Global Financial Center Cities Office Recovery Occurring at Contrasting Pace, Says CB Richard Ellis

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According to a new research report by CB Richard Ellis (CBRE), office markets in the world's three top financial centers -- Hong Kong, London and New York -- have moved at varying speeds in their recovery from the impact of the global crisis financial crisis.

The report titled: Hong Kong, London, New York: From Recession to Recovery, highlights how Hong Kong's economy rebounded quickly from the global financial crisis, mirroring the resilience of Mainland China, with growth in the financial sector since 2009 strongly outpacing the two Western cities.

This analysis runs counter to the traditional view that real estate markets in global financial centers move in lockstep and points to the importance of local economic dynamics and market structure as real estate drivers.

"The contrasts in the pace of real estate recovery seen so far in the three global financial centers need to be viewed in the context of the shift taking place in the global economy in favor of Asia," said Dr. Raymond Torto, CBRE's Global Chief Economist. "This shift is likely to continue to drive differences in office market performance in the world's leading financial centers."

With a rapid rebound in office demand, Hong Kong's office market recorded sharply falling vacancy rates through 2010 while prime office rents climbed by almost 40% by the end of Q1 2011.  High investment demand, boosted by capital inflows from China, drove down office yields to produce a dramatic uplift in capital values: the CBRE Capital Value Index for prime Hong Kong office buildings rose by 150% in the two years to Q1 2011, surpassing its pre-crisis peak by 35%.

In New York, the impact of the financial crisis on office demand made for a slower market recovery. The Manhattan market witnessed a slow pace of decline in vacancy during 2010, and a significant upturn in prime rents became apparent only in Q1 2011.

The New York office investment market, with its high reliance on debt financing, remained largely frozen through 2009 but thawed rapidly during 2010 as credit availability improved and CMBS issuance began to resume.  Capitalization rates have compressed sharply from their mid-2009 peak, reflecting low interest rates and improving economic conditions.

Central London recorded a relatively early rebound in leasing activity and in prime rents, although momentum slackened as the market entered 2011.  As in New York, the initial upturn in demand owed much to occupier requirements being reactivated after the downturn and tenants taking advantage of lower rents and generous incentives.  London also saw a rapid re-compression of prime office investment yields from mid 2009 with a rise in transaction volumes driven strongly by the city's success in capturing a disproportionate share of global flows in search of prime real estate.

The CBRE report was written to identify important factors supporting rental recovery in all three cities as the absence of a significant overhang of new development supply after the downturn. All three financial center cites face a squeeze in new office supply for at least the next two years, which should lead to higher rents and pressure on occupiers to pre-lease to satisfy major requirements.

 

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