‘Are We Overbuilding?’

From the second half of 2017 up to the end of 2019, more than 700 million square feet (msf) of office space are expected to be completed and delivered across key cities globally.

This is said to be the equivalent of five good-sized cities like Washington DC, Dallas, London, Singapore and Shanghai, according to global real estate advisor Cushman & Wakefield.

But is there really a demand for such a huge office inventory?

Overbuilding concerns

In its report entitled, “Are We Overbuilding?”, C&W noted that although demand will remain robust over that same time period at approximately 520 msf, it will still fall far short of supply and will cause vacancy to rise in most cities globally.

“From that perspective, the world is overbuilding,” it said.

“Or maybe it isn’t. Throughout this global expansion, it is clear that occupiers have generally favored newly-built-high-quality space over older, Grade B and C product. In the United States, for example, newly built space has accounted for 65 percent of all of the office space absorption since 2012,” the report stated.

“Nevertheless, vacancy will generally be on the rise in most cities around world. The development boom will be led by Asia Pacific, particularly Greater China. In fact, nearly 60 percent of the world’s new construction will be concentrated in the Asia Pacific region. Within the region, new supply is concentrated in a handful of markets: Beijing, Shenzen, Shanghai, Manila and Bangalore,” it added.

The five markets accounted for 55 percent of construction in Asia Pacific and over one-third of construction worldwide.

And much like the supply side, the demand side of the equation is strongest in Asia Pacific with Beijing expected to have the distinction of leading the world in both supply and demand growth, it further noted.

Completions, vacancy

Manila, in particular, is expected to have 31.5 msf of fresh office space inventory between 2017 and 2019—the fourth highest among 80 cities globally, data from the report showed.

Manila is likewise forecasted to post a higher vacancy of 6.9 percent by the end of 2019, ranking 12th among the 81 cities assessed in terms of having the lowest vacancy rate. It should be noted that in 2016, Manila recorded the lowest vacancy at 2.3 percent among the cities included in the report.

Average rents, however, are expected to grow at a slower pace of 2.1 percent yearly from 2017 to 2019, the report added.

Growth drivers

According to C&W, the growing demand for office spaces is fueled by improving global economic conditions.

“After several years of mostly disappointing growth, the global economy is finally showing clear signs of momentum. Although the growth spurts vary greatly from one country or city to the next, the economic upswing in mid-2017 is more ubiquitous than at any other point in the current cycle,” the report stated.

“World GDP (gross domestic product) growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. If these developments come to fruition, those would be the strongest back-to-back years for global growth since the initial rebound years of 2010 and 2011. There are still significant tailwinds and scenarios that may push growth rates even higher in the near term,” it added.

Emerging markets

Similarly, economic conditions are seen to continue improving throughout Asia Pacific, with the region’s powerhouses anchoring growth for the foreseeable future.

In the emerging markets alone, the Philippine and Vietnamese economies will remain among the fastest-growing in Asia Pacific. Favorable demographics, a stable business process outsourcing (BPO) industry and overseas Filipino workers’ (OFW) income—as well as an infrastructure boom—will be key to the Philippines’ positive outlook, it said.

Hiring spree

Add to that the fact that global banks are once again on a hiring spree in key Asian markets—reversing the trend of aggressive job cutbacks of recent years—in an attempt to capitalize on the region’s growth, according to C&W.

The report disclosed that in the last 12 months through May 2017, the banking, financial services and insurance (BFSI) sector was the biggest driver of leasing activity.

Radical advances in e-commerce and mobile applications, breakthroughs in artificial intelligence (AI), robotics and automation also continue to reshape office growth drivers in the region. While rapid advances have displaced some workers, ongoing technological changes, according to C&W, will generate 300,000 net new jobs across the region led by Bengaluru, Manila and Hyderabad.

“This growth potential in the BFSI and technology industries bodes well for the office sector. We estimate that this could translate to a record annual average of over 100 msf of new office space requirements across the region through 2019. This comes at an opportune time as development surges; 2017 will be a record year, with nearly 150 msf of new office projects slated for completion across the 25 major cities that we track,” C&W noted.