European office market activity subsides
European economic growth is operating in a global environment that whilst not unfavourable, is beset by many uncertainties. The latest and largest to rapidly emerge is the external trade policy that will be conducted by the new U.S. president. At a European level, the well-known uncertainty in the short and medium-term relates to the Brexit situation in the United Kingdom, as British and European negotiation strategies on their economic relationship are still vague and may remain so in 2017. But events that relate to a potential change in European political executives could also generate a wait-and-see attitude. The first of these events is the Italian referendum on the 4th December. In 2017 further uncertainty may come from elections in France, Germany and the Netherlands that may see a surge in populism. Eurozone GDP growth should reach 1.5% in 2016 as most of the impact of the Brexit is likely to occur in 2017. GDP growth in the Eurozone in 2017 is expected to be around 1%.
After on-going growth during the first half of the year, office take-up in Western Europe subsided in Q3 2016. Nevertheless, with 5.8 million m² transacted during its nine first months, 2016 is the best year since 2008 so far, 5% above 2015 figures. This performance is led by Brussels (+48%), Central Paris (+16%), and German cities (+14% for the four main markets). While Central Paris and Brussels were fuelled by deals for units larger than 20,000 m², small and mid-range size classes contributed strongly to the performance of German markets. This also occurred in Madrid, where the take-up is at a good level despite the absence of mega deals in 2016. In Central London, the market dropped (-27% compared to Q1-Q3 2015) in spite of two very large unit transactions.
The average vacancy rate of the 14 main European markets kept on shrinking in Q3 2016 and hit its lowest point since 2007 at 8.2%; it has lost in average 60 bps over the last 12 months. Only Central London and Luxembourg saw vacancy rates picking up. This contraction trend is driven by the CBDs that exhibit the lowest vacancy rates in each market. This is particularly evident in Brussels, where the CBD vacancy rate lost 40 bps in one quarter. German cities have reached their lowest level of vacancy in 15 years with the situation becoming quite dramatic in Berlin with the vacancy rate dropping below the 3% mark for the first time ever. Due to a high level of deliveries, the vacancy rate in London is unlikely to show any significant falls in the short to medium term.
As a consequence of high occupier demand mainly directed to CBDs and a substantial reduction of the vacant space in these prime locations, prime rents remained high or increased as in Berlin (+6%), Brussels (+ 4%) or Lisbon (+4%). In Berlin, the prime rent has climbed by 17% to €336/m²/year, an all-time record for this market. In Paris and London, commercial incentives saw little movement in Q3 with average rent free periods holding steady.