Lack of office completions across European core markets creating critical lack of supply

21 December 2016

According to international real estate advisor Savills the level of office completions across Europe is 9% down on last year, which was already 16% lower than 2014.  This, combined with increasing demand for high quality space, is significantly reducing the supply of office space  across Europe’s core markets.
 
Savills recorded that the average vacancy rate across Europe in Q3 fell to 7.9%, down from 8.45% in Q3 2015.  The tightest markets in terms of supply are relatively unchanged from previous quarters with Berlin, Munich, London WE, Paris CBD, Stockholm and Zurich recording vacancy rates below 5%.  Lydia Brissy, Director of Savills European Research, comments: “In core countries, office supply has reached pretty much the same low as pre-crisis levels,  and the situation is becoming critical for companies who need to relocate. Several are now forced to postpone or revise their plans if they do not want to move out to suburban locations.”
 
Notably Stockholm (3.1%) and Berlin (2.9%) have the lowest vacancy rates in almost a decade. Consequently they have observed Europe’s highest yoy rental growth of 19.6% and 12.1% respectively.  Paris La Defense (10.2%), Zurich (6.5%) and Paris CBD (3.2%),  all witnessed strong positive rental growth. In peripheral markets however, office supply is still above the levels recorded in 2007- 2008. And with vacancy rates above 12%, Amsterdam, Helsinki and Warsaw are at the other end of the spectrum.
 
Savills European Office Market report states that prime CBD rents across Europe grew an average of 2% yoy, down from the 4% growth recorded in Q3 2015. Based on the overall office pipeline,  a rebound of development activity across Europe of 25% is expected in 2017 (compared to -9% anticipated at year-end) and as a result, the average prime CBD rental growth will slow to 0.5% yoy. Despite the uplift in office completions, Europe is far from an over-supply situation. Of the 2.5msqm of office space in the pipeline for 2017, much of this is already pre-let, therefore the vacancy rate will continue to decrease and reach 7% at the end of 2017.
“Next year however, prime rental growth will be stronger in non-CBD locations as suburban areas offer newly developed large-scale office premises which are scarce in most CBDs”, comments Brissy. According to Savills, average prime rents in non-CBD locations across Europe increased by 4% yoy, which is driving competition for high grade property in these areas. 
 
Savills has recorded that office take- up across Europe is up 1.9% yoy and 7% above the 5-year quarterly average, and demand is set to grow due to decreasing unemployment and growing business expansion. 
 
Matthew Fitzgerald, Head of Savills European Tenant Representation, Savills,  comments:  “The lack of supply across all of Europe has become a significant issue for European businesses over the last 12 months, with a rise in occupancy costs and real pressure  from landlords. However,  there are unprecedented levels of uncertainty surrounding business and it remains to be seen what effect the US elections, Brexit and the upcoming elections in Europe will have on overall occupier demand.”
 
Brissy adds: “Half of the markets we cover in this report are, and will remain, constrained by tight supply situation and we are predicting that overall take-up levels in 2017 will be around 13% down, compared to 2016. The development pipeline isn’t set to effectively replenish office stock until 2018, when we will expect a turning point in terms of rental growth.”

 
 

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Key Contacts

Matthew Fitzgerald

Matthew Fitzgerald

Director
WOS - Tenant Rep

Savills Margaret Street

+44 (0) 207 299 3082

 

Lydia Brissy

Lydia Brissy

Director
European Research

Savills Margaret Street

+ 33 (0) 1 44 51 73 88