It is no secret that in recent years corporate occupiers have been constrained by stringent cost management strategies born out of the economic downturn.
Corporate real estate occupiers are expected to return to the market with new office space requirements across Europe as 2014 progresses. Particularly they are expected todemand prime office space in city centres. These are the findings from the latest research by the global real estate advisor CBRE.
“It is no secret that in recent years corporate occupiers have been constrained by stringent cost management strategies born out of the economic downturn. As a result, we have seen a contraction in total office take-up levels across Europe, with the overriding commercial real estate trends being consolidation, cost savings, or operational streamlining”, explains Richard Holberton, Senior Director, EMEA Research, CBRE and says “Now, things are changing in line with an improving economic environment, which we expect to have material impact on the office market this year. One effect is that prime office rents are expected to increase as corporate demand to lease or acquire space accelerates. With grade A space in short supply across Europe, compounded by a thin office development pipeline, the expectation is that prime rents will move to an upward trajectory in more markets.”
Despite this expected future growth, total aggregate European office take-up for the first quarter of 2014 remained on par with other recent first quarters. However, there were some encouraging market performances, namely Madrid and Paris. Madrid’s first quarter take-up was just under 100,000 sq m for the period, a marked improvement on other recent first quarters, driven by occupiers taken advantage of low rents in prime central locations with many small and mid-size deals recorded. Likewise, two transactions exceeding 40,000 sq m each in Paris, alongside a plethora of consolidation projects bolstered the French capital’s take-up to 506,000 sq m, a substantial improvement on recent quarters.
The Czech market has been experiencing growth and interest in the highest quality of offices
The Czech market especially has been experiencing interest in a higher standard of grade A office buildings. This concerns buildings which fulfil the standards by which a modern office building is measured - they are usually equipped with suspended ceilings, raised floors, up to date heating and cooling system, magnetic card entry system, sufficient number of parking places and the best have green certification as well.
On a quarterly basis take-up in such buildings is around 90 % of the overall amount, the remaining 10 % of which is made up of leases in grade B buildings. All buildings which are being developed now are classed as grade A properties. This concerns approximately 317,000 sq m of new and 45,000 sq m of reconstructed space. “For example these include new projects such as BB Centre Delta, Aviatica, The Blox, Enterprise, Metronom, Crystal, ArtGen, Quadrio to name a few. Of the existing ones, e.g. Florentinum, Ligthouse, The Park are classified as grade A buildings and outside Prague such buildings can be found in Brno – e.g. Spielberk Office Centre, Brno Business Park or Campus Science Park and in Ostrava Nová Karolina Office Park, The Orchard or Axis Office Park,” says Katarina Wojtusiak, Head of Office Agency, Tenant Representation & GCS, CBRE.
“Prague office market continues to be competitive with a lot of speculative development that will be delivered to the market during 2014-2015. As a consequence vacancy rate is expected to rise up to 15% by the end of 2015 as well as on-going downward pressure on prime rents,”explains Katarina Wojtusiak.
Rents are expected to rise across all markets
As 2014 progresses, the tight supply of high quality office space and growing occupier confidence supported by positive economic signals is expected to move more markets into prime rental growth. This has already started in some of the stronger markets, with London a stand out performer including the West End recording a 5% prime rent increase to £105 per sq ft per annum in the first quarter of the year. Amsterdam and Munich saw an increase of 1.5% each respectively over the same period, with both cities experiencing demand for buildings with well-equipped office space and high levels of amenities for employees. As a result, Munich has just 35,000 sq m of space available in the city centre pushing prime rents to stand 5% higher than 12 months ago at €33 per sq m per month. This trend is not confined to the West of Europe with the Nordic cities of Oslo and Stockholm seeing a similar pattern with both recording prime rental growth of 5.2% and 2.3% respectively over the same period.
“It is evident that there has been a shift in the priorities for corporate real estate occupiers over the last year. Concern about the impact of weak economies has diminished significantly with future growth opportunities now a core part of portfolio planning again. Accompanying this shift, is a heightened focus on the quality of location, the attraction and retention of talent and the internal built environment resulting in a higher demand for prime office space which, given the constrained supply, is driving up costs”, says Mike Gedye, Executive Director, EMEA Global Corporate Services, CBRE.