According to Savills latest European office market report, rental growth for prime CBD and secondary office properties is expected to polarise further.
According to Savills latest European office market report, rental growth for prime CBD and secondary office properties is expected to polarise further. The report highlights that the tight supply of prime office space is causing rents to rise or stabilise in the best locations whilst secondary rents are decreasing due to higher availability and rising incentives in secondary buildings and locations. In one third of the markets surveyed* rental growth of above 4% was recorded for prime CBD offices in 2013, with Dublin (16.1%), Helsinki (7.4%) and Oslo (6.1%) at the top of the ranking. Going forward the firm predicts that the highest prime CBD rental growth trends in 2014 will be recorded in London’s West End, Dublin, Manchester and Brussels. Secondary CBD rents recorded varying results with markets such as Paris, Warsaw and Belgrade experiencing significant (-10% to -12%) rental discounts, however in Brussels, Dublin, Oslo, Stockholm and London a rental growth of between 5% and 10% has been recorded.
Tight supply of prime space is reflected in low CBD vacancy levels with the average CBD vacancy rate recorded at 7.5% across the markets surveyed, compared to an overall average vacancy rate of 10.2%. The international real estate advisor attributes the decreasing supply of prime stock partly to demand being driven by large-scale requirements. These have been characteristic of most European markets during the downturn as occupiers have, in many cases, consolidated their space and downsized to bring operations under one roof. The firm notes that this has resulted in the absorption of the best space and vacancy being largely concentrated in secondary locations and buildings. Savills expects overall average vacancy rates to drop below 10% in all markets except Helsinki, Athens, Berlin and Warsaw. The tightest markets are currently London, Berlin, Munich and Vienna where average vacancy is below 7%, according to Savills.
Eri Mitsostergiou, European research director at Savills, comments: "Occupiers in European markets are still looking for high quality buildings so the availability in prime locations is much lower than average, pushing rents up. We are now also beginning to see falling supply of prime office stock, which is triggering developer activity for refurbishments and new buildings, setting off a new cycle.”
The research finds that in 2013 the level of development completions across the markets monitored increased by 12% on average with the highest rises noted in Berlin (68%), Frankfurt (99%) and the City of London (75%). As well as new developments the firm notes that landlords are increasingly opting to refurbish and upgrade older office space in good locations, particularly in Madrid and Milan. In addition, landlords in some markets are seeking new uses for older office stock so that they remain viable and marketable. For example, in Amsterdam and in Frankfurt approximately 200,000 sq m and 120,000 sq m of office space respectively has changed use to residential and other uses in 2013 contributing to a decrease in supply.
Savills data records total take-up in the survey area at 7.9 million sq m in 2013 and expects take-up volume to remain largely stable or grow in some markets in 2014, except London which saw exceptional levels of demand in 2013. The firm predicts total take-up will reach 7.8 million sq m by year end across the markets it monitors.
Eri Mitsostergiou adds: “Take-up in 2014 will be determined by a firm improvement of economic conditions and business sentiment on the one hand and by the availability of the type, size and location of stock being sought by occupiers on the other.”
*Savills survey area includes Vienna, Brussels, Paris, Berlin, Frankfurt, Munich, Dusseldorf, Hamburg, Cologne, Athens, Dublin, Milan, Amsterdam, Oslo, Warsaw, Madrid, Stockholm, London, Helsinki, Belgrade