Elevated energy prices and construction costs, tightening monetary policy and high inflation have dampened European economic growth prospects. While the pan-European road to recovery may be fractured between countries able to deal with difficult market conditions, the office occupational markets appear more resilient and insulated from volatility. This may set the scene for a V-shaped recovery following a European-wide recession.
A tight labour market will support the economic recovery
The economy will benefit from record low levels of unemployment in 2023 with job vacancy rates at record highs. Although the unemployment level is forecast to rise slightly, it will remain much lower than in previous economic crises. The recent Deloitte European CFO Survey claimed that skilled labour shortage is among the top three risks for companies in Germany, the Netherlands and Austria, highlighting that the labour market is still strong and that the economy may hold up better than expected. Competition for talent means businesses will also be keen to both attract and retain staff by signing leases for good quality office space.
A scarcity of ESG compliant offices will support rental growth
With a more limited development pipeline as a result of rising construction costs and supply chain shortages, we anticipate the availability of prime, ESG compliant office stock will become even scarcer.
Demand for prime, best-in-class CBD offices is expected to remain high as occupiers continue to search for assets that comply with corporate ESG strategies. We expect the professional services sector to be a key driver of demand in 2023 and anticipate rental premiums between prime and secondary stock to widen further, as rental indexation in mainland Europe will help to shield investors from inflation.
Buyers will benefit from less competition
From an investment perspective, cash-rich private equity firms are well placed to navigate rising interest rates, inflationary pressures and macroeconomic instability. Data from Savills latest EME Investor Sentiment Survey conducted in September 2022 shows that a quarter of respondents reported dry powder increases of over 10 per cent against the previous year. Given rising regulations on energy certifications, this presents an opportunity for value-add investors to retrofit older stock, while proactive core/core plus investors will be seeking to buy prime assets at a discount in a market of fewer buyers.
So as long as there are bright spots in the office occupational market, investors have a reason to remain positive.
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