Despite the drive for right-sizing from occupiers, with office occupancy in Madrid and other locations almost back to pre-pandemic levels, the sustained demand for office space in key European cities is clear. Our research shows an average 4.1% prime rental growth last year.

Given the lack of the ‘right’ type of space and prime rents increasing, we are noticing that the speed of decision, or indeed indecision, from occupiers who have deferred capital expenditure (capex) decisions has resulted in Europe’s average office vacancy rate increasing from 5.5% to 8.4% since the pandemic. However, for the most desirable locations, occupiers are facing some of the lowest vacancy rates in history. Rates have dropped to 2.2% in Paris CBD, 3.8% in Cologne, and take-up in certain markets, such as Milan, is actually up by 29% against the five-year average. From both the occupier and the investor side, we are seeing a real bifurcation between prime and secondary offices and a premium emerge for ESG-compliant assets. Across Europe, the yield spread between BREEAM/LEED certified and other offices has reached its highest level on record.

The drive for best-in-class office space has created a stark polarisation in the market, even though there remains appetite from smaller occupiers with a less ambitious price point who are looking to high quality refurbished stock that has a nod to ESG and can meet their requirements. In this smaller tier, and to an extent the mid-tier relocation bracket, cash is king. Whether in the Netherlands or other markets, we are increasingly seeing turn key solutions being sought by occupiers wishing to reduce cash heavy fit-out exposure and preferring to pay higher rents for quality fitted solutions.

At the other end of the spectrum, office assets in specific micro locations throughout Europe, where the hybrid working model has resulted in a significant reduction in demand and subsequently take-up, combined with the growing capex and ESG requirements, has resulted in these spaces looking increasingly stranded. For office stock in secondary or tertiary locations, we expect to see an increase in conversions to alternative uses, including hotel, multifamily and student housing.

It seems that polarisation will continue throughout the year in the European office market. Occupiers will carry on seeking the best space and those landlords that are able to deliver what is desired, with a focus on futureproofing, will reap the rewards. However, landlords that are capital constrained and unable to react to increasing demands from their customer base, along with ESG requirements, will see voids and vacancy rates increase. Interestingly from an investment perspective, for some buyers, the next 12 months will present a window of opportunity. With values bottoming out and a stifled supply pipeline, those that are brave enough, have access to capital and are able to identify the nuances of occupational demand, may find this an opportune moment to invest.

Further information

Contact Rebecca Webb or Mike Barnes

Global Occupier Services