Demand for office space in Europe outstrips supply

Demand for office space is outstripping supply in Europe, as businesses expand across the continent.

The latest Savills European Offices Market report shows that total take-up for office space in Europe reached 1.75m sq m in the first quarter of 2016, slightly down on the same period last year. Limited development (down 16 per cent) in 2015, though, means that supply is drying up across most cities and demand is now outpacing it.

There are only three exceptions – Poland (up 180 bps qoq), Copenhagen (20 bps) and London West End (10 bps) – with most cities unlikely to feel the benefit of an anticipated 22 per cent rise in development activity.

That construction surge is expected to create around 2.7 million sq m of office space – about 42 per cent of the average five-year take-up across Europe. With the exception of Warsaw and Brussels, many projects are already pre-let, up to 63 per cent in Berlin, and it is expected that vacancy rates will either decline or remain stable rather than see growth.

Indeed, the average vacancy rate across European cities is at its lowest in seven years, dropping from 8.4 per cent in Q4 2015 to 8.1 per cent in Q1 2016.

With demand particularly growing for small and medium-sized office floor space and occupancy rates so high, rental growth is forecast for 92 per cent of Europe’s markets, although pressure on rents will ease as completions climb once more. Prime CBD rents grew an average of 4.9 per cent yoy, up from the 3.4 per cent growth recorded in the first quarter of 2015. Some tenants, meanwhile, are now tending to sign longer leases, especially if they can negotiate a better rent.

“The new supply planned will be easily absorbed by continuing strong demand, and with the level of office pipeline planned for 2017 currently 9 per cent down on 2016 levels, this under-supply is expected to continue for the foreseeable future,” predicts Lydia Brissy, Savills European research director.