Global real estate market activity has remained healthy through the first quarter of 2019, although there are signs that momentum is slowing from last year’s impressive levels, according to JLL’s latest Global Market Perspective May 2019 report.
Global real estate investments decreased by 8% year-on-year in the first quarter to US$156 billion due to political and economic uncertainty.Declines in the Americas and EMEA outweighed a record-setting performance in Asia Pacific as global activity dropped to its lowest quarterly level in two years.
Despite investor concerns, global commercial real estate is poised to maintain its steady performance. Though property yields remain compressed, falling risk-free rates have helped to stabilise, or, in some cases, widen spreads, keeping real estate investment an attractive option for investors. Meanwhile, capital values and rents are both predicted to edge up in 2019. In this environment JLL expects full-year global investment in commercial real estate to decline by about 5%-10%, to roughly US$690 billion. Much of this decrease will be a result of weaker activity in the Americas and EMEA, while Asia Pacific is likely to continue to outperform.
High leasing volumes sustained into Q1 2019
At 10.5 million square metres (across 96 markets), gross leasing activity during the first quarter has maintained the healthy pace of 2018, with global volumes up 2% on a year ago.
For the full-year 2019, global leasing volumes are forecast to be broadly flat on 2018 levels, with some slight softening of activity in Europe and Asia Pacific (of up to 5%) due to a combination of economic uncertainty and, in some cases, limited supply.
Global office vacancy rate falls further to new cyclical low
The global office vacancy rate decreased further in Q1 to 11.1%, the lowest of the current cycle in spite of elevated levels of new deliveries. Vacancies fell in Europe to 6.0% and the Americas to 14.5%, but were broadly stable in Asia Pacific at 10.3%.
New deliveries are forecast to peak this year at over 19 million square metres, comparable to levels at the height of the last construction cycle in 2008. With completions projected to be one-third higher than in 2018, the global office vacancy rate is expected to start edging up during the rest of 2019 to finish the year at around 11.5%.
Annual prime rental growth trending at 4%
Rental growth for prime office space has remained remarkably consistent over the past 18 months, trending at an annualised average of close to 4% across 30 global cities. Boston, Singapore, Amsterdam and San Francisco top the global rankings with double-digit annual office rental growth.
Aggregate rental growth for prime offices is anticipated to stay positive in 2019, although slowing marginally to around 3% as supply options increase. While Singapore is predicted to be the leading rental performer in 2019, the top positions are likely to be dominated by select cities in the Americas, notably Boston, San Francisco, Toronto and Sao Paulo.
Retailers and landlords focus on innovation to meet changing consumer expectations
Retailers and landlords are continuing to experiment with new formats and uses for space as competition for consumer attention and expenditure intensifies. Retailers are focused on improving their omni-channel retail offer, with some now using stores as cost-effective delivery hubs, while others are investing in robot-driven smart warehouses and self-driving cars for local deliveries.
In the U.S., average lease lengths for general retail shops and apparel stores have contracted notably over the last decade. Underscoring this move to shorter leases, pop-up stores continue to gain appeal as they represent a low-risk way for retailers to experiment with new types of products, technologies, and services, while boosting their brand. In Europe, retail sales have rebounded as consumer confidence returned in Q1 following a sharp slowdown at the end of 2018, with strengthening labour markets and wage growth expected to fuel consumption over the next two years. In Asia Pacific markets, landlords and retailers are keeping a focus on tech-driven services to enhance the customer experience; meanwhile, rental growth continues to be variable across the region.
Hotel investment activity muted during the first quarter
Global hotel investment activity amounted to US$11.8 billion during the first quarter of 2019, down 25% on last year due to an absence of large transactions and investors adopting a wait-and-see approach in some markets due to political uncertainty. Asia Pacific bucked the trend with a 12% increase in transaction activity driven by China and increased liquidity in Japan, while the U.S. and EMEA both saw their deal volumes decline.
New cyclical low vacancy reached in U.S. multifamily market
The national multifamily market in the U.S. continued its remarkable streak of growth in demand at the beginning of 2019 as absorption kept pace with rising levels of new inventory in Q1, allowing national vacancy rates to hit a new low of 4.6%. Effective rental growth climbed for the sixth consecutive quarter, reaching 4.5% on an annual basis, lifted by sustained outperformance in Sun Belt markets. Construction activity is once again expected to ramp up in the coming quarters and peak in Q2 2020, likely leading to the formation of near-term supply-demand imbalances. Despite this, the U.S. multifamily market has continued its enviable record of strong performance.
Investment activity in the institutional residential market in Europe continues to be robust, with an active start to the year in France, Spain and the UK, while a shortage of stock constrained transactions in Germany despite sustained investor demand.
In Asia Pacific, policy measures and falling mortgage rates helped buyers regain confidence in China in Q1, while sentiment in Singapore remained clouded by last year’s cooling measures.