led by technology, financials and flexible space operators.
European gross leasing volumes were down 14% in the last quarter of 2018 compared to the previous year. However, this was primarily a result of record-low vacancy rather than a lack of demand. Indeed, European net absorption increased by 53% in 2018, reflecting the underlying strength of the corporate occupier market. Furthermore, on a full-year basis, 2018 take-up was equal to the record 2017 levels. As demand for office space continues to be solid across most of Europe, full-year 2019 leasing volumes are forecast to be around 12.7 million square metres – below 2018 levels but still 13% above the 10-year average.
Regardless of widespread talent shortages, U.S. tenants remain in growth mode, as more than half of all leases represented some form of expansion in 2018. Leasing activity continues to be broad-based, although the ascendance of co-working to be the third largest sector in terms of office space take-up after tech and finance continues to be the most notable trend. With most of this activity representing pure expansion, flexible space operators are the dominant driver of occupancy growth.
Despite a rise in new deliveries, another fall in the global office vacancy rate was recorded in the last three months of 2018, bringing the rate down to 11.3%, the lowest of the current cycle. Buoyant end-user demand is encouraging construction activity, with global new deliveries in 2019 likely to be around 25% higher than 2018. With high levels of new office completions and stable demand, the global vacancy rate is projected to rise over the next 12-18 months, pushing towards the 12% threshold by the end of 2019.
Annualised rental growth for prime offices across 30 global cities has been steady at around 4% for the past 18 months, with 3.8% growth in 2018. Several major office markets recorded double-digit rental uplifts in 2018, led by Berlin, Singapore, San Francisco and Madrid. Aggregate rental growth for prime offices is expected to remain positive in 2019, although slowing to around 2%-3% as supply options increase.
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