European Office Market 2019 Overview

It’s good news across the European office market going into 2019, with prime rents up, vacancy rates down and demand continuing to increase.

In the three main markets, take-up in Central London is especially strong thanks to the continued growth of its media and technology sector, which improved 19% in 2018. The four German markets (Berlin, Munich, Hamburg and Frankfurt) dropped by a combined 8% but still represented 3.04m sq m, well above the long-term average. And in Paris, a 30% drop in transactions over 20,000 sq m has seen volumes decline by 9%. However, the share of empty premises fell by 100bps in the French capital.

Many smaller European cities, meanwhile, have seen staggering growth. Vienna is on the rise (+54%), as are Luxembourg, Lisbon (+21%), Milan and Warsaw (+10%).

The average vacancy rate shrunk again in 2018, putting most markets in a strong position going into 2019. However, the vacancy rates in several markets are now presumably at their lowest possible levels, meaning there may be some increases on the horizon.

Meanwhile, prime rental values have also increased in the main European markets, with the exception of Central London, where uncertainty over Brexit has caused rental values to stagnate.

And office demand continues its upward trend as employment growth across the continent drives demand for new office space in cities. Take-up was up 0.8% in 2018, reaching 13 million sq m overall.

As for the overall state of the European office market in 2019, Global Head of Research at BNP Paribas Real Estate, Richard Malle predicts that:

• The European market will slow down but remain resilient
• The ECB (European Central Bank) will continue zero interest rates
• Long-term yield bonds might rise very slightly by the end of 2019 while prime yields will remain stable

Richard Malle believes that the ECB will try to have minimal impact in 2019. “They will stick to the discontinuation of quantitative easing, meaning short-term rates such as the three-month Euribor will go up while still remaining in negative territory,” he says. “This means interest rates will stay low, inflation will be controlled, attitudes to risk will be averse, and growth will be low.”

However, Richard Malle also believes the letting markets are healthy, with vacancy rates unlikely to change and good rental growth potential for flagship locations.

Take-up in 2018 was 361,500 sq m and fuelled mainly by the demand for flexible office operators, who accounted for 20%.

While this is part of an ongoing downward trend observed since 2016, another year of declining vacancy rates (-40bp over the year) and an increase in office investment (up 32%) are encouraging occupiers to jump ahead in pre-letting developments.

Brussels in particular is seeing a number of new sustainable developments and buildings that facilitate social interaction and employee happiness. These buildings are in short supply, making them highly attractive to investors interested in these emerging office trends.

In 2019, some 207,200 sq m are expected to be completed, of which 45% have already been rented. Investors – especially in Korea – are therefore expecting a strong year in the Belgian capital.

Buoyed by a strong Danish economy, Copenhagen continues its upward trend, despite a slight increase (+20bp) in vacancy rates in 2018.

But historically high demand and low vacancy rates across the rest of Denmark have helped to shape a market focused on innovation in the capital.

Of particularly strong interest is the co-working sector, as demand in Copenhagen is being driven primarily by small and medium-sized businesses who are choosing flexible office facilities that can accommodate fast growth.

This makes Copenhagen a particularly attractive area to international investors interested in European offices. Co-working spaces in particular are attractive, as they are not dependent on long-term leases and therefore at lower risk of long periods of vacancy.

Industrial and logistics sectors are, in particular, experiencing significant growth. 2018 was a particularly strong year, with growth almost doubling from 4.5% to 8%.

Investors may baulk at Lisbon; the Portuguese capital presumably hit its peak in 2018, achieving 200,000 sq m of lettings before running into a supply shortfall which will mean no substantial deliveries until 2021/22. However, this is only a temporary setback and has opened the door for 2019 to be the year of office refurbishments. Look out for significant refurbishments at the Parque das Nações and the integrated development of Entre-campos.

This period of low deliveries will give Lisbon time to consolidate its reputation for high quality of life, which in turn will become a major attraction for technology entrepreneurs. By the time new office space hits the market, we expect demand to be on an increasing high.

In the meantime, investors can look out for a diversified investment base which, in 2019, will include student residences, assisted living and health facilities – fantastic asset classes for investors wanting to diversify their risk portfolios.

Source: European Office Market 2019 (BNP Paribas Real Estate)