Battle for brain power is forcing occupiers to prioritise talent in a costly European location strategy

With business and consumer confidence at its highest level since the GFC, attracting and retaining talent has become the biggest challenge for employers. In Europe, this issue is being further compounded by a severe lack of available office space across the continent’s CBDs, says Savills.  

Vacancy rates in Europe’s CBDs are currently experiencing unprecedented lows. In terms of available space, Savills reports that the tightest markets are Berlin (2.5%), Paris CBD (3%) and Munich (3.6%).

“In order to remain competitive, occupiers need to be in a position to attract and retain the very best talent, which more often than not requires a CBD location with access to public transport and amenities,” comments Matthew Fitzgerald, Director, Savills European Tenant Representation team. “With the severe shortage of available office space across these locations, it means occupiers are now being forced to choose between accepting rapidly increasing occupancy costs and talent retention or an office in a more affordable, less attractive location.”  

According to Savills, prime CBD rents increased by 5.2% yoy on average in Q2 2017. Unsurprisingly, rental growth was particularly strong in cities where vacancy is the lowest or where is decreased the fastest, namely Berlin, (+33.2%), Stockholm (+16.7%) and Amsterdam (+15%).  Interestingly, prime rents in non-CBD locations increased by 3.9% yoy on average.

“With rising occupancy costs and limited options for space, occupiers are now having to plan further and further in advance of their lease expiries and engage in strategic planning to ensure business continuity is not effected,” comments Fitzgerald.

Whilst CBDs remain, by far, the preferred locations, Savills suggests that some companies have no other choice than moving into suburban areas with more choice of office space. Oslo, Copenhagen, Munich, Stockholm are all cities that have seen this overspill from the CBD. “In the desirable CBD hot-spots such as Paris, Berlin, Munich and Amsterdam, we have observed that some companies choose to limit their CBD requirements for their core operations and move support stuff to  non-CBD locations, where they can find larger, cheaper space,” comments Eri Mitsostergiou, Director of European Research, Savills.  

In addition to companies rethinking their city strategies, Savills suggests that occupiers should consider improving the design and layout of their offices. The workplace is an extension of a company’s culture, which can engage employees and improve productivity. Offices now need to cater for four generations in one building therefore healthy investment and into an attractive workspace can pay dividends when looking to attract and retain talent.  

According to Savills, with M&A activity on the increase, the shortage of office space will only get more severe. And with a scarcity  of development land, supply in Europe's CBDs will not drastically improve in the short to medium term. “The development pipeline is slowly increasing although completions in the major 15 European capitals in 2017 are expected to be no more than one third of last year’s take-up,” comments Eri Mitsostergiou. “This ratio is predicted to reach 40% by 2019, when we may start seeing a rebalance of supply in the favour of tenants. The cities that are expected to see the most significant rises in annual new supply in 2018-19 compared to 2016-17 are Dusseldorf, Cologne, Berlin, London City and Paris.”

In the meantime,  Savills indicates that the interesting locations to watch are the burgeoning peripheries of these CBDs, where real estate developers are identifying opportunities to create  attractive office space around A class amenities, targeting companies forced to look beyond CBD zones. “Already we have seen developers improving the amenites and enhancing areas such as the South Axis in Amsterdam, the northern suburbs of Brussels and the peripheries of Stockholm’s CBD, to the effect that banks, legal firms and the TMT sector are all committing to longer leases in these locations.”