European office demand has seen a rise of 9% year-over-year in the second quarter of 2024 to 1.6 million m2, according to Savills.
As a result, H1 take-up reached 3.7 million m2, a 5% increase over H1 2023 but 7% below the five-year average.
While overall European office investment transactions have declined by 21% to €14.1bn in H1, the UK continues to dominate the market, accounting for 29% of all activity, above its five year average of 24%.
Several European cities outperformed their five-year average in H1 including Prague (45%), Lisbon (40%), London City (25%), Barcelona (11%), and Madrid (9%).
Savills reports a slight increase in European office vacancy rates, from 8.6% to 8.8% in Q2 2024 due to the return of some secondary stock to the market. Core markets like Paris CBD and major German cities remain below 6%. Average prime office rents have risen 2.4% year-over-year.
The banking, insurance, and finance sector dominated European office leasing activity in H1, capturing a 25% share, up from 17% in the same period last year, primarily driven by strong demand in major financial centers like the City of London (up from 26% to 34%). While the professional and business services sector remained the second most active, its share decreased from 28% to 22% due to a large number of requirements being fulfilled in 2023. The tech sector followed with 13% of the total leasing activity.
Christina Sigliano, EMEA head of Global Occupier Services director at Savills, commented: ‘Overall, office leasing activity across Europe so far this year is up on the same period last year, although there are some variations between cities. Some of this is due to a lack of suitable stock, with many tenants renewing their existing tenancies rather than settling for space that isn’t well-connected with established amenities and good sustainability credentials. For this type of space we are often also seeing longer leases being taken, as occupiers who are able to secure prime space are choosing to commit for a longer term. Others are being driven more by corporate strategies: some firms have temporarily reduced their office footprint while they await more favourable economic conditions, and some more permanently in order to align with new working arrangements.’
High interest rates continue to have a significant impact on European office investment transactions. In H1, these transactions reached €14.1 bn, down by 21% year-over-year and by 60% compared to the five-year average of €36 bn. The UK remained the dominant market for office investment, capturing a 29% share, as a result of a faster initial price adjustment and attractive yields for cash buyers. European average prime office yields remained stable quarter-on-quarter at 4.9% during Q2. Vienna and Paris La-Défense were the only markets to experience notable yield movements, with increases of 25 basis points and 50 basis points respectively. Since Q1 2022, prime office yields have risen by an average of 157 basis points.
Overall, European office markets are considered to be in fair-value territory. However, Oslo and Madrid, with prime office yields of 4.75% and 4.90% respectively, appear to be particularly underpriced when compared to sovereign bond yields. On the other hand, Lisbon, Bucharest, and Copenhagen have witnessed relatively limited movement in their prime office yields compared to the fluctuations in sovereign yields.
James Burke, director, Global Cross Border Investment at Savills, added: ‘Data shows that Spain and Norway office investment volumes appear closest to their five year average during H1 following more significant price adjustments. Across markets, there remains a gap in buyer-seller expectations, although this appears to be gradually closing, with both buyers and sellers adjusting their pricing ambitions.’
