Landlord incentives to occupiers have fallen 1% over the last year, despite the worsening macroeconomic backdrop, as occupiers compete for the limited prime "green" office space on the market, according to Savills' Prime Office Costs analysis.
Incentives given to tenants allow landlords to adjust rental rates. They can include fit-out agreements, rent-free periods and shorter-term leases.
Savills says there is a big regional and city-level variation. The Europe, Middle East and Africa region has seen the strongest drop in incentives, with an annual fall of 5%, largely being driven by major gateway cities such as Paris, London and Dublin.
Asia-Pacific has seen minimal declines in incentives, with the regional average change hovering at -0.5% for the year, while North America has seen a 2% average increase, driven by San Francisco, which Savills says has been working hard to retain and attract occupiers in the face of large-scale shifts within the tech industry.
Savills forecasts that prime offices across the globe are likely to see flat to slightly positive rental growth during 2023, with Asia Pacific seeing 1% growth, EMEA 2% and North America 0%.
Over the past year it says rent increases for prime offices averaged 3% globally, as rising costs were "relatively obfuscated" by declining incentives and landlord contributions towards fit-outs.
Net effective costs to occupiers – the cost inclusive of rent, fit-out, and any incentives – were up 4% year-on-year, considerably lower than inflation and the increase in energy and labour costs.
Matthew Fitzgerald, director of Savills EMEA tenant advisory team, says that despite the uncertainty in the macro-economic environment, the fundamental supply/demand imbalance of prime office space in many key cities has held rents up.
"Incentives have largely fallen, and rents are actually forecast to increase over the next 12 months, but the inflationary impact on fit-out and service charge costs is now affecting occupiers. The situation varies across cities of course, depending on the industry types associated with that city, but an almost-universal rush for ESG compliance with multinational companies considering only ‘green rated’ buildings will likely to continue to push up pricing for the high-quality, certified assets.”
London's West End is the most expensive place to occupy offices in terms of net effective cost at $248.17 per square foot, ahead of Hong Kong, New York (Midtown), Tokyo and the City of London.