Economic recovery in Europe boosts office market take up by 21%

The third quarter of 2015 has shown a positive trend in the demand for good quality office space according to international real estate advisor Savills.  Across the 18 European cities analysed by its research department, take-up in Q3 this year was close to 2.4 million sq m, 21% higher than Q3 2014 and 11% above the five-year average.  In half of the markets studied, take-up rose to more than 35% on last year. Notably, Amsterdam and Dublin saw office take-up increase by 142% and 120% respectively, driven by some large scale deals in the TMT sector in Amsterdam and an expanding ICT and professional services sector in Dublin.

“The knock on effect of improved economic conditions in the Eurozone has also seen a marked increase in M&A activity, which in turn means that  the financial and legal  firms have experienced significant expansion in order to accommodate the increased headcount,” comments Matthew Fitzgerald, of Savills’ European Occupier Services team. Increased regulatory requirements means that many firms have looked to extend  both in-house and outsourced auditing and compliance departments, again driving the need for space. Expansion requirements, coupled with the upcoming supply lag in many cities means occupiers are being forced to act now to secure their requirements.”

Rents are also increasing beyond the CBD in core cites. Good quality space becomes increasingly more expensive as demand strengthens forcing occupiers who are seeking value for money and space to look beyond the CBD. Rents for non-CBD locations can range between 15% (Amsterdam) and 47% (Madrid) lower compared to the previous high,  however some cities are catching up fast and prime non-CBD rents across the continent increased by 4.5% y-o-y  in Q3 15 compared to 3.6% in the CBD.

As Europe continues along the path to recovery, the average vacancy rate has been falling consistently since 2010 and Q3 2015 saw the lowest vacancy rate of 8.2% since 2008. In Q3, the highest decreases in the availability of space compared to the previous year were noted in Dublin (-3.4percentage points) and London City (-3.1pp) due to significant pick up in leasing activity and a drop in new supply. “Development activity has not yet picked up significantly in Europe and we will see a lower volume of office completions in Stockholm, London, Dusseldorf, Frankfurt and Cologne in 2015, says  Eri Mitsostergiou, Director of European Research at Savills. “However, the office construction activity in the remaining markets surveyed will be higher than last year, and we expect the total volume of completions to be up 4% from 2014.”

There is also evidence in at least a quarter of the markets that incentives for prime office space are going down. Overall rent free periods account for about 9.1% of the total lease period, down from 11.1% in Q3 14 and 13% in Q3 13.

“European office take-up has picked up significantly in 2015 pushing availability to a six year low and this is a clear sign that the markets are recovering,” comments Eri Mitsostergiou. “The total take up volume across the 18 core cities in 2015 should be up 10% on last year’s figure and due to stronger competition, we expect supply to go down further in two thirds of our markets in 2016.”  Savills also forecasts an average prime CBD rental growth of 4.7% (high scenario) across its markets next year and expects Dublin (19.1%), Madrid (11.5%) and Stockholm (7.5%) to top the league, followed by key German cities (7%).

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