European office take-up reached 1.6m sq m during Q3 2020, reaching a total of 5.7m sq m for Q1-Q3 2020. Year to date, this is -31% against the five-year Q1–Q3 average, and -41% on the five-year Q3 average (see chart, below).

Among the most resilient markets have been La Défense (+25%), driven by a megadeal early in Q1 2020, although leasing activity in Central Eastern Europe (CEE) and Northern Europe has generally been most resilient compared with previous years (see chart, below).

The metropolises of London and Paris have suffered the most in terms of occupier demand during 2020, reflecting the most severe lockdown measures in these cities. However, we anticipate office demand will recover once businesses are allowed to reopen, and office workers are encouraged to use public transport and return to the workplace.

Europe’s Q4 office take-up has historically recorded a 20% increase in volumes against Q1–Q3. We do anticipate an increased level of take-up compared to the last two quarters albeit this will be dampened by the imposed lockdowns.

Vacancy rates

Suppressed occupier activity is weighing in on availability, as European average offices vacancy rates have increased from 5.6% to 6.3% between Q1 2020 and Q3 2020 (Chart 4). The core Western European markets of Paris CBD (2.6%) and German top seven (including Munich 2.4% and Berlin 1.6%) maintain the lowest vacancy rates in Europe, although we have seen the largest increases in vacancy rates across the CEE over the last six months. Warsaw (+2.1 percentage points (pp) to 9.6%, landlord only), Budapest (+1.9 pp to 8.1%) and Prague (+1.8 pp to 7.2%) report among the largest increases in vacancy rate across Europe. This is partly down to shorter lease lengths and higher levels of development completions, reflecting a rise in Grade B space returning to the market.

La Défense recorded the largest increase in vacancy rates during the last six months, rising 2.3 pp to 7.8% due to limited occupier activity in the second and third quarters. The German top seven cities generally avoided any noticeable increases in vacancy rates over the past six months and remain among the most undersupplied markets.

Average European vacancy rates remain significantly below the equilibrium of circa 9% for stable prime rents at end Q3 2020. Lease incentives will continue to increase throughout winter 2020/21 and into spring 2021, reflecting a reduction in net effective rents.

Development pipeline

Compared to the global financial crisis (GFC) in 2008/09, the 2021 office development pipeline appears either restricted or majority pre-let across the core markets of Berlin (48% pre-let), Munich (72% pre-let) and Paris CBD (13% pre-let, although only 104,800 sq m in total). Nordics markets, Oslo (63% pre-let) and Stockholm (73% pre-let) vacancy rates will remain low into 2021, with only 100,000 sq m of total space scheduled for completion in Helsinki next year.

With 311,000 sq m of space scheduled for completion in Warsaw next year and 228,000 sq m for completion in Budapest, there is potential for vacancy rates to rise into next year, although generally, development pipelines continue to remain modest and we anticipate developer caution going forward. Prague’s relatively constrained pipeline should shelter landlords from any significant vacancy rises.

Prime rents

Average prime European office rents remained stable with zero growth over the past six months. Lisbon (8.7%), London WE (7.5%) and Hamburg (5.0%) recorded some of the strongest rental growth over the past six months, although some of the financial centres of Zurich (-5.6%), London City (-4.3%) and Geneva (-4.7%) recorded declines. The majority of core European markets remained flat or a minor increase in headline rents. Rising lease incentives will continue to take their toll on net effective rents, more so in the non-core markets.

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