Signs of Stability Emerging in European Office Markets
London, 26 November 2009 – Take-up in the EMEA office market rose in the third quarter of 2009 compared to the second quarter, despite continued low leasing activity levels as a whole this year compared to 2008, according to CB Richard Ellis’ latest EMEA office market research.
Across the region, aggregate take-up in Europe increased slightly in Q3 2009, but leasing activity will clearly fall short of last year’s levels, probably by around 30%. Expansion appetite is still limited as tenants renegotiate lease terms and corporates remain preoccupied with maximising the efficiency of existing space.
These trends continued to cause downward pressure on rents in Q3 2009, with the CBRE EU-27 index of prime office rents down by 1.6%, although this is the smallest rental decline the index has recorded in the past year. Western European office rents in particular showed signs of stability or only marginal reductions, with steadiness noted in core markets such as Paris, Frankfurt and London’s West End. Markets such as Madrid, Zurich and Dublin remain notably weak, with overall rental levels likely to remain subdued in these areas, at least in the short term. Moscow was the most active letting market in Q3, but CEE markets more generally are among those seeing downward pressure on rents.
The patterns observed in London suggest the market is now emerging from a period of decline. A 61% quarter-on-quarter rise in take-up levels was noted in London in Q3, as well as a sharp rise in the volume of space under offer, suggesting there is momentum in the market that would be expected to feed through into leasing levels in Q4.
Richard Holberton, Director, EMEA Research, CBRE, said: “Having entered the downturn earlier and more steeply than others, the UK in particular is now beginning to show signs of improvement ahead of other markets. Since the largest non pre-let property transaction ever seen in the City of London - Nomura’s 500,000 sq ft acquisition at Watermark Place in August - there has been a pick-up in activity. From an occupier’s perspective, this reflects a growing view that the market is unlikely to get much better than it is now - incentive packages and rental terms look set to tighten next year, creating less choice and a shrinking window of opportunity for occupiers.”
On the supply side, the EU-27 office vacancy rate saw the sharpest rise of the year, reaching 8.7% in Q3. However, vacancy trends are beginning to show much greater local variation; London and Moscow saw vacancy reductions this quarter, but this was outweighed by increases in the Spanish markets as well as in Paris and Central and Eastern Europe.
Holberton continued: “In an uncertain environment in which many corporates have reduced headcount, there is believed to be additional slack in the markets due to unused and under-utilised space, understating the true picture. Vacancy in existing buildings will, however, offer occupiers expansion space, even if measured vacancy begins to contract. Occupiers must bear in mind that their choice of large-volume prime buildings in central business district locations is, in many cases, far more restricted than overall market trends would indicate. Unoccupied space has the potential to drag on rental recovery, but development pipelines are continuing to contract sharply – a good indicator of future supply potential.”
A lack of new development activity across Europe due to weak demand, rising vacancy levels and falling rents, as well as restricted availability of finance, has started sowing the seeds of future supply constraints. “There is little evidence anywhere of new development starts taking place on a speculative basis and occupiers need to be aware of individual city pipelines to ensure they act whilst there is sufficient choice of space. Our research suggests that, from next year, we will see significant reductions in development completions across those markets that are most advanced in the development cycle, notably London and Paris, and from 2011 the rest of Europe should follow suit,” concluded Holberton.