Delivery of EMEA office developments to surpass 2008 level - CBRE

An acceleration of completions of speculative office development schemes in markets across Europe, Middle East and Africa (EMEA) in the second half of this year will result in the total for 2009 surpassing 2008 levels, according to the latest research by CB Richard Ellis (CBRE).

Many office schemes which commenced during the real estate boom period are scheduled to complete this year. The peak in new supply will lead to greater choice of good quality office space for occupiers in the short term, the report said. Yet, with new completions expected to drop in 2010 as developers continue to suspend projects not already under construction, occupiers’ choice of new buildings will become much more constrained from 2011 as the market faces a more restricted development pipeline than in previous cycles. Occupiers looking to relocate to non-core submarkets or rationalise their space are taking advantage of the current loosening supply conditions.

CBRE's EU-27 vacancy rate index has risen from 6.7% in Q1 2008 to 7.8% in Q2 2009. In some cities, such as London and Prague, the vacancy rate has increased by over 4% in the last year. Not only is there more choice of space, but occupiers are experiencing greater lease flexibility as recessionary conditions have eroded tenant demand by a third on both a quarterly and annual basis across all primary Western European markets.

Widespread falls in office rents are present in all major European markets, adding further weight to tenant negotiations, with London and Madrid rental falls most prominent and large adjustments in CEE markets such as Warsaw and Budapest. CBRE’s EU-27 office rent index fell by 3.5% for the second consecutive quarter in Q2, taking the year-on-year decline to just under 10%. Even in those markets where rents remain stable, such as Frankfurt and Milan, longer rent-free periods and other incentives are being granted and it is increasingly possible to negotiate shorter leases.

Matthew Pullen, head of Global Corporate Services EMEA, CBRE, said: 'Worsening economic conditions across Europe have continued to force occupiers to rationalise their real estate portfolios. We expect further contraction in demand for space across the region, which will keep landlords under pressure to offer flexibility to tenants.'

He continued: 'Occupiers generally only have about a 12-month window of opportunity to take advantage of existing market conditions, so it is imperative that corporate real estate functions ensure that they have an optimum portfolio occupation strategy in place now, to implement in the final quarter of the year.'