Office Fit-out Costs Pushed Up By Inflation, Supply Chain Issues

GLOBAL – A report by property consultancy Savills indicates that inflation and supply chain issues are increasing office fit-out costs and keeping tenants’ net effective costs high in many cities across the globe, reported Workplace Insight on Thursday evening (14 July, SGT).

According to Savills’ Prime Office Costs Q2 2022, office fit-out costs have risen by 6 percent on average in the past year across cities it tracks. Nonetheless, fit-out costs remain a small portion of total costs compared to office rents.

But a number of office markets are also registering rising office rents, particularly for office space complying with ESG requirements (environmental, social, and corporate governance), as strong demand continues to support high-end office space.

Moreover, Hong Kong took the lead in terms of prime office costs, with the net effective cost of office tenants there exceeding that in London’s West. As for Tokyo, it rose from 3rd place in Q1 to 5th in Q2 2022, enabling Midtown New York and the City of London to each move one place up to the 3rd and 4th spot respectively.

While Paris was the only office market to witness a decline in rent-free periods in Q2, others cities registered increases in headline office rent, although these were often driven by index-linked office lease structures, noted Savills. Apart from Dubai, these included Asia Pacific cities like Seoul, Shanghai, and Ho Chi Minh City, as well as key European metropolises such as Madrid, London, and Amsterdam.

Data from Savills also revealed that the average office utilisation rate has jumped to 59 percent across the office markets it surveyed – the highest level since the pandemic, although there is significant geographic variation. This is up from the 49 percent seen during the first quarter of the year.

“This is the first quarter where the vast majority of our key markets have not faced restrictions on the return to the office and when hybrid working trends have become established,” said Matthew Fitzgerald, Director of tenant advisory team at Savills EMEA.

“Many occupiers have focused on creating inspiring, collaborative workspaces to attract the best talent and in line with their commitments to sustainability. This has held demand for the best in class space, keeping rents high in this segment of the market, whilst inflationary pressure on fit-out and labour in many markets in Q2 have also added to overall costs.”

Moving forward, macroeconomic uncertainty may result in some office tenants treading more cautiously, but this stance could lead to higher related expenses.

“But any tentativeness needs to be balanced against the fact that supply chains are long and construction increasingly expensive, with office space in some markets taking 50 percent longer to be delivered. While occupiers may want to delay decisions while they confirm their final working arrangements, the reality is that doing so they may face tighter timelines and more expensive estimates in the long run,” added Fitzgerald.