Luxury Rents Around the World Rose Faster Than Sales Prices 2023

Luxury residential rents remained strong globally in 2023, outperforming capital values in 28 of the 30 cities tracked in the Savills World Cities Index, according to a report from the British real estate company on Wednesday.

On average, luxury rents increased by 5.1% last year, compared to the average home price growth of 2.2%.

“In the face of economic uncertainty, the prime residential rental market proved resilient in 2023,” said Kelcie Sellers, associate at Savills World Research. “Continuing a trend from the past year, prime rental value growth outpaced capital values, largely driven by a lack of stock in global prime markets and increased levels of demand from individuals and families who would look to purchase a property, but are holding off until the economic and interest rate situations stabilise.”

Lisbon was by far the leader in rental growth, with luxury rents increasing by an average of 39% over the year and by 22% in just the second half of 2023, according to the report.

“Lisbon has seen an influx of people moving to the city, attracted to its climate, the quality of life on offer and strong business environment. But some have been more reluctant to enter the purchase market in Lisbon due to rising house prices and increasing interest rates,” Sellers said. “While the supply of houses in the rental market has not kept pace with demand, leading to a rise in rental prices throughout Portugal, it remains comparatively priced compared to other rental markets in Europe and will likely continue to attract new renters and investors over the coming year.”

Singapore led the Asia-Pacific region, with its rental growth at 12.3%, though that was down from 32.3% in 2022. Hong Kong also saw luxury rents increase, jumping by 5.9%, as high deposit requirements, increased interest rates and an influx of buyers from Mainland China drove would-be buyers to the rental market, according to Savills.

As for the year ahead, a slight increase in luxury rents is expected across the 30 global cities, though the price growth may be less than usual.

“Looking at the year ahead, prime rental prices are forecast to record a slight increase for the 30 cities covered in the World Cities index, as would-be prime buyers continue to turn to rental markets, but this growth will likely remain below the historic average,” Sellers said.

Savills predicts that Amsterdam will lead this year’s rental growth index, with a forecasted increase of 6% to 7.9%, as the city has seen a spike in demand in tandem with limited supply and increased regulations on the private rented sector.

Manhattan’s office-vacancy rate climbed to more than 15% this year, a record high. About 80 miles away in Philadelphia, occupancy also is at historically low levels. But a 24-storey office tower located between the two cities has more than doubled its occupancy over the past five years.

Developer American Equity Partners bought the New Jersey office tower, known as 1 Tower Center, for $38 million in 2019. At the time, the 40-year-old building felt dated. It had no gym, tenant lounge or car-charging stations. The low price enabled the firm to spend more than $20 million overhauling and luring tenants to the 435,000-square-foot property.

Now, the suburban building is nearly fully leased at competitive rents, mopping up tenants from other buildings after the owner added a new lobby, movie theatre, golf simulator, fitness centre and a tenant lounge featuring arcade games and ping-pong tables.

“Our tenants told us what they needed in order to fill up their offices,” said David Elkouby , a co-founder of American Equity, which owns about 4 million square feet of New Jersey office space.

The new owner also liked the location at the 14-acre hotel and conference-centre complex, off the New Jersey Turnpike’s Exit 9 in East Brunswick. The site is a relatively short commute for millions of workers in central New Jersey and is passed by 160,000 vehicles daily.

The property’s turnaround shows how office buildings can thrive even during dismal times for most of the U.S. office market, where vacancies remain much higher than pre pandemic.

Success often requires an ideal location—one that shortens the commute time of employees used to working at home—and the sort of upgrades and amenities companies say are necessary to lure employees back to the workspace.

One Vanderbilt, a deluxe office tower with a Michelin-star chef’s restaurant and plenty of outdoor space in Midtown Manhattan, is fully leased while charging some of the highest rents in the country.

The 11-story Entrada office building, in Culver City, Calif., is making the same formula work on the other coast. It opened two years ago with a sky deck, concierge services and recessed balconies. A restaurant is in the works. The owner said this month that it has signed three of the largest leases in the Los Angeles area this year.

1 Tower Center shows how the strategy can be effective even in less glamorous suburban locations. The tower is prospering while neighbouring buildings that are harder to reach with outdated facilities and poor food options struggle to fill desks even at reduced rents.

The recent interest-rate cut and reports that some big companies such as Amazon .com are re-instituting a five-day office workweek have raised hopes that the office market might be getting closer to turning.

But with more than 900 million square feet of vacant space nationwide and remote work still weighing on office demand, more creditors are seizing properties that are in default on debt payments.

Rates are still much higher than they were when tens of billions of dollars of office loans were made, and much of that debt is now maturing. The recent interest-rate cut doesn’t mean “office-sector woes are now over,” said Ermengarde Jabir, director of economic research for Moody’s commercial real-estate division.

Lenders are dumping distressed properties at steep discounts to what the buildings were worth before the pandemic. Some buyers are trying to compete simply by cutting their rents.

“Most owners don’t have the wherewithal to do what is required,” said Jamie Drummond, the Newmark senior managing director who is 1 Tower Center’s leasing agent. “Owners positioned to highly amenitise their buildings are the ones who are successful.”

HCLTech, a global technology company, illustrates the appeal. It greatly expanded its presence in New Jersey by moving this year to a 40,000-square-foot space designed for its East Coast headquarters at 1 Tower Center.

The India-based company said it was drawn to the building’s amenities and design. That made possible a variety of workspaces for employees, from quiet nooks to an artificial-intelligence lab. “You can’t just open an office and expect [employees] to be there,” said Meenakshi Benjwal , HCLTech’s head of Americas marketing.

HCLTech also liked the location near the homes of its employees and clients in the pharmaceutical, financial-services and other businesses.

Finally, it didn’t hurt that the building is a short drive from nearby MetLife Stadium. The company has a 75-person suite on the 50 yard line where it entertains clients at concerts and National Football League games.

“All of our clients love to fly from distant locations to experience the suite and stadium,” Benjwal said.

Luxury Rents Around the World Rose Faster Than Sales Prices 2023

New amenities, from a gym to a movie theatre, and a good commuter location filled this suburban office tower