European office rents accelerate in Q1 as leasing volumes soften - C&W

Rental growth is being driven by occupiers prioritising best-in-class space meeting the latest environmental, wellbeing and digital connectivity standards, as well as rising construction costs, states the firm’s latest European Office report, which examines trends in the occupational and investment markets. There has been no discernible change in the level of incentives offered, with rent free periods stable over recent quarters in most markets.
 
While prime rents continue to climb the report highlights that leasing volumes softened in the first quarter to 2.2 million m2 of space, a 23% reduction on what was a strong Q1 a year ago. Following a sustained post-pandemic resurgence in activity, this was the lowest quarterly volume since Q1 2021 as occupiers react to a weaker economic environment. On a trailing annual basis leasing activity slowed to 10.9m m2, just 1% lower compared to Q1 2022.  
 
Nigel Almond, EMEA Office Research & Insight Lead at Cushman & Wakefield, said: 'The reduction in leasing activity particularly reflects fewer transactions at the upper end of the market in the first quarter. There have not been many major leases over 9000 m2 signed across the leading gateway cities in France, Germany and the UK. We have seen some pockets of growth driven by single transactions in relatively smaller markets. Rome, for example, saw activity rise 84% to over 90,000 m2, with one single transaction of 50,000 m2.'
 
Availability
Available space was up 2% over the quarter, and up 3% on a year ago, at 22.5m m2. This reflects 8.3% of total stock but is still – just – below the 10-year average of 8.4%. In the majority of markets tracked, 19 out of 32, the availability ratio remains below the 10-year average. In many markets, including Paris, Berlin, Munich and Hamburg, ratios remain below 6%. Dublin continues to see the highest ratio at 17.5%, although this has improved from 18% last quarter. For comparison, the figure was above 20% for much of period after the global financial crisis.
 
Although availability is rising across all grades, in the past 12 months Cushman & Wakefield has observed higher growth of 7% in non-Grade A space in the markets it tracks versus a more modest 3% increase for Grade A space. This reflects generally stronger occupational demand for better quality space that meets their wellness, sustainability and connectivity requirements.
 
Investment markets
Rising interest rates and increased margins, along with wider market uncertainty, are limiting lending capacity and contributing to a sharp reduction in investment activity. Just €39 bn was invested across Q1 2023 across all asset types, a significant 60% drop on the same period a year ago. Of this, €10.8 bn was invested into offices in Q1 2023, a 63% decline on Q1 2022.

Offices are accounting for a lower proportion of overall European real estate investment compared with a pre-pandemic average of around 40%. Some investors have been reassessing their strategies while the office market adapts to more hybrid working, changing occupier expectations, the amount and type of space required and increasing legislative action around minimum sustainability standards.
 
The prime office yield for 46 markets tracked averaged 4.77% in Q1 2023, 18bps higher over the quarter and 81bps above Q1 2022 levels. Germany (+111bps) and the UK (+108bps) have seen the largest outward shift in yields in the last 12 months and stand at 3.76% and 5.64% respectively. Most regions have seen yields edge out by over 50bps in the last 12 months.
 
James Young, head of Investor Services EMEA & APAC, added: 'The broad trend across Europe is that prime yields will continue to move outwards as higher debt costs continue to filter through in 2023, albeit to a lesser extent than seen in 2022, and are likely to remain broadly stable in 2024. We expect the level of trading to remain subdued but to recover later in the year as greater clarity emerges on pricing and the outlook.'