Research article

European Occupier Market

Despite a sharp fall in 2023, take-up is still outperforming its pre-pandemic levels

Take-up in 2023 totalled 28.8m sq m, a decline of 24% compared to 2022. While this negative result reflects a significant slowdown in the market, it’s notable that take-up was 9% higher than the five-year pre-pandemic average. This likely reflects a secular shift in the market, with higher levels of activity relative to the previous decade, even as occupier demand has cooled off in the last two years.

The final quarter of the year saw a total of 8.1m sq m of space leased, the strongest quarter this year, albeit still a decline of 7% compared to Q4 2022. There are reasons to be positive here, as the occupier market looks to have stabilised in the last three quarters and is now on an upward trend. Indeed, the second half of the year saw take-up rise by 17% compared to H1.

In annual terms, Romania (+595%), Portugal (+196%), Italy (+75%) and Belgium (+42%) saw the greatest outperformance vis-a-vis their pre-pandemic averages. In contrast, the Netherlands (-22%), Germany (-12%) and the UK (-7%) saw the greatest underperformance.

Belgium (+9%) and Dublin (5%) were the only markets to see annual growth in take-up, with Belgium recording record levels of take-up in 2023. The Czech Republic (-38%), the UK (-38%), and Germany (-29%) saw the sharpest annual declines in take-up.

These shifts in take-up have seen national shares of take-up shift relative to the five-year average. Notably, with the markets that traditionally make up the bulk of European demand, the UK, Germany and the Netherlands are all in the bottom half of the table in terms of annual change in take-up, their shares in take-up have diverged from the five-year trend, falling by 2–3% each. In contrast, smaller markets like Italy and Belgium and peripheral markets like Romania and Budapest are seeing their shares grow from a very low level.

In terms of which occupier types are currently active, we have anecdotally seen activity in several markets from supermarket tenants who typically operate in 10-to-15-year cycles. 3PLs are active in multiple markets but are notably absent in other markets, where they have excess space, opting to shuffle tenants within their existing portfolios to best suit their needs. Despite weakening manufacturing output in mainland Europe, the UK is seeing significant activity amongst manufacturing occupiers. There was an uptick in eCommerce activity in the final quarter of 2023, with Amazon taking space in the UK, accounting for 24% of Q4 take-up, and a Chinese eCommerce operator leased 265,000 sq m in Poland's largest-ever deal in the same quarter.

The increase in vacancy rates is slowing

In the real estate industry, the time required for building new properties naturally amplifies the sector's cyclical nature. The planning and construction of pipeline projects can take several years, and sluggish market responses mean that the supply tends to decrease sharply during a boom as pipeline supply struggles to keep up with the demand. Conversely, even as the demand slows down, the volume of units on-site generally peaks several quarters after the demand. This phenomenon has been fully visible in the previous few years, as the supply across Europe dropped to record lows in 2022 before rising sharply over the last year.

The average vacancy rate across Europe has risen by over 205bps in the last year, rising to 5.37% in the final quarter of the year. While this will inevitably put pressure on rental growth as greater competition erodes the power of asset owners to achieve higher rents, there is significant variation across Europe’s markets at the national and city levels. Additionally, our previous prediction of a slowdown in construction appears to be playing out, with the increase in the vacancy rate decelerating sharply in the final quarter of the year, increasing by just 11bps, 83% slower than the previous three quarters.

Looking at the individual markets across Europe, there is significant variation in supply. Markets like Dublin and Denmark remain acutely undersupplied, with vacancy rates of 1.7% and 2.2%, respectively. Since Q3 2023, Madrid's vacancy rate has increased by 130 basis points to 9.2%. Notably, Madrid has historically experienced higher vacancy rates than other markets. Indeed, Madrid and the Netherlands saw the sharpest increases in the vacancy rate this quarter, with the former experiencing an increase of 170 bps to 4.4%. The Netherlands illustrates the variance between cities: the 210 bps increase in Schiphol (to 8.8%) in the vacancy rate has driven the increase in the national figure. In contrast, the vacancy rate in Venlo has only risen by 80 bps, to 1.6%. Indeed, in annual terms, Venlo and Rotterdam have seen their vacancy rates fall by 240 bps and 10 bps over the last four quarters compared to a 300 bps increase in Schiphol.

Prime rental growth has slowed in Q4 2023

As vacancy has increased throughout the year the growth of prime rents has started to slow. According to Savills Index of European Prime Rents, rents grew by 11% year-on-year, which is 1 ppt faster than in 2022, but the majority of this growth comes from the start of the year with a quarterly increase of just 1.5% in the final quarter of the year.

Much like supply, we have observed significant variation in rental growth between markets. Zurich, Oslo, Copenhagen and Upper Silesia all saw negative rental growth this quarter, but these markets are in the minority. In total, eleven markets saw positive rental growth in Q4 2023. Notably, these include markets like Madrid and London, which have seen above-average increases in vacancy rates. The strongest rental growth this year was in Budapest (33.3%), Lille (26.5%) and Brussels (23.1%).

Looking forward, we would expect to see rental growth continue to slow. The graph below examines the relationship between the average vacancy rate of the previous four quarters and the annual rental growth over that period. The trajectory from Q3 2020 to Q4 2021 clearly outlines how falling vacancy rates drive increases in rental growth. Notably, as we have progressed into 2023, the series diverges from the line of best fit with sustained rental growth despite an increase in the vacancy rate.

There are two potential implications here. Firstly, because our rental data is only nominal, this could suggest that rental growth has been sustained by cost-push factors, with landlords looking to maintain their real returns. The other implication is that rental growth will soon succumb to gravity, and begin to slow in 2024. With that said, higher levels of take-up this year could reduce the vacancy rate, supporting further rental growth.

Read the articles within Spotlight: European Logistics Outlook – February 2024 below.

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