European prime office rents

Increase of rents in Warsaw will be a result of lower new supply of office space forecasted to be delivered in the months to come, especially in central location, high demand for office space and growing cost of construction.

Savills has recorded that since 2010 the average prime rental growth across Europe’s CBDs has been rising constantly; in Core markets by 2.4%pa and 5.4% pa in the Nordic region. In addition to rising rents, vacancy rates in Europe’s CBDs hit historic lows in Q3 last year, at an average of 6.6%, meaning that there is very little choice of high quality space for occupiers.

Eri Mitsostergiou, Director, Savills European research, comments: “Following at least four years of rising demand and cautious lending conditions for new construction, the availability of office space has been shrinking. As a result, these conditions have long been most favourable to landlords of high quality buildings in Europe’s cities but very unfortunate for those occupiers who are competing for limited stock and dealing with rising costs.” 

“Availability of office space has decreased also in Warsaw. Considering relatively low new supply projected in 2018 and 2019 and high tenants’ activity visible both in gross take-up and record high level of net absorption, further decrease of vacancy rate is to be expected with a small increase of rents,” - says Wioleta Wojtczak, Associate Director in Research Department, Savills.

There are now a number of European cities where prime office rents are considerably higher than the pre GFC peak in 2007. These include:  Stockholm (+49%), Berlin (35%), Oslo (26%) Munich (16%) and London WE (14%).

“The economy in these markets has gone from recovery to rapid expansion and with a strong GDP growth forecast for the next few years, continued business expansion will sustain positive rental growth across Europe’s CBDs,” says Matthew Fitzgerald, Director, European Tenant Representation, Savills.

Wioleta Wojtczak comments “Expansions accounted for almost 11% of gross take-up in 2017, which translates into over 90 000 sq m of office space. It is a growth from 3% recorded in 2012. There are no signs this trend to reverse. Record high level of net absorption is another sign companies require more office space”.

Savills has analysed that the overall amount of space in the pipeline for 2018 -2019 across Europe’s CBDs is around 10.5 million sq m and this corresponds to about one year’s take-up, based on the long term average. As it should take some time before demand and supply rebalance, upward pressure on prime CBD rents will be sustained and for 2018 Savills forecasts an annual increase of 2.5% pa on average. Notably Oslo, Madrid, Barcelona and Copenhagen are likely to encounter annual rental growth of over 4%pa and there is speculation around how high rents can go in some of these markets.

New supply expected in Warsaw over the course of 2018 and 2019 is forecasted at ca. 450,000 sq m, divided more or less equal between 2018 and 2019. The average annual level of net absorption from the last five years stands at 237,000 sq m, with record 378,500 sq m of office space recorded in 2017.

Matthew Fitzgerald suggests: “Occupiers are expanding and the competition to hire the best talent is driving demand for prime space in the CBD. For key industries, the race to attract the smartest workforce has overtaken cost concerns relating to location. This is a trend which is likely to continue unless we see another dip in business sentiment across Europe, and property costs again become too much of a burden on company balance sheets.”