The amount of European office space completed in 2023 dropped by 32% compared to the previous year, reaching a five-year low of 3.3 million m2, according to a new report from Savills.
A slight rebound is expected in 2024 with a projected 30% increase to 4.3 million m2, followed by a 3% drop to 4.2 million m2 in 2025.
Rising construction costs, up roughly 50% since 2019, and labour shortages are blamed for the slowdown. Savills reports that 33% of the office space expected to be completed in 2023 was delayed and is now slated for completion in 2024 or 2025.
The total planned speculative space has dropped 21% year-on-year, from 5.7 million m2 to 4.5 million m2, preventing a potential rise in office vacancies. Over the past two years, the speculative pipeline as a proportion of existing office space has shrunk from 3.1% to 2.1%.
Mike Barnes, associate director European Research at Savills, commented: ‘As occupier demand gradually recovers over the next 12 months, we expect the supply of Grade A space to gradually decline and prime rents to continue growing. Budapest (4.8%), Lisbon (4.5%), and Barcelona (3.9%) have the highest proportion of speculative space set to complete by the end of 2025, as a percentage of total stock, although we expect much of this space will be absorbed as leasing markets remain buoyant and occupiers compete for best-in-class office stock to reduce their Scope 3 emissions.’
According to Savills' leasing data for the past five years in London, office buildings with BREEAM Outstanding/Excellent certifications are three times more likely to be leased out before they are even finished being built than those with just a BREEAM Very Good rating.
Oliver Fursdon, director, London Commercial Development at Savills, said: ‘Occupiers continue to seek better quality office stock, both in terms of environmental performance as well as location. It has been positive to see that UK construction activity has returned to growth for the first time in nine months. This is likely buoyed by positive rental growth and improved sentiment regarding the UK economic outlook.’
James Burke, director, European Capital Markets & Global Cross Border Investment at Savills, added: ‘Development starts have dropped significantly across Europe over the last year which could result in an undersupply of Grade A space by 2027/2028. All things being equal, it may be that developers will require prime office rents to rise by a figure in the region of 10% in order for new schemes to look viable.’
Savills' analysis reveals that as a result of a 10% decline in European office rents over the past three years (adjusted for inflation), occupancy costs represent a smaller share of a company's overall operational expenses. This could provide tenants with more breathing room to absorb potential rent increases in the future.
