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European office sector recovery continuing but divergence in speed and strength remains

Strong on-going demand for quality space in key cities is propelling momentum

​The recovery of the European office sector continues, with the outlook improving inline with upward revisions on the economic outlook. However conditions remain diverse and markets are moving at varying speeds according to Jones Lang LaSalle’s Q3 European Office Property Clock.

The London office market is witnessing a rapid increase in momentum; strong on-going demand for quality space has seen take-up in the first three quarters of 2013 already exceed FY2011 and FY2012 results. The German and Nordic centres, while continuing to perform, are meanwhile experiencing decreasing momentum.

Conditions in the Paris leasing market are currently impacted by on-going headwinds on the economic side. The Paris investment market however continues to show healthy activity as domestic as well as international investors continue to target office property in this highly liquid core market.

While activity in the occupier markets in the Southern European centers remains low, it is expected that these have reached, or are close to, the bottom of the cycle with forecasts projecting conditions to improve from 2014 onwards.

Aggregate prime European office rents could not sustain the upward trend shown at the beginning of the year. The European Office Rental Index decreased by 1.1% in Q3  as a result of rental decline – particularly in Paris (-7.2%) where occupiers are deferring leasing decisions or are scaling down requirements as a consequence of on-going economic headwinds. Rental declines in Milan (-4.2%), Prague (-2.4%) and Barcelona (-1.4%) are also reflection of weak demand levels and cost-consciousness from occupiers.

The contrasting prime rental increases in London (+2.6%), Munich (+1.6%) and Frankfurt (+1.5%), based on a combination of healthy demand and a shortage of quality stock, could not offset these falls. The German and Nordic centres, while continuing to perform, are experiencing decreasing momentum and could be reaching a cyclical peak.

European office leasing volumes softened slightly on aggregate over the quarter.

“Cost-efficient, productive and high quality space in key inner-city locations remains in demand, though is often scarce. Where this product is not available or where cost pressures remain to the fore, occupiers seem to prefer to renegotiate existing leases rather than making compromised or costly decisions.” Said Lee Elliott, Head of EMEA Research at Jones Lang LaSalle.

The scarcity of modern space is also supporting prime rents for example in Paris and is driving some rental growth, particularly in markets such as London, the core German cities and the Nordic capitals.

“For the moment, we expect European office leasing volumes to continue to improve with the 2013 out-turn set to remain just under that of 2012. Sentiment has improved markedly but it is still vulnerable to external shocks, and occupiers are consequently remaining vigilant. Assuming that economic growth will reach current forecast levels for 2014 and 2015 and drive further momentum, the office market recovery stands on solid ground.” Concluded Elliott.

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