A report from Savills revealed a significant trend in the commercial real estate market: prime office rents are 31.4% higher than those for Grade A offices globally. This premium is most pronounced in North America, where prime office space rents are a 62.5% above Grade A stock, while 94% of major office deals in the first half of 2024 involved either expansion or renewal of the same amount of space.
Savills’ quarterly “Prime office costs report” indicated that gross prime office rents in major cities worldwide have increased by 3% from Q2 2023 to Q2 2024. Meanwhile, tenants’ net effective costs, which include rent and fit-out expenses, have risen by 3.8%.
Leading the way in terms of prime office costs are London (West End), Hong Kong and New York (Midtown), maintaining their positions as the top three markets. The report highlighted a significant bifurcation in the US and Canada commercial real estate market, where high demand for limited prime office spaces persists despite ample availability of Grade A buildings.
In the Asia-Pacific region, the premium for prime office space stands at 33.7%. However, the report highlighted there are significant variations within the region. For instance, Sydney’s premium is only 13.5%, while in Shenzhen and Beijing, the premium exceeds 70%. This high demand for top-tier offices in China may see some adjustment as rents in prime locations begin to decline, Savills noted.
Europe, the Middle East and Africa have a lower regional premium for prime offices at 17.9%. This is reportedly attributed to the more land-constrained core business districts, which keep the demand for Grade A offices high.
The “Market makers” report, complementing the “Prime office costs report”, revealed that global occupiers are largely maintaining or expanding their office space. Only 6% of the top 10 prime office occupier deals involved reducing their footprint, while 94% of businesses chose to expand or renew their leases, according to the international real estate advisor. The tech industry remains the leading sector in these deals, accounting for 19% of the total, driven by the growth of AI firms and other tech ventures.
Rick Schuham, CEO of global occupier services at Savills, noted: “The analysis shows the continued flight to prime and the resilience of global top-tier office leasing markets. Many businesses continue to invest and, in many cases, expand their office space, core to their business operations, with an emphasis on quality, in spite of rising costs and broader economic uncertainty.”
Kelcie Sellers, associate director in Savills World Research team, added: “Looking to the second half of 2024, we expect a continued flight to prime spaces. However, increased fit-out costs and macroeconomic uncertainty may loom in the background of real estate decisions for the foreseeable future.”
