Vacancy rates still declining in a strong office letting market
The main 15 European office markets experienced a slower pace in occupational activity in Q2 overall, which mostly stems from reduction in large unit lettings in Europe’s biggest cities. With an aggregate 4.75 million sqm of lettings in H1 2019, volumes decreased by almost 2% compared to H1 2018. However, this level of take-up is still good as it is the 2nd best performance of the decade and as some markets continue to achieve records.
Central Paris and Central London were the most affected by slowdown in occupation rates. Volumes dropped to 996,000 sqm (-16%) for Paris and 549,000 sqm (-18%) for London, although both remained in line with their 10- year average. More encouragingly, expectations for large unit deals by the end of the year in Paris are high, whereas London is performing better than expected in the context of the approaching Brexit deadline. Despite the weaker economy in the country, the four main German markets continue to perform extremely well, with a 5% increase in volumes. Berlin (418,000 sqm, +9%) and Hamburg (306,000 sqm, +23%) both set new all-time highs, and Munich regained its position as the leading German market, despite a drop in volumes (428,000 sqm, -8%). The Frankfurt market grew by almost 3% (281,000 sqm). Thanks to an exceptional Q1 and a dynamic Q2, the Brussels office market recorded a 125% increase over 6 months. The private sector drove the market, accounting for 91% of Q2 take-up. Madrid (342,000 sqm, +35%) recorded its best H1 since 2007 and Barcelona (250,000 sqm, +25%) and Milan (242,000 sqm, +18%) their best H1 ever. Prague (156,000 sqm, +6%) also came close to its record.
The average vacancy rate in Europe reached 6.2% at the end of H1, representing an 80 bps fall year-on-year. The share of empty premises contracted in most markets, except in Bucharest. The lowest vacancy rate in Europe was still recorded in Berlin (1.7%), followed by Munich (2.2%) and Luxembourg (4.3%). Vacancy dropped the most in Warsaw (-260 bps), whereas Lisbon (-210 bps), Amsterdam (-190 bps), and Dublin (-180 bps) also saw important declines in vacancy. In Brussels, vacant office space fell below the 1 million sqm mark for the first time in over 15 years.
Prime rental values remained steady or increased in all main European markets, except in Central London (-2% vs. Q2 2018) where prime rents reached £1,211/m²/year. Hamburg (+11%, €360/m²/year) saw the most significant growth in rental values. Other big increases y-o-y were in Warsaw, Berlin (+9%), and Milan (+5%).