New research from global investment giant AEW suggests the effects of the global pandemic could restrict future office supply.
The firm's latest research into the European office market has found that occupiers are reassessing their needs for office space in the wake of the working from home (WFH) trend.
On the back of the 2020 GDP decline, AEW has forecast rents to come down by nearly 10% this year. The firm notes that so far in 2020, second quarter take-up has fallen by over 20% and vacancy has risen by 20bps, from a record low of 5.4% in the first quarter of the year.
The research finds that while other reports are largely focused on the demand-side impact, few are considering supply-side dynamics.
AEW said that previous reports had demonstrated that the oversupply of new space had exacerbated previous market downturns. Therefore, issues of supply are important when assessing the short to medium term outlook.
'The good news is that expected new supply remains at less than half the level seen pre-global financial crisis (GFC),' the report states. 'For the 2020-24 period we project new supply at 1.3% of existing stock per year, relative to the pre-GFC period at 2.7% per year.'
Supply slowing
In addition, the report highlights that JLL has estimated a decline of 9% in 2020-22 supply across 15 markets since the start of 2020, mostly as a result of Covid-related delays in construction due to the health and sanitary measures and material shortages.
Looking long term, development-focused land and redevelopment acquisitions as a share of total office acquisitions are likely to continue an already-established downward trend.
'Post-GFC lending regulations have limited banks from committing to speculative development projects, despite a recent uptick in 2018 in Germany. Based on more recent data, we expect that post Covid-19 conditions will further tighten finance availability and terms for office development,' the report adds.
'As investors, developers and lenders come to grips with lower occupational demand, we also expect that many office developments will be postponed, down scaled or cancelled over time. This will further reduce the new supply across markets,' the report concludes.
However, the research suggests that large supply pipelines persist in some CEE markets, Dublin and Barcelona, with construction also picking up in Amsterdam, Lyon, Berlin and Munich. These latter markets are protected by record low vacancy rates below 4%.
'In the largest European office market, Paris, we highlight that based on our in-house database, the pipeline is significantly larger than indicated by CBRE. The new office pipeline for Paris is mostly concentrated in La Défense and inner rim sub-markets,' the AEW report says.
