Take-up of office space in Europe in 2022 ended 2% above pre-pandemic average.
As corporations compare how many people are coming into their offices according to the city staff reside in, meanwhile data regarding demand for office space by companies is equally being lapped up.
Savills says in its latest European Office Outlook report that in 2022, European office take-up by occupiers reached 9.9 mln m2 for the full year, which is 2% above the pre-pandemic average. Post-Covid, leasing activity continued to recover, rising 14% year-on-year, which the agent ascribes to a recovery in business confidence as occupiers resumed activity.
Trends in office use remain one of the hottest topics in European real estate. And while changing needs of occupiers and employees were being noticed well before Covid, as 2023 unfolds, informally occupiers are very curious to gauge the level of staff coming into the office to work. Some companies report near-normal full attendance in some of their locations while anecdotally telling of differences elsewhere.
When it comes to the level of office attendance, personal working taste and factors such as commute times are likely among the biggest factors alongside corporate expectations. But on the demand-side of the equation for offices, Savills said in its report that recent European economic growth indicators were pointing to an ‘improved sentiment’ since the end of the year.
It said: ‘Eurozone GDP flatlined in 2022, against the consensus view for a recession, and February 2023’s purchasing managers’ index points to an expansion in economic output, particularly across Southern European economies and driven by the service sector.’
‘However, growth prospects remain weak, with Capital Economics forecasting -0.5% growth during 2023, followed by 0.8% growth in 2024. On a more positive note for the office sector, employer sentiment is less subdued, with Oxford Economics forecasting a total of 3% office-based employment growth over the next five years.’
Savill said Southern Europe leasing activity performed strongly against the pre-pandemic average, led by Lisbon (+80%) following a number of pre-lets from professional services companies and Milan (+51%). Conversely, Amsterdam’s take-up fell by 44% against the pre-pandemic average. Strong pre-pandemic performance was caused by the completion of various new developments, whereas post-pandemic, demand has been concentrated in South-Axis and the city centre, where stock remains limited.
Decision making put off
Looking to 2023, some occupiers are holding off on decision-making, not committing capital at a time of geographical uncertainty, but occupancy levels are rising, and there is still a demand for skilled talent remarked Savills.
‘Rising costs are shifting companies into cost-control mode, as observed in Deloitte’s European CFO survey Autumn 2022, However, skilled talent remains in European CFOs’ top three challenges over the next twelve months, and occupiers will use real estate to differentiate themselves as a key draw for talent.’
Vacancy rates edge up Vacancy rates increased by an average of 50 bps from 7.5% to 8% during 2022, most apparent in Dublin (+290 bps to 12.5%), La Défense, (+250 bps to 16.7%), Budapest (+210 bps to 11.3%), and Amsterdam (+220 bps to 7.8%).
Most of the increase in vacancy rates is reflected in an increase in secondary office stock, or in non-CBD locations following an occupier shift towards best-in-class, CBD-located stock. Some of this increase was recorded during the second half of the year, with a number of companies seeking to sub-lease space in order to reduce overall costs.
European office lease incentives remained stable between Q1 2022 and Q4 2022, at 10.3% of total lease value. In 2019 the average rent-free period was 7% of total lease value, indicating that lease incentives are still some way from pre-pandemic levels.
Among many markets, lease incentives fell as vacancy rates stabilised, and a shift to prime locations is taking place. London WE and City lease incentives both fell, reflecting both a shortage of best-in-class supply and a regulatory cliff edge of minimum EPC B by 2030 as ESG remains a key focus for both landlords and tenants. Low vacancy rates in Munich and Paris CBD also reduced lease incentives.
Conversely, Paris La Défense is an interesting outlier, standing out from the European trend as lease incentives increased from 30% to 35% of lease value, reflecting an occupier shift to more mixed-use, well-connected locations, such as Paris CBD. Whilst in Berlin, lease incentives increased from 0.6% to 4.5% of lease value, reflecting a more active development pipeline during 2023 and 2024.
European fitout costs have increased by an average 14% over the last year due to increasing material and labour costs. Occupiers are holding off on committing to fitouts costs. As a result, the level of fitout contribution from landlords is rising in Prague, for example, although local market practices vary depending on whether the fitout is usually paid for by tenant or landlord.