European office markets maintain momentum
Economic growth should remain solid in 2016 in the Eurozone, still benefiting from lower energy prices plus weak interest rates. However, the UK's decision to leave the EU will affect short-term growth in several ways: a direct impact on trade, heightened uncertainty and a tightening of monetary and financial conditions. GDP growth in the Eurozone has therefore been revised and is likely to be 1.4% and 0.9% in 2016 and 2017 respectively. European countries will be affected in varying degrees: Ireland has by far the greatest exposure, Germany is the most likely to be impacted of the four largest Eurozone countries and Italy the least. The long-term economic impact of Brexit is uncertain, depending on the form the new EU-UK relationship will take.
Occupier office take-up continued to increase in Q2 2016, totalling 3.8 million m² in H1 2016. On a rolling year basis, occupier demand for office space maintains the expansionary trend seen from 2014, progressing by 9% in H1 2016 compared to H1 2015. It is for the first time beyond 2008 take-up volume. Most of European cities are exceeding their 5-year averages except for four cities including notably Central London (-16%), directly affected by the pre-Brexitvote wait-and-see attitude.
Brussels performed well (+80%) due to an exceptional Q2 marked by > 5,000 m² transactions, Central Paris maintains the Q1 2016-momentum (+28%), while Berlin's office market (+21%) beats half-year record of 2015.
As regards supply, European office markets solidly continued its downward trend. Most cities are seeing their vacant space volume decline due to the higher level of transactions over the past two years combined with the still modest new construction. Thus, the vacancy rate declined over the last 12 months, losing an average of 70 basis points, with 200,000 m² of vacant space absorbed during Q2 2016 in European countries. The vacancy rate reached 3.5% in Berlin and 4.3% in Munich, hitting a 10-year low for these markets.
Over the last 12 months, half of European city prime rents increased, but no significant change occurred in H1 2016 except a rise for Berlin (+6%), which hit a historic high. The apparent stability of rents in other cities may be hiding a gradual reduction of incentive packages which typically anticipate headline rents increases.