Prime and secondary rents for European offices have started to diverge as occupiers focus on better quality office stock.
Our recent analysis of rental trends between prime and secondary central business district (CBD) office rents indicates there is an increasing rental premium for newbuild, energy-efficient office stock in a comparable location to older, less energy-efficient office stock. All rents refer to newly signed leases and do not reflect index-linked rents.
Between 2014 and 2020, rental growth for both prime and secondary CBD offices followed a similar trajectory. However, since 2020, the relationship between the two has been disrupted, as prime rents have grown by a total of 11.8%, whilst secondary rents have grown by only 4.8%.
The rental premium emerging for prime assets can be largely attributed to occupiers’ flight to better quality office stock. A stronger occupier preference for best-in-class amenities is driving headline rents, as businesses compete for premium space and do not want to compromise on quality. This heightened demand is partly the result of companies showcasing their offices to attract and retain employees.
ESG regulations are another aspect influencing the demand for prime office space. Tightening regulation means corporate strategies are increasingly focused on leasing space with the highest environmental credentials in order to comply with both internal and external policies. A higher supply of poorer quality and non-certified office stock is suppressing rental growth for secondary assets.
Over the past four years, the gap between prime and secondary rental growth has increased most significantly in London’s West End (WE), Amsterdam and the City of London, by 32%, 25% and 18% respectively. In the Netherlands and the UK, regulations on energy performance certificates (EPC) have restricted occupiers from signing for secondary office stock. As more regulation is introduced across Europe, we expect the prime/ secondary rental divergence to increase. On the other hand, Milan, Hamburg and Oslo have observed faster growth in secondary rents more recently, as limited prime supply has forced occupiers to lease older secondary stock.
Development pipeline constraints in Europe are also affecting the number of new office completions. Landlords of existing newbuilds are therefore able to charge a rental premium for prime offices amid a shortage of supply. Munich has one of the most constrained 2024/2025 speculative development pipelines, helping to explain why prime rents have diverged from secondary by 12% since 2020.
However, in real terms, prime CBD office rents have fallen by 10% since 2020, according to our latest European office development spotlight. This suggests tenants have the capacity to pay higher rents, and we expect prime rental growth to outperform inflation over the next couple of years, as tenants compete for the best space.
Further information
Contact Georgia Ferris or Julia Moore
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