The European office investment market is expected to perform poorly in 2023, with the lowest annual volume since the Global Financial Crisis.
This is due to rising interest rates, uncertainty about hybrid working, and increased work from home, says AEW in its report on 32 European office markets.
Investors are also shifting their preference to higher-quality assets, which has led to a reassessment of the risks that secondary offices will become obsolete.
As a result, transactions are slower as investors try to quantify the impact on rents, leasing speed, and ESG-related capex.
This divide between prime and secondary European offices is confirmed by the record-high difference in yield between prime and secondary office buildings, which is now 138 basis points.
Despite these concerns, the global real estate investment and asset manager believes that investors are overstating their concerns about the office occupier market.
The authors of the AEW report argue that the limited new supply in central office areas combined with a recovery in post-lockdown take-up is driving rental growth. In fact, prime headline rents have increased by a solid 1.4% per quarter over the past two and a half years.
Vacancy across European office markets is expected to peak at 7.9% by 2024, as new development deliveries start to slow down.
Stock growth, which has been contained since the GFC, is expected to scale back to under 1% per annum after a moderate catch-up post-Covid. Simultaneously, net absorption is expected to revert back to pre-pandemic levels by 2025.
However, office usage rates are still not back to pre-Covid levels, suggesting that the reduction in office needs is a lasting trend. This is partially offset by a recent stabilisation of office space per employee.
The report concludes by ranking the resilience of European office markets based on a number of factors, including office employment growth and demand elasticity.
The latest rankings show that the cities of Copenhagen, Bristol, The Hague, Utrecht, and Hamburg are the most resilient in terms of their office markets in the post-COVID era.
Hamburg, Rome, Amsterdam, and Warsaw have all seen significant improvements in their rankings compared to last year.
