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European office market conditions show huge variance

Recovery of the European office sector continues, but at variable pace reports Jones Lang LaSalle


In its latest European Property Clock for Q2 2013, Jones Lang LaSalle report that in Europe, prime office rents continue to recover overall.

The European Prime Office Rental Index increased by 0.2% over the quarter but remains in negative territory (-0.7%) compared with a year ago. Jones Lang LaSalle forecast only moderate rental growth for the remainder of the year. The aggregate numbers however disguise the diverse picture across the region with markets in all four quadrants of the Office Clock, mirroring the mixed economic conditions across the region:

  • Over the quarter, prime office rents in Dublin continued to recover from their historic lows, increasing by +9.4%.
  • Rental declines were recorded in Lyon (-5.3%), Budapest (-2.5%), Warsaw (-2.0%), and in Barcelona (-1.4%).
  • Prime office rents in both London’s West End and the City remained unchanged at £1,049 / € 1,225 and £614 / €716 sqm pa respectively. However, the growth outlook remains strong.
  • Prime rents in Europe’s biggest market Paris remained stable, too, though the current economic headwinds are likely to take their toll on the short term outlook.
Supply remains limited: Office completions decreased further over the quarter (-11%) to reach a 10-year low. With just 720,000 sq m delivered in Q2 2013, volumes were 50% below the Q2-5Y average. With 1.5 million sq m completed in H1 across Europe, this suggests a slight downside risk to forecasts of full year volumes in excess of 4 million sq m made earlier this year, though quarterly completion levels are forecast to increase.
 
On the demand side, Q2 office take-up in Europe improved slightly over the quarter (+5%), but is down on Q2 2012 (-3%) and below the 5Y average (-5%).  Improvements in occupier activity were recorded in both Western and Central and Eastern Europe (by +5% and +7% respectively).
 
Activity in Germany remained healthy with all index markets, apart from Hamburg, showing increases over the quarter. The London office market remained buoyant, driven by high take-up in the City, while healthy activity was also recorded in the Stockholm office market. However, volumes in Western Europe were heavily impacted by weakness in Paris, where Q2 volumes were 4% below an already subdued first quarter.
 
Overall, occupier activity remains impacted by on-going uncertainty over the short term economic outlook as well as weak labour markets. Occupiers remain cost-sensitive and continue to examine their lease options very carefully.
 
Dr Lee Elliott, Head of EMEA Research, Jones Lang LaSalle said: “There is some evidence of occupiers taking the opportunity to upgrade if clear gains in floor plate efficiency and workplace productivity and/or location can be realised. However, activity depends on occupier’s willingness and ability to commit and invest facing current uncertainty. There are some initial signs of improving sentiment in select markets, but this will need to be sustained and extended if expansionary demand is to materialise.”
 
European Property Clock for Q2 2013.jpg