In Italy, occupational demand has proven to be resilient, whilst flight to quality has supported rental growth. In the first quarter of 2024, office sector returned to be the first asset class in terms of investments volume.

At a global level, in Q1 2024 office investment registered the lowest quarterly outturn since 2009, and the narrative remains negative for the sector in this matter. Capital markets have experienced a much larger decline in activity related to occupational markets, although differences were registered in terms of geographies: in the US, take-up declined by around 30% in 2023 vs 2019, and investment volumes by 50%; in Europe, the decrease of take-up was around 25%, while investments surpassed the 60% mark. Occupiers are generally taking less space due to a number of reasons, such as increasing rents, hybrid working implementation, and uncertainty in the economic landscape. Consequently, forward looking investors are shifting away their preferences from offices, reflecting a negative view on the future of the sector, while at the same time landlords are reticent to sell at discounted yields. In Europe, this has brought the market to a standoff that only lower interest rates can unlock.

In Italy, office sector returned to be the first asset class in terms of investment volume in Q1 2024, with a total of €520 mln, a figure four times higher than Q1 2023, although still below the last 10-years trend. This result was due to the closing of one significant deal in Rome’s CBD. In fact, unlike the past year, Rome attracted most of the quarterly volumes (57%) across two transactions. Milan continues to be the most dynamic city, recording 7 deals out of 9, located in both central and peripheral areas; an owner occupier deal of more than €100 mln stood out. Although still low in volume, the quarter was characterised by an increase of the average deal size that came back closer to the last 10-years average (€58 mln). International investors returned to prevail, while domestic landlords are still on wait-and-see mood. After the slowdown in 2023, a single positive quarter led by two significant deals originated in a different market momentum, is perhaps too limited to consider that the Italian office investment market is firmly returning to the levels of past years. However, in cities like Milan and Rome, landlord friendly conditions are likely to persist in the long term for grade A assets, as near-zero availability and occupier demand remains dynamic. In fact, the Italian office market is heavily under-supplied: still solid occupational market and tight supply are supporting the market as inventory levels for grade A and ESG compliant assets is falling. Obsolescent stock will need to be deeply renovated or repurposed for alternative uses to maintain relevance and appeal in the current market.

The Milan office market was resilient: occupational market is solid and vacancy rate for grade A office buildings is around 2%. By 2027, approximately 860,000 sqm of new supply will land the market, 30% of which is already pre-let. Of the 91,000 sqm completed in Q1 2024, 54% was already leased by the time of completion. Office take-up in Milan recorded approximately 93,000 sqm in Q1 2024, a value 10% higher than the same period last year, and a result that followed two years of record levels. With very tight availability in both CBD Historic Centre and CBD Porta Nuova, coupled with a shortage in grade A product and a strong demand for Grade A assets, prime rents increased in the last 24 months. Meanwhile, grade A deals accounted for 73% of total take-up, higher than the last 5-years average, confirming that ESG factors and quality of buildings are front and centre right now. Geographies are also changing: most deals were closed in Periphery (27%), followed by Hinterland (21%), CBD Historic Centre (18%), and Semicentre (17%). Although the demand for spaces in both CBDs remains strong, supply is too low to satisfy all tenants, so it spills onto other submarkets. The quality of the product drives the choices of the tenants who, compared to the past, are more inclined to move. The average deal size remained stable at around 1,300 sqm in the last 15 months, although we are registering a decrease in the number of medium size deals (600-2,000 sqm; -6%) and an increase in the lower size (<600 smq; +6%). Deals related to the bigger size (>2,500 sqm) remained stable.

Office spaces are changing towards polyfunctional spaces for cooperation, networking and brainstorming, where amenities are registering a growing appeal. Following this, property management is growing in relevance as cost effectiveness matters more and tenants are increasingly demanding. In the last 3 years, higher cost of construction, along with delays in new building completions due to the pandemic and to the disruption in the supply chain, created a pent-up demand that will sustain the market in the next years. Work-from-home is now normalised and integrated in the corporates and employees day-by-day life, offsetting a positive work-life balance and the need to cooperate, meet clients, create a cohesive and inclusive team, develop new ideas. In 2024, many companies will upgrade their headquarters with state-of-the-art design and technology.