Although each economic downturn is usually different in nature, we can draw on evidence from the Global Financial Crisis (GFC), to analyse the resilience of Europe’s office market. During the GFC, unemployment rates rose from 7.5% in 2007 to 12% in 2013 in the Euro Area, according to data from Oxford Economics. Analysis of the core European office markets during the GFC indicates that vacancy rates rose from 7.9% to 9.6% from 2007 to 2009 which subsequently reduced prime rents by an average of 18% from the 2007 peak to the 2009 trough (see below). This analysis shows the c.9% vacancy rate level is the equilibrium for stable office rents across the core cities.

We feel the prospect of prime rental declines to the same extent as those witnessed during the GFC are unlikely, for a number of reasons. Firstly, supply/demand fundamentals present a more landlord-friendly market. At the beginning of the pandemic in Q1 2020, the average European office vacancy rates stood at 5.2%, consistent with the previous quarter, as Berlin and Paris CBD both remain under 2% vacancy (see below). This is significantly below the 7.9% vacancy rate in 2007, with more capacity to withstand the 9% vacancy rate threshold.

Secondly, the government 'bazookas' introduced to provide business aid in response to lockdowns have been faster and firmer than during the GFC. This will limit the number of jobs lost in the short term, assuming a second wave of infections does not materialise. This will also depend on the length of time each government will be able to sustain furlough payments. However, once this aid is wound back, we expect some small- and medium-sized businesses to observe some job losses.

What’s more, 2020/21 office development pipelines are significantly lower than the level of new space set for completion during 2008/09. With new office deliveries likely to be delayed by 9–12 months, prime rent levels are expected to hold relatively firm and tenant incentives to increase, impacting net effective rents for prime stock. For example, Savills latest Global Sentiment Survey from 15th April outlines how concessions/terms for occupiers have changed within the office sector. Results of the survey show that 10 out of 16 European office markets are observing a change in payment structure, with three markets observing deferred service charges as landlords and tenants show more signs of working together to find short term solutions alongside government intervention. More evidence will be visible with May's monthly rent collection stats.

Landlords will be paying particular attention to tenant covenant strengths of existing occupied space to avoid high levels of second hand space being released back to the market in the wake of business casualties. Although unemployment will rise, Oxford Economics forecast the overall number of Eurozone office based workers to increase by 1.3 million by 2024, marking a 3.1% increase. Luxembourg, (+12.2%), Stockholm (+10.4%) and Oslo (+8.0%) top the most resilient cities for office based employment.

Capital Economics forecast average European city office rental growth to fall by 0.6% across the major European markets during 2020, against the previous set of forecasts released during Q4 2019 indicating 3.8% growth. However, based on a five year forecast, European office rental forecasts appear relatively unmoved, falling by -0.1% pa on the previous quarter to 1.8% pa by 2024. This is largely indicated by a bounceback in office rents during 2021 as businesses resume occupational activity.

_{Read the articles within European Offices Outlook below.}