"There won't be such a sharp divide" in 2009 between fast-growing markets such as Abu Dhabi and those with declining rents such as London's West End, says Torto. Next year will see growth in occupancy costs--which averaged 8% among the 172 markets monitored in the survey--level off, he says.
And if the declines in occupancy costs from Q3 2007 to Q3 2008 were steeper in London and Tokyo than in Midtown, Torto says it may be that those two cities had a head start over New York City. "London's West End started to see an adjustment about a year ago," he says. However, even with a 17.2% decline in occupancy costs, the West End remains the world's most expensive office market at $248.66 per square foot, compared to $98.06 in Midtown.
London's city financial district saw an even steeper year-over-year decline of 18.9% to $148.16 per square foot, and Torto adds that prices of office buildings there are starting to fall along with occupancy costs. "That's not the case in New York, where you still have a buyer/seller gap and therefore no transactions as a result," he says. In Tokyo's Inner Central District, occupancy costs saw a 5.9% decrease to $184.26, while in that city's Outer District, the fall-off was 11.2% to $151.69 per square foot.
Midtown may be the most expensive office market in North America, but is not even in the top 10 globally. CBRE ranks it in 15th place worldwide, while Downtown comes in 48th worldwide at $59.16 per square foot.
Although the CBRE survey notes that "it is unclear whether the worst of the financial crisis is over," the report also predicts that many markets globally will be better able to withstand further softening than in the past. "Unlike previous downturns, which have occurred simultaneously with extensive overbuilding, the real estate market globally today is in a stronger position to weather the difficulties than in the past," says Torto in a release.
The Manhattan office market, which has experienced slower year-over-year declines in occupancy costs than some other US markets--notably Atlanta, Indianapolis and suburban Miami--has been touted for its durability and resilience. However, the NKF report forecasts difficulties ahead, including a decline in average asking rents from $77.86 currently to $69.98 in Q3 '09.
"With activity in virtually all segments of New York City's financial industries down significantly, improvement in the pace of business will not likely happen before the second half of '09 at the earliest," according to a release. "Total office sector employment could fall by 5% to 6% before the recovery begins and close to four million square feet of new space will likely come on line in '09 or early 2010. Asking rents will decline substantially, and the average for '09 will be at least 10% lower than the average level in '08. The peak-to-trough decline in asking rents will be much larger, and the fall in effective rents will be larger again."
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
