Demand for western european office space hits new high

Madrid, where prime office rents have risen for the first time since the recession Photo: Marcp_Dmoz

Corporate real estate occupiers are returning to the market, according to CBRE, as demand jumped 21 per cent in the second quarter of 2014 compared to the previous three months, marking the highest Q2 office take-up in Western Europe since the economic downturn.

Central to this was strong activity in Milan and Lisbon, while London retained its dominant position as a popular destination for corporate occupiers with a 29 per cent quarterly take-up increase. Milan’s take-up more than doubled in Q2 to 94,000 sq m while Lisbon recorded one of its strongest quarters in recent years. In addition, the Paris office market which had been subdued during the downturn with occupiers lacking the confidence to relocate, posted its highest office take-up level for two years in Q2, representing a 28 per cent uplift from Q1.

Across Europe as a whole, aggregate take-up rose by a healthy 12.2 per cent compared to the first quarter of the year.

As a result of this increased demand, the aggregate office vacancy rate in Western Europe fell in Q2. Central London saw a third consecutive quarterly decline in vacancy rates with prime space now in very short supply. Likewise, increased demand for office space in Brussels, Paris and Amsterdam also contributed to vacancy declines. Frankfurt saw the most noticeable drop, where vacancy fell sharply for the second consecutive quarter due to the removal of obsolete stock and the conversion of older commercial buildings into residential units.

Despite this, the overall vacancy rate remained flat across Europe for Q2 skewed by a large volume of new office completions in core Central and Eastern European (CEE) markets which are yet to be occupied. For example, office stock is forecast to grow by at least 10 per cent in Prague, Warsaw, Moscow and St Petersburg over the next 18 months, a large percentage of which is being built on a speculative basis.

The knock-on-effect of office vacancy declines, particularly in Western Europe, is likely to put upward pressure on prime rents in the longer term. Madrid, for example, has seen its prime rent increase from €24.50/sq m per month to €24.75/sq m per month in Q2, its first rental growth since the recession, symbolic of improved economic stability. The strongest performing office markets continue to see the steepest rises in prime rents; Dublin saw rents rise by a huge 14.2 per cent in Q2 to €430.50/sq m per annum driven, in part, by strong demand from Technology, Media and Telecoms occupiers. London’s West End market recorded a 2.4 per cent increase in rental growth across the same period.

Tim Hamilton, Senior Director, EMEA Global Corporate Services, at CBRE explains: "We are seeing greater corporate appetite to lease or acquire space, particularly across Western Europe, which is encouraging. It signifies that corporate occupiers who have been hamstrung in recent years by tightening budgets and stringent cost management strategies resulting in a contraction of take-up levels, are now in a position to flex their muscles and take new space. As the markets become more buoyant, the growth in prime office rents is likely to become more widespread over the next 12 months."