Office-using employment growth and strong demand for industrial assets continued to drive commercial real estate rent and capital value growth in 2019.
Average office and industrial rents increased marginally in 2019, while capital value growth slowed for the office, industrial and retail sectors (Figure 1). Year-over-year capital value growth in the office sector rebounded strongly in Q4 2019, driven by a recovery in European markets.
Industrial assets have been the most consistent and reliable in terms of rent and capital value growth among the three major commercial property types. Capital value of industrial assets has grown an average 1.9% quarter-over-quarter for the past three years, followed closely by 1.6% for office. Retail trailed at just 0.2%. Similarly, average rent growth for office and industrial was on par over the past three years, while retail trailed. Industrial assets excelled in both capital value and rent growth throughout 2019.
Industrial Rent & Capital Value
Industrial rent growth was the highest among the three property types, rising 0.8% quarter-over-quarter and 3.0% year-over-year in Q4. EMEA and APAC had slight accelerations in quarter-over-quarter rent growth, consistent with moderate leasing growth and easing trade tensions. Leading markets for Q4 rent growth included Antwerp, Marseille and Oslo in EMEA, and Beijing, Shenyang and Hong Kong in APAC. Notably, Hong Kong recorded industrial rent growth for the eighth consecutive quarter, despite ongoing political demonstrations. Rent growth in the Americas eased slightly in Q4, as leasing activity declined most significantly in Milwaukee, Pittsburgh and Cleveland.
Capital value for industrial assets grew across all regions in Q4, up by 1.8% from Q3 and 7.3% year-over-year. The Americas reported the largest growth, driven by an improving manufacturing sector in the U.S. and strong investor interest in industrial hubs such as San Jose, Newark and Phoenix. In APAC and EMEA, industrial assets in Liege, Amsterdam, Auckland and Sydney had moderate appreciations in value. The uptick in industrial asset appreciation in Australia and New Zealand is likely a byproduct of the recent U.S.-China trade tensions, as Chinese businesses shift global supply chains to avoid future disruptions.
While disruptions from the trade tensions have eased, the spread of the coronavirus (COVID-19) outbreak has caused an additional adverse impact on industrial assets, particularly in APAC.
Office Rent & Capital Value
Global office rents registered healthy growth of 0.7% quarter-over-quarter and 2.8% year-over-year in Q4. Strong office-using employment growth in the U.S. propelled overall Americas rent growth, led by gateway markets such as Chicago, New York and Boston. The Hague, Zurich and Cologne drove moderate rent growth in EMEA. APAC office rent eased, growing a mere 0.6% year-over-year—a six-year low. Chinese office markets underperformed on a quarter-over-quarter basis, while Australian markets outperformed. Hong Kong office rent, once a stable growth driver in APAC, fell for the third straight quarter as firms reconsidered their futures in the city.
Capital value for office assets rose by 2.0% quarter-over-quarter and 6.6% year-over-year globally in Q4. EMEA posted an impressive 4.0% quarter-over-quarter increase—a four-year high— and a 9.1% jump year-over-year in Q4. Athens, Cape Town and Porto had above-average capital appreciation due to attractive yield spreads and pro-business progress. APAC and the Americas reported 6.2% and 4.8% year-over-year growth, respectively.
Should the COVID-19 outbreak be contained in Q1, the office sector may recover as soon as Q2. However, if the global situation worsens, expectations will be revised down.
Retail Rent & Capital Value
Retail sector performance continued to ease in Q4, with average rent down by 1.1% and capital value down 1.3% quarter-over-quarter. In the Americas, average retail rent fell by 2.5% quarter-over-quarter and 7.2% year-over-year—the largest quarterly decline in both metrics since 2009. Retail rents in New York, Washington, D.C. and Chicago fell the most. In APAC, Hong Kong’s average high-street rent fell 15% quarter-over-quarter, while capital value fell by 28%—the largest quarterly decline on record—as ongoing political demonstrations discouraged retailers, investors and consumers. Australia’s capital value growth also fell significantly, partially due to devastating bushfires.
EMEA was the only region to post retail rent and capital value growth in Q4, both up by 1.0% and driven by an uptick in leasing demand in Western European markets like Zurich, Vienna and Rotterdam. Athens stood out with substantial quarter-over-quarter rent growth (9%) and capital value (13%), as renewed business confidence bolstered its outlook.
Overall Global Performance
Despite easing capital value growth, industrial and office assets maintained strong rent growth in 2019. Americas industrial assets and EMEA retail assets outperformed within their respective sectors, while Americas and EMEA office assets both performed remarkably well in Q4. As we look to 2020 performance, the impact of COVID-19 remains to be seen. Mounting restrictions on travel and business activity will slow the global economy to a certain degree, including real estate performance. But history has shown that epidemics are temporary, and a rebound will bring things back to trend in the medium term.