By Kevin Thorpe, Global Chief Economist
The world will deliver 700 million square feet new office space between now and year-end 2019. That is equivalent to five good-sized cities worth of office inventory (think Washington D.C., Dallas, London, Singapore and Shanghai). Do we need it? Based on current demand predictions, maybe not. But then again, maybe.
With the global economy showing tangible signs of progress, economic momentum arguably is more widespread in mid-2017 than at any other point in the current cycle. From the U.S. to Continental Europe to Asia Pacific, from advanced to emerging economies, from commodity-producing to commodity-consuming nations, the world economy is well positioned to break out.
World GDP growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018 – putting us on pace for the best back-to-back years since the initial rebound in 2010/2011. And multiple scenarios could push up growth rates event further. Policy-easing in the U.S., soaring equity prices and rebounding confidence may translate to higher-than-projected consumption and business investment. Of course, a multitude of downside risks could derail this progress, but most of these threats are slow moving, sitting on the tails of normal probability curves.
From a real estate perspective, an accelerating global economy combined with continued low inflation/interest rates provides a recipe for healthy, if not robust conditions. Here’s the ironic catch. In some areas, the prolonged consistency in the labor markets might ultimately be what slows demand for office space. After eight years of continued expansion, some labor markets have tightened substantially – making it difficult for businesses to fill open positions. As such, we anticipate that Tier-2 cities will emerge as the new growth leaders, as businesses seek markets where workers are easier to find and less expensive to hire. The net effect? Demand will remain healthy, totaling 517 million square feet through 2019
Getting back to that building boom. With demand falling far short of supply during the 2017-2019 period, vacancy rates in most cities around the globe will to rise. From that perspective, the world is overbuilding. Yet it also is abundantly clear that occupiers generally favor new high-quality office space over older Grade B and C product. In the U.S., for example, newly-built, high-quality space has accounted for 65 percent of office space absorption since 2012. Throughout this cycle, developers have been rewarded for delivering prime product, even in markets with elevated vacancy.
Looking ahead to this end, all eyes should be on Asia-Pacific markets, where 60 percent of the world’s new construction will be concentrated. Much like the supply side, the demand side of the equation is strongest in APAC; Beijing will have the distinction of leading the world in both supply and demand. The Americas will house the next-highest concentration of new product, with the U.S., Canada, and Latin America building substantially more than they absorb. To a lesser degree, the development pipeline is also ramping up throughout Europe. Some cities (Paris, Vienna, London and Brussels) will hit a cyclical high in terms of new construction over the next two years. Then again, those same cities report vacancy rates that lower than pre-recession levels. Perhaps they are the most in need of new space.
For more, download Office Forecasts for over 100 Global Cities 2017 – 2019.
Kevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Kevin has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. In 2014, he was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.