“The credit crunch and the downturn in global equities markets is clearly having an impact on international financial institutions, however property market fundamentals still remain solid through the majority of financial centres,” says Jones Lang LaSalle’s Australian Head of Leasing Kevin George.

Q2 figures revealed vacancy rates were either tight or at market in equilibrium in Sydney, Hong Kong, New York and London. Moving forward, the outlook appears more positive for the Asia Pacific region than the US or Europe.

Vacancy rates remained at a tight 6.5% in the Sydney CBD, well below the average of 8.1% this decade. The rate of rental growth slowed in Q2, but prime gross effective rents increased by 1.1% over the quarter to AUD 738 per sqm.

Although the expansion plans of the Australian finance and insurance sectors are likely to be delayed, with unemployment close to 30 year lows, the sector is expected to hoard labour in the short-term. In fact, “The Australian banking sector is focusing on cost reduction and protecting margins, however there is unlikely to be a reduction in space requirements as occupiers in this sector are at capacity in existing space,” said Kevin George.

Projects under construction in the Sydney CBD and scheduled for completion by 2010 only total 114,000 sqm or 2.4% of existing stock.

Jones Lang LaSalle expect a demand upswing in the 2011-2012 period. “By this point, we will not have witnessed much new supply since 2000, with almost 90% of the stock over 10 years old. Global financial institutions have a preference for modern contemporary buildings. There will clearly be demand for new product when the financial markets stabilise and we anticipate an upturn in pre-commitment activity when that occurs,” said Kevin George.

The review indicates that Hong Kong was the strongest performing market with vacancy rates on a downward trajectory. Vacancy declined to 4.5% in June 2008 from 4.9% a year earlier. Declining vacancy has provided the catalyst for upward pressure on rents. With Hong Kong operating at historically low vacancy rates, rents have increased by 36.8% in the past 12 months.

“Banking and finance sector tenants have remained active in the Hong Kong leasing market, in spite of the continuing lacklustre performance of the global financial markets. Some recent examples include Westpac Banking Corporation (570 sqm), HSBC (1,500 sqm)and Taiwan Business Banking (1,000 sqm). Looking ahead, occupier sentiment remains positive in Hong Kong. Foreign tenants are still expecting to grow their businesses in the region, although there could be some difficulties in securing headquarter approval,” say Jones Lang LaSalle’s Hong Kong Head of Markets Gavin Morgan.

The US economy is slowing, but the fundamentals of the New York office market have continued to hold up. Although vacancy rates have increased moderately, they remain within equilibrium for the New York markets. Rental growth remained firm with Manhattan rents increasing by 1.6% over the quarter and 11.1% in the past 12 months.

Jones Lang LaSalle’s Head of International Business New York City Jeremy Sheldon said “The second half of 2008 will be a difficult period for the Manhattan office market. Continuous news of layoffs and persistent rumours of more space coming onto the market is starting to have an effect. The New York office market is disproportionately reliant on the financial services sector and the latest downturn could lead to further weakness in the Manhattan market. Financial sector employment is expected to contract over the next two years with the current estimates for declines of 12,000 jobs in 2008 and 2009, before a recovery in 2010.”

In the UK, the impact of the credit crunch has continued to reduce activity in London. One of the worst affected sectors is financial services and this has had an impact on the City precinct. Many financial occupiers have a latent need for new space but are delaying or protracting their decisions. The net growth in demand in 2Q08 was the lowest since 2Q04.

Despite the slowdown in demand, the aggregated vacancy rate in London remained at a tight  4.1% in 2Q08. In the City precinct, rents declined by 1.6% over the quarter.

Jones Lang LaSalle’s UK Office Head of Agency Neil Prime said “In the City market, we have seen a reduced level of activity this quarter. Rents remain under downward pressure and will do so for the next 18 months or so. However, there is active demand, much of it driven by structural issues such as lease expiries and breaks, and is focused on the best quality buildings. Therefore, as we predicted at the start of the year, rents have declined far less on new accommodation that the rest of the market suggested”.

Comparisons to the 2003 slowdown in London are inaccurate. Before the previous slowdown in 2003, many of the large banks had committed to large new offices, in anticipation of significant extra headcount growth. As a result, a lot of new space was placed on the sub-lease market in addition to older secondary backfill space.

“Prior to the current downturn, there were stories of banks having people working in corridors and space was very densely occupied. As a result, the slowdown and job losses has not resulted in excessive spare capacity in banks’ occupational portfolios, merely a reduction to normal densities,” said Neil Prime.

Although there will be an upturn in sub-lease space it will not be as severe as in 2003, as evident by vacancy rates remaining tight. The most notable example is in Canary Wharf where Citigroup released around 17,000 sqm, but has already agreed a deal with Transport for London (Crossrail) for approximately 10,700 sqm.