Occupancy cost gap between US and Europe/Asia narrows.

The vast gulf separating lower occupancy costs for prime space in major U.S. cities from dramatically higher occupancy costs for similar properties in Europe and Asia seems to be lessening, as U.S. costs inch higher and overseas costs decline, according to research released by Cushman & Wakefield, a leading provider of real estate services. Even so, U.S. properties are still a "bargain" when compared with these markets overseas.

The research conducted by Cushman & Wakefield studied and compared 16 markets in North America, 15 markets in Europe, three markets in Latin and South America and eight markets in Asia over a period that included first quarter 1995 through first quarter 1997.

"The trends we are seeing are demand-driven," said Arthur J. Mirante II, president and CEO of Cushman & Wakefield. "The recovery of U.S. markets started to take hold in 1994, and as business services firms such as computer data processing firms, temp agencies and advertising agencies have increased their activities, their expansion needs have grown. This growth is driving the demand for space. At the same time, the supply of space has remained largely the same, resulting in higher asking rents, etc."

"In contrast, Europe and Asia saw less robust general economic growth, keeping demand relatively soft," Mirante said. "Some Asian markets, notably Shanghai, saw declining asking rents because of an increased supply of new space on the market."

US Markets Edge Up Significantly, As Canada Holds Its Own

The San Francisco market showed the greatest increase in occupancy costs, as they climbed from $19.91/per square foot (psf) in 1995 to $25.75/psf in 1996 to $30.92/psf in 1997. The Boston market also typified the trend, going from $23.10/psf in 1995 to $31.34/psf in 1996 to $32.82/psf in 1997. The Washington, DC market also saw a significant rise in occupancy costs, starting at $28.17/psf in 1995, and going to $33.91/psf in 1996 and to $34.30/psf in 1997.

New York City's Downtown market showed the impact of a local government tax incentive program. In the Downtown market, occupancy costs began at $37.74/psf in 1995, rose to $43.77/psf in 1996 and sank to $30.89/psf in 1997. The Midtown market began at $30.45/psf in 1995, rose to $35.21/psf in 1996 and rose again to $35.74/psf in 1997.

In Canada, Toronto and Montreal have held their own, while recent activity in Vancouver has resulted in speculative construction and an increase in rental rates. For example, the Montreal market had occupancy costs of $12.80/psf in 1995. These costs went down to $12.28/psf in 1996 and are up to $13.21/psf in 1997. Similarly, the Vancouver market began with occupancy costs of $18.01/psf in 1995, which declined to $15.84 psf in 1996 and have rebounded to $21.72/psf in 1997.

Latin America Follows North American Lead

The Buenos Aires market echoed the growth of its North American counterparts with occupancy costs growing substantially from $26.73/psf in both 1995 and 1996 to $49.61/psf in 1997. Buenos Aires has a lack of prime space, as 90 percent of the market is Class B and C space. Similarly, Sao Paulo's costs edged up from $37.40/psf in 1995 to $39.53/psf in 1996 to $43/psf in 1997. Sao Paulo has a limitation on foreign capital for new development, but interest in the market remains high. Even the Mexico City market, which saw occupancy costs fall front $43.25/psf in 1995 to $31/psf in 1996, experienced a healthy increase to $35.20/psf in 1997, as confidence returned to the battered Peso.

Asian Markets Cool Off

Hong Kong saw the most dramatic declines in occupancy costs as the impending shift of sovereignty to China loomed closer on the horizon. Occupancy costs that began at $160.64/psf in 1995 collapsed to $93.30/psf in 1996 and actually recovered slightly in 1997 at $106.60/psf.

The major city markets in China, like Beijing and Shanghai, which saw rents triple between 1992 and 1995, are finally seeing occupancy costs fall dramatically, as large amounts of space constructed during the boom years comes on the market. For example, Beijing has seen a steady decline in occupancy costs, falling from $95.92/psf in 1995 to $62.53/psf in 1996 and to $59.24/psf in 1997. Shanghai also followed this trend, with occupancy costs falling from $81.61/psf in 1995 to $61.13/psf in 1996 to $53.00/psf in 1997.

The Tokyo market also reflected the decline in Asian occupancy costs. From a start of $134/psf in 1995, occupancy costs declined to $112.17/psf in 1996 and $94.79/psf in 1997, owing largely to the delay in Japan's economic recovery.

The city-state of Singapore also followed the overall trend, with occupancy costs falling from $90.57/psf in 1995 to $67.59/psf in 1996 and to $63.80/psf in 1997, as slower economic growth and government measures to curb speculation drove costs down.

Of all the Asian markets surveyed, only Bombay bucked the trend, with occupancy costs increasing consistently and robustly from $111.11/psf in 1995 to $120.49/psf in 1996 to $143.30/psf in 1997.

Europe Showing Mixed Signs

The occupancy costs patterns paint a mixed picture of Europe, with some economics showing signs of economic recovery and others still in stagnation.

Some European markets are edging back up in 1997 after steep declines in 1996. London, both City and West End, typify this trend. London City's occupancy costs began at $96.99/psf in 1995, fell substantially to $83.40/psf in 1996 and have since recouped at $94.87/psf in 1997. London's West End's occupancy costs saw a similar pattern, falling from $115.99/psf in 1995 to $88.30/psf in 1996 and then rising back to $97.32/psf in 1997. This is because of an undersupply of prime space, coupled with the strengthening of the Pound Sterling.

This pattern was also repeated on the Continent. For example, occupancy costs in Frankfurt were $61.24/psf in 1995, fell to $52.05/psf in 1996 and have risen to $55.02/psf in 1997. This is indicative of Frankfurt's leading role in the overall German economic recovery.

The Milan market typifies the stagnation pattern, with occupancy costs failing consistently from $41.25/psf in 1995 to $34.28/psf in 1996 to $29.21/psf in 1997. The Paris market also shows steady decline that seems to be leveling off. Occupancy costs in the Paris market fell dramatically from $71.69/psf in 1995 to $52.73/psf in 1996 and were almost unchanged at $52.40/psf in 1997.