Net costs for prime office occupiers continued to rise in Q3
Savills latest global Prime Office Costs (SPOC) analysis has revealed that average net effective costs for occupiers taking top quality office space in key cities around the world rose 0.8% in Q3 2023, bringing the average increase in net effective costs since the end of 2022 to 2.6%.
The international real estate advisor says this is reflective of the ongoing flight of occupiers to top spec office space, which led to annual gross rents increasing by 0.9% across the quarter among the cities it samples, but the more significant proportion of the increase is attributable to the rising expense of fitting-out space across many cities, especially those in the US, which drove up fit-out costs by an average of 3.2% in Q3.
Savills notes that in the US these rising fit-out costs have been mitigated by landlords increasing concessions, leading to total net effective costs to occupiers in its SPOC markets declining -0.7% in Q3, even as average gross rents have risen 0.5% in the past six months. Miami, which Savills is including in SPOC for the first time, is an outlier, however, with net effective costs rising 10.7% across as limited supply and strong demand push rents up for prime space and limit concessions.
Across EMEA SPOC cities,net effective costs rose by an average of 2.1% in Q3, with annual gross rents increasing by 1.1% on the quarter, largely driven by rises in Milan, Frankfurt, and Madrid. Dubai, with new company registrations increasing demand, saw annual gross rents increase 1.2% and net effective costs increase 2.0% in the third quarter.
Asian cities, which have tended to see lower adoption of hybrid working models, have continued to see relatively stable occupational markets, says Savills, although an excess of office development in China and Hong Kong has led to vacancy rates climbing in these markets, contributing to regional net effective costs decreasing -0.1% in Q3, as average rents fell 0.7% in the quarter.
Christina Sigliano, head of EMEA occupier services at Savills, comments: “Whilst even the best spaces aren’t immune to average vacancy rates creeping up this year, the landlords of top-tier offices in many of our SPOC markets have reasons to remain cautiously optimistic. Where rising fit-out costs in some locations could deter some occupiers landlords have responded by increasing concessions to retain or attract tenants, thereby keeping the markets resilient and prices high. Of course, there are also some exceptional markets such as Miami and Dubai where strong demand and limited supply mean concessions are less of a factor as the structural imbalance has allowed landlords to continue to increase gross rents.”
Kelcie Sellers, analyst in Savills World Research team, adds: “It’s clear that occupiers continue to search for top quality spaces, supporting prime office markets worldwide. For the first time we’ve included Melbourne, Milan, Miami, Seattle, and Zurich in SPOC – all cities that may attract some of the world’s biggest occupiers, but are at different stages of their cycles – to provide an even more nuanced picture of the current state of the top end of the market.”
