Falling European vacancy levels drives rise in office rents but growth to slow as development activity picks up

The average prime rent in a European Central Business District (CBD) grew 2.5% year-on-year to the end of Q1 2017, with non-CBD rents also rising by 3.5%, as a lack of high quality space pushes tenants towards alternative locations outside city centres, according to Savills latest European Offices Market Report.

Rental growth is above the five-year average in 12 of the 15 European markets monitored by the international real estate advisor, with increasing demand and limited supply pushing rents in CBDs up 7.5% and non-CBD rents up 6% above the five-year average, although Savills says that as new supply comes to the market growth will slow across most locations.

With office take up across Europe increasing 4% year-on-year to the end of Q1 2017 to 2.46 million sq m, a 9% increase on the five-year average, the average vacancy rate has fallen 60 basis points (bps), according to Savills. Across Europe the overall office vacancy rate currently stands at 8%, with all but three markets seeing a fall in available space. For the majority of markets the Q1 2017 vacancy rate was the lowest registered since 2008. Amsterdam saw the biggest fall, falling 420 bps year-on-year thanks to a 90% increase in office demand compared to Q1 2016. The tightest markets in terms of supply are unchanged from previous quarters with Berlin (2.5%), Stockholm (2.75%) and Paris CBD (3.43%) registering the lowest vacancy rates.

Matthew Fitzgerald, director, Savills European tenant representation team, comments: “Business expansion and M&A activity is driving demand for space across Europe. Occupiers are more than ever driven by the need to attract talent which requires quality CBD locations with access to amenities. Falling vacancy rates on a regional level and the real lack of CBD space in key cities is forcing occupiers decide between prime central locations with rising occupancy costs or more affordable locations with alternative staff attractions. Fringe locations that can provide quality office space with good transport links and are benefiting from the spill over out of the CBD.”
The downward shift in vacancy levels is starting to filter into increased development activity, particularly in peripheral areas where there is a greater availability of land. Savills forecasts that the development pipeline will rise 8% per annum in 2017 and 10% in 2018. In addition, developers are set to focus their renovation plans on updating grade B space into grade A in ‘B’ locations.

Eri Mitsostergiou, director, European research at Savills, adds: “By the end of 2017, CBD rental growth will stabilise across the majority of the markets in our survey area, with only Oslo and Paris CBD are expecting rental growth to outstrip the five-year average. But new locations will become popular with cost conscious tenants who are being priced out of traditional prime locations. Co-working and flexi working spaces will continue to be a popular short-term solution amongst larger companies who require business space in prime locations.”

Read Savills European Offices Market Report here.