As a result of working from home during the pandemic, Savills Research has observed an increase in the level of tenant-controlled space available for sublet, or 'grey space' across Europe’s office markets. Analysing the breakdown of vacant space across a sample of European markets, the average level of tenant-controlled available space has risen from 0.7% to 1.3% of total stock over the course of 2020 (see chart, below).

London City’s total office vacancy rate has risen from 5.5% to 6.5% since end 2019. Landlord-controlled vacancy has only briefly risen from 4.2% to 4.4% during this period, as tenant-controlled vacancy rose from 1.3% to 2.1% of total stock. A similar trend was observed within the West End office market, rising from 1.3% to 1.8%, despite generally smaller average floorplate sizes and less exposure to financial services occupiers, one of the major contributors to sublet space. London’s longer average lease length, of course, offers more opportunity for tenants to sublet space, so it comes as no surprise that London has seen among the largest rise in grey space across Europe.

We have noticed an increase in grey space in the Dublin market, which has risen from 46,000 sq m at end 2019 to 69,000 sq m at end Q3 2020. Despite total vacancy rate remaining fairly stable during this time, falling from 8.6% to 8.5%, tenant-controlled space has risen from 1.2% to 1.7%. While the majority of the grey space is located in the CBD, this is more due to the fact that the CBD contains the most standing stock rather than an exodus of occupiers from the CBD. In terms of tenant types, the ICT (42%) and Financial Services (32%) sectors are responsible for the majority of tenant-controlled space on the market. 52% of the space on market is “plug and play” space (including furniture and telecoms), and 41% is fully fitted with no furniture, so through the nature of grey space, sub-tenants are able to make savings on fit-out costs.

Tenant demand for more flexible lease terms across the Netherlands has driven Amsterdam’s flexible office market in recent years. As a result, this has contributed to a relatively low proportion of tenant sublet space, rising from 30,000 sq m to 39,000 sq m throughout 2020, with overall vacancy rate remaining below 6%, and grey space only 0.6% of total stock.

Whereas Warsaw’s tenant-controlled space totalled circa 15,000 sq m at end 2019, representing only 0.3% of total stock, this has now jumped to just under 100,000 sq m of space (1.7% of stock) as tenants have opted to sublet space to the market. Warsaw’s total vacancy rate has risen from 8.1% to nearer to 11.3% over the course of the year. Prague’s office market provides a similar story – whereas tenant sublet space was close to zero before the pandemic, this has risen to circa 40,000 sq m by end Q3 2020.

Stockholm has observed among the highest levels of tenant-controlled space returning to the market in 2020, with tenant vacancy rising from 0.6% to 2.4%. Total vacancy rate has now reached 7.8% at end Q3 2020, up from just 3.5% at end 2019, marking the largest increase in vacancy across the European markets. However, this is largely down to a couple of large tech occupiers returning space before the first wave of the pandemic, rather than being linked to the virus outbreak. We anticipate the vacancy rate to recover despite some occupier caution at leasing sublet space.

Over the border into Norway, however, Oslo was the only city to observe a reduction in the level of tenant sublet space over the course of 2020 from 46,500 sq m to 25,000 sq m and now only accounts for 0.3% of total stock. Strong fiscal support has maintained business activity, although an increase in landlord supply has led to total vacancy rate increasing from 5.1% to 6.2%.

With standard lease terms generally shorter in mainland Europe than in London, we anticipate that the tenant sublet space will remain more of a London theme, and that landlord-controlled space will increase more quickly to what is now around 7.2%. In Madrid, for example, only around circa 1% of availability is tenant-controlled. Anecdotally, we are observing some minor increases in availability of grey space within Paris and German top seven cities, although this appears to be below the trend we have observed in London and CEE markets.

We have noticed that while tenants have shown a preference for flexible lease terms and existing fit-out, often the flexible lease terms and fit-out on offer in grey space does not match tenant requirements. They find they do not want to inherit another occupier’s lease terms and fit-out – instead, they would prefer their own bespoke office. Although potential occupiers have more choice between landlord, tenant and flex space, we do not expect increased grey space to have a significant impact on achievable rents for flexible offices.

Comparing European key cities with that of Manhattan, New York, tenant-controlled space remains relatively low. During Q3 2020, sublet supply accounts for 26.7% of total available space, which has remained fairly stable during 2020, although since Q4 2018, an additional 613,000 sq m (6.6m sq ft) has been added to the market, now totalling 1.5m sq m (16.1m sq ft). It is anticipated that by end 2020, available sublet space will exceed the levels observed during the GFC.

Although it is early days in terms of the vaccine approval, European heads of real estate will now be keeping an eye firstly on return to work strategies and secondly on long-term occupational moves. As a result, the open marketing of grey space may shift to the form of swing-space over the coming months as occupiers turn their lights back on.

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