As vacancies across major European cities soar, the argument that prime offices may be resilient becomes more difficult to plead amid a tidal wave of businesses promoting three-day weeks, says new research from Bloomberg Intelligence.
The latest European Real Estate 2021 Midyear Outlook from Bloomberg Intelligence reveals that with office rents at just 7-15% of occupier costs, moving or downsizing may be delayed until employees settle into a new work pattern – perhaps in 2022. For now, second-hand vacancy (which accounted for 77% of London's vacant space in Q1) is taking the primary hit from home-working-demand loss.
Rent intake has stabilized near 95% for Gecina, Derwent, Covivio, Great Portland Estates, Merlin, Landsec and British Land, yet vacancy risk persists.
BI’s analysis suggest that even if prime rents fall 1-3%, asset values for well let space may see less than 2-5% attrition in 2021, as demand to buy offices is recovering. Outer areas, such as Paris' La Defense, and non-prime space face greater falls.
The jury is still out how hybrid-working patterns may affect office rents and values, yet Bloomberg Intelligence believe the allure of prime space may stave off major declines for REITs such as Gecina, Derwent London and Covivio, which saw only modest rent or value declines despite rising vacancies. As an unwanted-space solution, offices are being converted to homes.
The Q1 rebound in the net absorption of office space in European cities isn't enough to avoid net-tenant outflows leading to higher vacancy that may be more concentrated in non-prime space. Landlords in London, Paris, Madrid and Berlin report new tenants are requesting more meeting space and less desks, with short-let or serviced space in demand. Environment friendly, good ventilation, efficiency and flexibility are also regular desires. Yet new leases secured by London REITs have been as much as 3% below estimates, and EU peers reported flat or modestly lower 1H rental income.
Deals are slow to seal as occupants reassess their needs, yet volume is up. REITs report that newly modernized space which complies with desired credentials is sought-after, so that buildings under construction are generally 50-100% pre-let on completion.
Susan Munden, BI Senior Industry Analyst said: 'A swift decline in office occupancy in European cities may drive rents lower in 2H, especially for space that needs modernizing, yet it could also trigger a switch to residential or hotel use. REITs such as Gecina, British Land and Covivio are actively refurbishing space into residences to capitalize on the buoyant demand for homes in major cities such as London, Paris or Berlin. Re-purposing takes time, so near-term rents and values may drop for non-prime space.'
