Hot to Trot – Western European Office Market Heats Up. Are you ready to take advantage?
The demand for office space across Western Europe has hit its highest level since the financial crisis. Tim Hamilton, Senior Director - EMEA Global Corporate Services, explains what is driving this trend and what it means for real estate corporate occupiers.
The second quarter of 2014 has seen a 21% uplift in office take-up on the first quarter across Western Europe. This marks the highest second quarter take-up since the equivalent period in 2009 - the height of the financial crisis. Across Europe as a whole, aggregate take-up rose by a healthy 12.2% compared to the first quarter of the year.
Driving this is strengthening activity in some core markets namely London, Milan and Lisbon while Paris is showing signs of an upturn in fortunes too. London saw a 29% quarterly take-up increase compared to the first quarter, with corporate occupiers returning to the market with new office space requirements. Similarly, Milan’s take-up more than doubled, across the same period, to 94,000 sq m while Lisbon recorded one of its strongest quarters in recent years. In addition, the Paris office market which has largely been subdued during the downturn with occupiers lacking the confidence to relocate, posted its highest office take-up level for two years in the second quarter, representing a 28% uplift on the first.
Often, a direct knock-on-effect of increased demand for office space is vacancy declines. We’ve seen this across Western Europe with the overall vacancy rate falling in the second quarter. Drilling down further, Central London saw a third consecutive quarterly decline in vacancy rates with prime space now in very short supply. Likewise, Brussels, Paris and Amsterdam also contributed to vacancy dips with ever increasing demands for office space in prime locations. Meanwhile, Frankfurt saw the most noticeable drop, where vacancy fell sharply for the second consecutive quarter driven by the removal of obsolete stock and the conversion of older commercial buildings into residential units.
Crucially, vacancy rates effect rental costs and this is starting to filter through into some key markets. Madrid, for example, has seen its prime rent increase from €24.50/sq m per month to €24.75/sq m per month in Q2, which although on the surface seems relatively small, it represents the Spanish capital’s first rental growth since the recession, symbolic of improved economic stability. The strongest performing office markets continue to see the steepest rises in prime rents, Dublin saw rents rise by a huge 14.2% in Q2 to €430.50/sq m per annum driven, in part, by strong demand from Technology, Media and Telecoms occupiers. London’s West End market recorded a 2.4% increase in rental growth across the same period.
So, why the upturn now?
During the recession the overwhelming, yet understandable, market trend was one of cost consolidation. This was felt worldwide and no sector was immune. Today, the market is not yet as buoyant as it was pre-recession, however, there is ever increasing corporate appetite to lease or acquire space, particularly across Western Europe. This is encouraging as it signifies that occupiers who have been hamstrung in recent years by tightening budgets resulting in a contraction of take-up levels, are now in a position to flex their muscles and take new space.
As the macro-economy and market strengthens, the growth in prime office rents is likely to become more widespread over the next 12 months particularly given the short supply and a relatively thin office development pipeline. Having spent a number of years taking advantage of falling rents, occupiers will need to start factoring in potential future rental increases into their strategic decision making.
Tim Hamilton, Senior Director - EMEA Global Corporate Services