Sustained office demand is creating historic lows in Europe’s CBD vacancy rates
The office market remains dynamic in Europe despite a slower economy
The European office market was still thriving in 2019, with take-up amounting to 12.73M sqm, barely 3% down on a very active 2018, and still well above the long-term average. Occupier momentum is still sufficiently great, even with economic slowdown, for many city markets to perform extremely well and achieve new highs in take-up. Records were broken last year in Milan (+25% vs. 2018), Rome (+60%), Brussels (+42%, best performance since 2007), Barcelona (+6%, best result since 2005) and Lyon (+33%). Another all-time high was in Berlin, where transacted volumes stood at 1.02M sqm (+22%). Berlin’s result is the first time ever that any German city reported take-up in excess of 1M sqm. Berlin allowed the combined four main cities of the country to reach 2.93M sqm, despite a dip in Munich (-21%), Hamburg (-9%) and Frankfurt (-6%). Leasing activity in Central London slowed compared to 2018 (-18%) and was below its long-term average, despite the good demand from media- tech companies and the finance sector. The lack of deals for large units (> 5,000 sqm) hampered the market in Central Paris, which was 6% below its 2018 result. However, the overall demand level remained good in the French capital as take-up was above its 10-year average.
Low vacancy and competition for the best space is pushing up rental values
The overall office vacancy in Europe reached 5.8% at the end of 2019, 40 bps down on 2018. With only 1.5% of empty offices, representing 304,000 sqm, Berlin displays the lowest vacancy on the continent, followed by Munich (2.4%), Vilnius (3.4%) and Luxembourg (3.6%). Other markets saw important drops in vacancy year-on-year, such as Barcelona (-210 bps, ) and Budapest (-170 bps). It is unlikely that Europe will see large increases in vacancy over the next five years: the restrained construction pipeline and strength of demand mitigate against that scenario occurring. The lack of supply pushed up prime rental values over 2019, especially for the prime assets located in the best-located business districts in Europe. Big increases in rents occurred in Lisbon (+19%), Berlin (+11%) and Barcelona (+10%), all among Europe’s liveliest office markets.