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Tokyo tops London as world's most expensive office market.

Occupancy costs for Class A office space in Tokyo's Inner Central district leapt more than 27 percent in the last six months in U.S. dollar terms, pushing the Japanese capital ahead of the City of London as the costliest prime office location in the world.

Tokyo, one of the more than 140 global markets monitored by the San Francisco-based global research and consulting unit of CB Richard Ellis (NYSE: CBG), saw occupancy costs rise from US $107.52 per square foot per annum to $137.53 per square foot per annum, mainly as a result of a strengthening yen, the semi-annual survey reveals. In spite of a slight increase in rental rates over the last six months, the one square mile City of London's $120.45 per square foot occupancy costs were still below those of Tokyo, as were costs in Mumbal (Bombay), India ($97.79), Hong Kong ($88.91) and Paris ($70.99).

By comparison, occupancy costs in the most expensive U.S. market, Midtown Manhattan, totaled $52.20 per square foot, placing the city as the 13th most expensive office location in the world. Occupancy costs have moved up more than 8 percent in Manhattan since last summer, when they were $48.25 per foot (15th most expensive at that time).

The greatest bargain in global office space occupation costs, according to the Global Market Rents survey, is Harare, Zimbabwe. Class A office occupancy costs in the city center total just $4.23 per square foot. Costs have fallen substantially in U.S. dollar terms recently as a result of currency depreciation. Harare's office rents actually rose by 8.3 percent in local terms, largely due to indexation clauses built into existing leases to offset the effects of the country's high inflation rate. Since office space is defined in different ways, and in multiple currencies around the globe, Global Market Rents calculates the U.S. dollar cost of renting an_ actual square foot of office space or square meter of space, including all costs of occupancy. CB Richard Ellis also calculates this cost in terms of the Euro, to reflect the introduction of the new common European currency. The information in Global Market Rents is used primarily by multi-national corporations as intelligence data for considering expansion and relocation cost decisions, and by investors as a market monitor to judge differing real estate cycles around the world.

"The strengthening of the yen relative to other world currencies had a major impact on rental costs in Tokyo, where rents have remained relatively flat over the last six months," said William Rothe, senior executive managing director of CB Richard Ellis Global Research and Consulting. "However, the likelihood of a weaker yen and downward pressure on nominal rents due to a persistently weak economy may make this distinction short-lived."

Tim Kirkus, CB Richard Ellis director for the Asia Pacific region, said that a combination of falling revenues among small and mid-sized Japanese firms, and rising vacancies in Tokyo, already are driving rents lower in Class B buildings.

In addition to monitoring and ranking office occupation costs in 143 cities around the world - the most markets tracked by any world rent survey - the CB Richard Ellis study also identifies cities with the largest increases and decreases in rental rates over the last six months.

In the United States, markets making the global increase list such as New York (8.3 percent increase), suburban San Diego (8.3 percent) and Seattle (6.8 percent) benefitted from a buoyant national economy.

"Asia Pacific markets fared badly in the rental stakes," said Rothe, "a result of both declining economies and the fact that construction activity continued unabated even while rents were falling. In contrast, many European markets showed strength as economies grew and supply remained tight."

As expected, of 12 markets experiencing greater than a 10 percent decline in rents (according to movement in local currency) during the last six months, eight are in the Asia Pacific region, including Shanghai (Puxi) and Beijing, China; Hong Kong; Singapore; Jakarta, Indonesia; Manila, Philippines; Bangalore and New Delhi, India. Rent decreases in these markets ranged from 30.6 percent in Shanghai's Puxi district to 11.1 percent in New Delhi, another victim of a plunging economy. Rents in Shanghai's Pudong district fell by 27.6 percent over the last six months, but only one market per city is represented in the Global Market Rents Top 10 lists.

Moscow experienced the biggest decrease in rents - 32 percent. Office occupation costs in the Russian capitol have plummeted 27.7 percent since the country defaulted on its debts and the ruble tumbled.

At the other end of the spectrum, several Western European markets showed strong rental gains, led by Glasgow, Scotland, with a 20 percent pick up in rental rates; followed by Dublin, Ireland (15 percent increase); Madrid (10 percent); Frankfurt (9.1 percent): and Milan (7.1 percent).

Bill Ashton, director of CB Richard Ellis' Europe, Middle East and Africa region, said that rent increases in UK markets are primarily the result of competition for limited office supply. "The dynamic now appearing in some UK cities, and other markets like Milan and Frankfurt is the same trend that happened in London and Amsterdam last year, namely that tight market conditions and a lack of new building have pushed rents rapidly upward," said Ashton.

Ashton also observed that although construction is increasing, European real estate markets are still witnessing some conservatism in respect to new development starts. "A proportion of the space under construction is pre-let, and this, combined with the perceived economic benefits of the Euro, could put Western European property markets on a very positive track," Ashton said.

"Generally, office rent cycles tend to be driven by oversupply, independent of economic demand and regardless of geographic location," Rothe said. "Although there may be many reasons for oversupply, a common cross-current tends to be the availability of capital, the length of the local development cycle, and the exuberance of developers in general."

Rothe said that there are several general assumptions that can be made by looking at global rent information. There will always be discrepancies between relative rental rates around the world due to demand, location and local economies, and because different regions experience supply-demand cycles at different times, he explained. In addition, Rothe said, currency fluctuations around the globe will always have a major impact on occupancy costs.

"Our tracking of global occupancy costs and rents tells us that the boom to bust cycle we've come to recognize here in the U.S. appears to be a global phenomenon, with rolling cycles throughout the major regions of the world," Rothe said. "If you look at what's happening with rents and over-building in Asia right now, you see parallels to what happened in the U.S. in the 1980's, where construction continued long after it was apparent that rents were softening."

"In all markets experiencing significant rental increases there has been relatively little new construction, so supply hasn't been allowed to outstrip demand," said Rothe. "Also, there's little doubt now that the growing securitization of the real estate market has had a positive impact in the U.S., even providing something of a brake on development late last year. In general, U.S. and European markets have also benefitted from fairly strong national and regional economies."

South America has fared less well in terms of rental growth, with Santiago, Chile being the one exception. Santiago trailed only Glasgow in having the largest increases in rents over the last six months at 15.1 percent, mainly due to increases attributable to inflation clauses in existing leases. In Buenos Aires, Argentina - the 15th most expensive office market in the world - occupancy costs have not moved in the last six months, remaining at $51.40. But in other South American markets, such as Quito, Ecuador, Lima, Peru and Sao Paulo, Brazil, occupancy costs have dropped by at least 10 percent. The recent devaluation of the Brazilian currency and economic problems throughout the region suggest that rents will continue to fall in the near future.

The full survey is available on the net at www.cbrichardellis.com and www.gallen.com.
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Publication:Real Estate Weekly
Date:Feb 10, 1999
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