Lack of stock putting squeeze on European office market - Savills

A lack of available office space in prime CBDs across Europe is set to lead to a fall in take-up and further rent rises throughout 2018, adding to the 4.9% prime rental increase seen during 2017, according to new research from Savills.

The international real estate advisor’s European Offices Market Report forecasts that total office rental growth in 2017 will be 4.9% above 2016 levels, but that full-year take-up volumes will have fallen by 3% due to a lack of stock. Prime CBD rents grew 3.3% in Q3 2017 year-on-year, while in non-CBD locations they rose 1.7%. Savills predicts that as good quality space remains limited, prime rents will continue to grow in some locations in 2018, with specific price corrections occurring in after 2019 as new office developments are completed.

Total take-up reached 8.2 million sq m in the first three quarters of 2017, says Savills; on a par with the same period in 2016 and 2% up on the five-year average. Limited options for occupiers in the face of low development have resulted in sharp year-on-year falls in Brussels (-60%), Vienna (-46%) and Paris La Defense (-58%). The average vacancy rate across Savills survey area fell 6.9% year-on-year, with the majority of markets remaining at historic lows.

Alice Marwick, analyst in Savills European research team, comments: “While rents in periphery or secondary areas are on average 30% below those in CBDs we’re seeing big corporate tenants choosing to pay more to have a prime building in a strong location, rather than considering cheaper options that may threaten staff retention. This has led to landlords having a strong negotiating position with incentives decreasing, but supply will gradually increase towards the back half of 2018, decompressing the tension between supply and demand.”

Savills expects office completions to rise by 17% in 2018 compared to 2017 and by a further 18% in 2019, but 36% of this space is already pre-let. Tenants who are looking for the best quality space in prime locations must therefore be willing to wait 12-18 months for new or renovated office space, says Savills.

Matthew Fitzgerald, director, Savills European tenant representation team, adds: “Although an increasing number of tenants are trying to opt for short to medium-term leases to increase business flexibility, the reality is that landlords are benefitting from falling vacancy rates. This means that tenants are having to enter into longer lease terms, providing increased security for landlords. In response to this, tenants are turning to alternative office solutions as they struggle to find appropriate space. Serviced office providers continue to grow and co-working is heavily influencing the sector as tenants are looking for temporary, short-term solutions to the current supply shortage.”

Read Savills latest European Office Market spotlight here.