European Office Markets: Better times likely in 2013?

The third quarter of 2012 was not great for the European office sector with leasing and investment activity down and rental growth reversing. However anyone expecting a smooth, demand-driven recovery was pretty much waiting to be disappointed – the road back to any sort of normality was always going to be bumpy and unpredictable.

Looking more postively at the current picture, the cooling of the market in the third quarter was of course largely a reflection of increased uncertainty surrounding the euro zone debt crisis but this reached its height in the late summer and has since stabilised and improved. Indeed, there are now signs that the road blocks put in the way of corporate decision making are being steadily lifted, particularly in more dynamic sectors such as technology and media.

As our latest report notes, (Global Office Forecast 2013-14), the office sector is likely to stabilise in 2013, with slow growth re-emerging even in Europe. The short term outlook may point to a lingering of recessionary conditions in some areas, but a steady improvement is forecast as the year goes by and any growth, however anaemic, will help to lift the corporate mood.

A key issue for occupiers to be alert to however is that the market is not really waiting for a demand led upturn – it is by and large supply led at present, with low levels of development meaning office availability is not being replenished and the choice of modern efficient buildings for occupiers to choose from is declining.

Vacancy was stable in Q3 at around 9.5% of stock across major European cities, but completion levels are running at barely 60% of their 10 year average and look set at best to move sideways in most markets in the next year.  Hence property rents are likely to grow faster than the weak level of forecast economic growth would suggest. We are currently predicting around 1% growth overall in prime rents but markets like London, Dublin, Moscow, Luxembourg and Brussels are expected to outpace this while increases matching or bettering inflation are likely in areas like Paris and major German cities.

This may mean that investors need to broaden their search parameters to access stock in growth markets and any assets with a good location and of a good or at least improvable quality in a market with some degree of liquidity should be in demand. For occupiers the same is true – a shortage of quality space, limited new development and a slow but steady increase in rents, means flexibility will be key to finding a solution to their occupational needs.  2013 could therefore be a more active year but a year of compromises for everyone in the market – and those compromises may be the first real signs that the market is getting back to normal.

David Hutchings, European Research Group, London

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