Savills News

New Office Space Completions Drop by 32% in Europe in 2023

Lisbon ranks second among cities with the largest pipeline of space projected to be completed by the end of 2025

According to the latest Savills report, in 2023, the completion of new office spaces in Europe dropped by 32% compared to the previous year, reaching 3.3 million square meters, the lowest level in five years. In 2024, the international real estate consultant expects a 30% year-on-year increase to 4.3 million square meters, followed by a 3% year-on-year decrease to 4.2 million square meters in 2025.

According to Savills, developers have faced a significant increase in costs in recent years, impacting their pipeline. Office construction costs in Europe have risen by about 50% since 2019, while labour shortages have delayed project completion dates. 33% of office spaces slated for completion in 2023 have been postponed to 2024/25.

Mike Barnes, Associate Director of European Research at Savills, states: “The total volume of office space in the pipeline in Europe has fallen by 21% year-on-year, from 5.7 million square meters to 4.5 million square meters, cushioning any potential increase in vacancy rates. Over the past two years, the development pipeline as a percentage of existing stock has fallen from 3.1% to 2.1%. As demand gradually recovers over the next 12 months, we expect the supply of ‘Grade A’ space to gradually decrease, and prime rents to continue rising.

“Budapest (4.8%), Lisbon (4.5%), and Barcelona (3.9%) have the highest proportion of space projected to be completed by the end of 2025, as a percentage of total stock, although we expect a large portion of this space to be absorbed as leasing markets remain dynamic and tenants compete for the best office stock to reduce their Scope 3 emissions.”

Comparative leasing data from Savills indicates that, in the City of London, over the past five years, office developments that achieved BREEAM Outstanding/Excellent certifications are three times more likely to be leased before completion than BREEAM Very Good developments.

Alexandra Portugal Gomes, Head of Research at Savills, emphasizes: “The results of the Savills report confirm the enormous challenges developers have faced in recent years to advance their projects. The severe labour shortage was compounded by rising construction costs due to factors such as raw material shortages and increased inflation. It is noteworthy that Lisbon is one of the European cities with the highest proportion of space projected to be completed by the end of 2025, as a percentage of total stock, which underscores the great dynamism of the office market in Portugal.”

James Burke, European Capital Markets & Global Cross Border Investment at Savills, notes: “The start of new projects has dropped significantly across Europe over the past year, which could result in an undersupply of ‘Grade A’ spaces by 2027/2028. If everything remains the same, it may happen that developers require prime office rents to increase by around 10% for new projects to be viable. However, our analysis shows that, in real terms, office rents in Europe have fallen by 10% over the past three years and therefore represent a smaller proportion of a company's total operating costs. This could mean that tenants have more room to absorb higher rents.”

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