DATE: 2012-07-27

A semi-annual real estate industry survey released the most expensive office markets world-wide. Overall, occupancy costs increased by an average 3.6% worldwide led by Asia-Pacific at 7.8%, Americas at 5.0%, and EMEA at 0.4%. 80 markets experienced increase in occupancy costs, while 24 markets occupancy costs decreased, and 29 markets remained stable. The most costly office markets have characteristics, which include a diversified economic base, limited vacant institutional quality space and strong currencies.

Occupancy cost refers to rent, local taxes and service charges.

1. Hong Kong (Central), Hong Kong
$248.83 per square foot annually

Hong Kong is the number one location for global office occupiers, has meager land for development, leading to the highest office rents.
While at the top of the list, Hong Kong experienced the largest annual decline of the markets in the survey, at -17.2%. This can be attributed to increasing pressure on the global financial services industry, which makes up a large majority of tenants. Some of these firms have consolidated space requirements leading to increased availability in the central business district of Hong Kong.
The demand for office space is decreasing brings the astronomical rent prices closer to Earth. Hong Kong is one of the most volatile markets, it was the first market to show recovery in 2009, and it’s the first now to show the world’s economic slow down.

2. London (West End), United Kingdom
$186.49 per square foot annually

London’s West end experience a 4.7% year-over-year increase
West End – formerly the world’s most expensive – slowed last year after a rapid 31% climb in 2010, allowing offices in Hong Kong to become the world’s priciest.

3. Tokyo, Japan
$180.76 per square foot annually

Tokyo occupancy costs climbed 7%, landing it at the second most expensive city in Asia this year. Two years prior, Tokyo was the most expensive city for office space in the world, followed by London and Hong Kong.

4. Beijing (Jianguomen), China
$166.89 per square foot annually

Rent for Beijng office space soared 49.4% in the past year – the largest annual change of occupancy costs for all markets. The increase in price can be attributed to vacancy rates reaching below 5%, increasing rental prices due to supply shortages. Beijing’s rise was driven by strong demand from domestic financial institutions, combined with lack of available space on Finance Street, which is 6th on the list.

5. Moscow, Russian Federation
$158.72 per square foot annually

Moscow experienced the largest increase in costs for the Europe, Middle East & Africa region as its office space costs grew by 19.1%. This increase was driven by strong tenant demand in the central business district, where vacancy is relatively low and new development is extremely limited.

32nd on the list is Los Angeles, California
$77.41 per square foot annually

For the first time in years Los Angeles vacancy rates have dropped slightly. Los Angeles County slipped to 18.6% from 19.1% in last year’s second quarter. This was the first year-to-year vacancy decline since the second quarter of 2007, explaining the increase in occupancy costs. However, this trend does not signal that landlords’ troubles are nearly over. Most markets are considered quite soft, which places tenants are in a strategic bargaining position.

Tech companies have been increasing their tenancy in Los Angeles, making Santa Monica and Venice’s occupancy rates decrease. Tenants have been also occupying nearby areas such as Culver City and Playa Vista, where office space is more plentiful and rents are cheaper.
Downtown has also experience an increase, after years of a weak market, attributed to downtown becoming a growing residential neighborhood with multiplying recreational options such as bars, restaurants and professional sports. With efforts such as LA Live and recent renovations of plazas, tenants are not moving out of the evolving area.
On the other hand, vacancy in older office buildings near Los Angeles International Airport, continually rise, topping 35% in the second quarter.