High class, but less available

The tenant leasing activity in Europe’s largest cities in the third quarter of 2022 totalled 2.97 mln sqm, representing a 7 pct increase on the previous year. For the twelve months up to the end of Q3 2022, tenants leased 12.7 mln sqm, which, when compared with the 9.86 mln sqm leased from Q4 2020 to Q3 2021 inclusive, is an increase of 29 pct. Over the last twelve months, a number of cities – including Brussels, London, Madrid, Munich, Paris and Warsaw – have seen growths in tenant leasing activity of over 50 pct on the previous twelve-month period.

Offices become highly sought

The transaction volume of 12.7 mln sqm illustrates the scale of the recovery of the office space market in Europe since the lifting of the pandemic restrictions. At the same time, it is a far higher figure than the 15-year average of 10.4 mln sqm and not far behind the volumes recorded for the last pre-pandemic calendar year of 2019, when tenants signed contracts for 13.2 mln sqm. “The pandemic increased the need for tenants to secure attractive space for their workers and thus provide an appropriate working environment for supporting flexible work strategies and collaboration while at the same time promoting the well-being of their staff and providing access to amenities – both within the office itself and the surrounding area,” points out Nigel Almond, the head of data analytics for the EMEA at Cushman & Wakefield.

A picture of availability

The availability index in Europe, or, in other words, the amount of office space available at any given moment in relation to the total stock, has grown from under 6 pct before the pandemic to more than 8 pct in Q3 2022 – the highest level since Q2 2015, despite the high leasing activity by tenants. This rise partially mirrors the cumulative effect of new office buildings being handed over for use during the pandemic as well as the reduced activity seen on the leasing market. The availability of class A space rose from 1.5 pct in Q4 2019 to 2.6 pct in Q3 2022. To put this into context, over the last three years the volume of space under construction over each quarter averaged 16.4 mln sqm a year. Over the same period, an average of 1.2 mln sqm of new office space was handed over on average each quarter.

The polarisation of the market is clearly becoming evident. On a pan-European scale, the available office space out of the total stock remains stable at 2.6 pct quarter-on-quarter and in some cities – including Brussels, Lisbon, Munich and Paris – it has fallen to below 2 pct. Meanwhile, the availability of non-class A space has grown from 5.2 pct in the second quarter to 5.3 pct in Q3 2022. As a result, the percentage share of class A office space out of the total available office space in Europe has fallen over the last two quarters from 35 pct to 32 pct. This is still relatively high, historically speaking, but there are a number of factors that will put downward pressure on higher quality buildings, including more interest in high-quality buildings and reduced development activity – and this will be the case both in relation to the total stock and the overall amount of available space.

Demand rises

“Tenants will be looking for modern space that allows them greater flexibility, that can be used more effectively, and that meets environmental, well-being and digital communication standards. With the introduction of regulations in Europe that require minimum standards for leased space, interest has grown in class A offices that meet both today’s and tomorrow’s expectations,” explains Nigel Almond. Due to relocations and occasionally to downsizing, tenants are vacating class A space, which is again finding its way back onto the market. This, in turn, is affecting the amount of non-class A space and the overall availability index. “Over the last quarter, we have also seen signs of developers slowing down. Currently, just under 15.4 mln sqm of space is under construction, of which less than half is speculative; however, the new supply in Q3 2022 came to 0.97 mln sqm. Both of these figures are currently below their three-year averages and this slowdown could result from rising construction costs and economic difficulties. Regardless of the cause, it all adds up to a limited amount of class A space and this in turn will push up rents,” foresees the head of data analytics at Cushman & Wakefield.

About C&W

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. It is among the largest real estate services companies in the world, with approximately 50,000 employees in 400 offices and 60 countries. In 2020, it generated revenues of USD 7.8 bln from its core services of property, facilities and project management, leasing, capital markets, valuation and other services.