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OFFICE

EMEA Real Estate Market Outlook 2020 Midyear Review
August 13, 2020

USER DEMAND: SHORT-TERM NEGATIVE BUT SIGNS OF RESILIENCE

  • Early indications point to some degree of resilience for many office-using sectors. Office-based employment (OBE) for the EMEA region as a whole has been stable up to mid-year, with some cities including Berlin, Amsterdam and Madrid retaining some positive momentum.
  • However, labour markets are clearly weakening and reductions in headcount will temper demand in the short-term, particularly as employment and wage support schemes taper. CBRE expects OBE to fall by about 1% over full-year 2020 before growth returns across most major markets in 2021. This will result in an overall rebound of around 1.5%, roughly in line with the 2017-19 annual rate of growth.
  • Technology and knowledge-based sectors have tended to dominate take-up in many markets, and remain somewhat better-positioned in terms of short-term revenue prospects. Over the medium-term, a rather more balanced demand profile looks likely.

FIGURE 12: OFFICE-BASED EMPLOYMENT GROWTH (EUROPE MAJOR MARKETS % Y-ON-Y), 2008-21


offices figure 12

Source: Oxford Economics and CBRE Research, 2020.


FIGURE 13: UNEMPLOYMENT RATE (%) VS OFFICE VACANCY RATE (%), EURO AREA, 2000-2024


offices figure 13

Source: Oxford Economics and CBRE Research, 2020.

LEASING VOLUME: SHARP BUT SHORT-LIVED SLUMP

  • With the effects of lockdown measures on office demand slow to become apparent, leasing volumes initially fell gradually, with tight supply conditions still a constraint in many markets. Q2 2020 data have started to reveal the extent of the lockdown-induced downturn more fully, with gross leasing levels across the main European markets falling by 49% y-o-y to the lowest quarterly total  in over 20 years.
  • For the main European office markets, CBRE expects take-up to decline by up to 40% this year, a steeper single-year fall than anything seen in the aftermath of the Global Financial Crisis.

FIGURE 14: EUROPEAN OFFICE LEASING, 2009-20 (% P.A.)

offices figure 14

Source: CBRE Research, 2020.

VACANCY: STEADY RISE FROM RECENT TROUGHS BUT CAPPED BY SLOWER DEVELOPMENT 

  • 2020 will represent a watershed in new office supply. Vacancy rates in most major markets had been trending down for most of the past five years, to a point where leasing levels were being stifled by a lack of options.  The expected rise in vacancy this year therefore signifies a clear turning point.
  • Most major cities are likely to see an increase in vacancy of 1-2 percentage points to levels that are still mostly lower than previous highs.
  • Curtailed development will limit the rise in vacancy. Even though the effect may not be immediate, with new completions running well above 2019 levels, this could still produce shortages of prime space in the medium-term, particularly since over 55% of expected new supply in major cities from now until end-2021 is already pre-let. This is truer for western European markets where expected vacancy growth is more muted, than for parts of CEE where development-fuelled supply growth appears far more likely. Major markets including Bucharest, Moscow and Budapest look particularly exposed. 
  • While lockdowns have stifled deployment, the amount of available capital remains high and should give confidence heading into H2 2020. With the pandemic necessitating changes to layouts and specifications, well-located properties or refurbishment of good secondary assets may provide opportunities for developers, particularly in some of the larger Western European markets such as Amsterdam. 

FIGURE 15: CURRENT AND FORECAST VACANCY RATES RELATIVE TO CYCLICAL PEAKS 

offices figure 15

Source: CBRE Research, 2020.


RENTAL OUTLOOK: SHORT-TERM NEGATIVE BUT GOOD PROSPECTS FOR A REBOUND

  • Rental growth in the major European cities was already starting to ease in the early part of this year. The downturn will accelerate this process and pitch several markets into negative territory before year-end. These markets include London, Dublin and Stockholm, where we expect falls of 3-5%. 
  • Markets that might buck the trend and see rent increases in 2020 are mainly located in Germany and the Netherlands, where the impact of lockdowns has been less severe and where vacancy was very tight going into the pandemic. This generally reflects the impact of growth in Q1 2020, with H2 2020 likely much weaker. Most of the other larger markets look flat.
  • While there are some markets – notably Paris and parts of CEE – where downward rental pressure looks set to persist or be delayed into 2021, in general a demand recovery will be sufficient to cause a rental rebound next year. Occupier incentives will naturally expand in the meantime.
  • With the short-term outlook volatile, investors and occupiers should where possible seek to ascertain optimal times to deploy capital or to re-gear leases. On a five-year view, London, Paris, the Nordics and Spain look like strong rental plays.

FIGURE 16: PRIME RENTAL FORECAST (%), FULL YEAR 2020

offices figure 16


Source: CBRE Research, 2020.


ACCELERATED AGILITY: THE SHIFTING ROLE OF THE OFFICE

  • As well as introducing massive short-term volatility, the pandemic is also accelerating a number of structural processes leading towards more fluid, multi-format real estate portfolios.
  • Expanded employee choice will likely include more remote working, including in satellite or suburban locations that do not require extensive commuting.
  • Technology investment in buildings will be crucial both for the existing motive of enhanced user experience but increasingly also for health management and wellbeing.  Expect a widening value gradient between prime, tech-enabled buildings and poorer stock.

FIGURE 17: KEY STRATEGIC CHANGES ANTICIPATED BY OCCUPIERS

updated_OFFICES FIGURE


Source: CBRE Research, 2020.

Key Takeaways

 

  • Short-term rental volatility offers opportunities for astute timing of capital deployment and lese audits. Expect turning points in many markets in late 2020 or early 2021. Occupiers should seek to maximise short-term incentives even where headline rents are stable.
  • Occupier demand shifting increasingly towards tech-enabled 'smart' space, offering development or refurbishment opportunities.
  • Health, wellbeing and sustainability becoming the touchstones of occupier choice. Early mover investors should target assets accordingly.

EMEA Real Estate Market Outlook 2020

Contributors

EMEA Real Estate Market Outlook 2020 Midyear Review