Two Markets Lead Office Amid Hints of Recovery

One of the reports examines the impact of the credit crunch and recession on the occupational and investment markets for office property in London, New York, Hong Kong and Tokyo–the four top-ranking international financial centers. The other says that office markets around the US are now starting to see some green shoots appear after suffering disproportionately over the last two years due to the financial crisis and the subsequent fallout in office-occupying jobs.

"International Financial Center markets are specialized, share high exposure to financial markets, and are inherently volatile," said Raymond Torto, CBRE's global chief economist. However, CBRE's report reveals key differences between these four international financial centers in terms of the effects of the crisis and the trends that have emerged as signs of recovery have appeared.

Office demand in New York and London was affected more quickly and directly by the global banking crisis than in the two Asian cities, according to the CBRE report. In Hong Kong and Tokyo, the global recession, with collapsing production and trade, did the most damage to occupier demand. Tokyo's market showed hesitant signs of recovery over the second half of 2009, while in both London and Manhattan, "There was a significant pick-up in office demand as financial market conditions improved," according to the report.

Investment sales "almost ground to a standstill" in the New York market, CBRE's report says, while investment in London's office market rebounded over the second half of 2009, with strong demand from overseas investors. Values have rebounded even more in Hong Kong, "almost re-gaining pre-crisis levels," CBRE points out.

In the US, demand declined 6.6% across the nation's leading office markets during the recession, with the economy having grown during the past two quarters. Considering this statistic, "It is hardly surprising that the office market is in such rough shape today," the report states.

Now, however, with monthly jobs numbers showing signs of improvement, "green shoots are beginning to emerge," the report says. It ntoes that office job losses "reached a fever pitch during the first quarter of 2009" and have since continued but with far less severity. Furthermore, the employment services category, which includes the temporary help services category, posted a modest gain for the fourth quarter of 2009. Since temporary workers are the first to be let go in a recession and the first to be hired when the economy recovers, this is a positive sign for the office market.

In addition, the slowing pace of rent decline "signals that many markets are now effectively re-priced," although fundamentals continue to erode. Nonetheless, the report says that we are now approaching a cyclical bottom and points out that most markets have moved beyond their worst rent declines in this downturn.

However, these signs "do not by any means indicate that the market is ready to rebound in 2010," according to the report. Vacancy rates are up by 2.3% to 16.3%, and shadow vacancy continues to be an issue. "But the slowing deterioration in market fundamentals and an improving economy over the past two quarters suggest that the office market is now far closer to recovery that it was last year at this time," the report concludes.