Positive rental growth and further yield compression were observed in Europe’s commercial real estate markets in Q3 2019, according to Cushman & Wakefield’s latest DNA of Real Estate.
The office sector continued to lead the charge for rental growth, with the European average prime office rent up 0.7% quarter on quarter (q/q), maintaining annual growth at a robust 3.3%. Geneva was the strongest market this quarter with the prime rent up 5.9% to 900 Swiss Francs/sqm/pa. Further growth was observed in Berlin, where rents grew 2.7% q/q, albeit lower than the average 6% observed in the previous two quarters. Low vacancy and continued demand is placing upward pressure on rents in the capital city. Although rents were largely stable in other leading German cities, there is upward pressure on rents.
Outside Germany, positive growth can also be seen in Portugal and Spain. Prime office rents in Lisbon rose 4.5% q/q and near 10% year on year (y/y) to €23/sqm/month, with Barcelona registering a 2.8% rose q/q to €28/sqm/month with rents rising 0.7% to €34.75/sqm/month in Madrid. This helped push annual rental growth across Semi Core markets to 5.1%.
Nigel Almond, Head of Data Analytics at Cushman & Wakefield, commented: “Although the number of markets reporting stable rents rose marginally in Q3, the outlook remains positive. Demand remains strong, albeit slowing off recent highs. Vacancy rates continue to fall with the European average at just over 6%, their lowest level since the early noughties. A shortage of Grade A space in many cities continues to drive rents higher for the best quality space, albeit the pace of growth is anticipated to slow into 2020 to around 2% per annum.”
The logistics sector continues to benefit from strong occupational and investor demand. Prime rents grew a further 0.5% over the quarter to an annualised 2.8%. The Nordics (+1.4% q/q), Germany (+1.2% q/q) and Semi-core markets (+1.0% q/q) were the main drivers of growth.
Logistics also registered the strongest yield compression for the 12th quarter in a row, with the average prime European yield 6bps lower at 5.59%. The drop was driven by a sharper inward movement across France (-25bps to 4.27%) and Germany (-22bps to 3.9%). It is now the first time prime logistics yields have dipped below the 4% barrier, falling to 3.9% in key German cities, including Berlin, Frankfurt and Hamburg. A combination of strong demand, further modest rental growth and the continued low interest rate environment will help maintain the relative attractiveness of this sector with yields set to remain below 4% in the near term.
The picture across European retail remains somewhat mixed. In the more mature markets of north western Europe retail remains under pressure, notably outside of prime, with very marginal rental growth. Changing consumer habits, including rising online sales and higher rental costs are impacting the profitability of stores in some locations. Recent rental growth has largely been restricted to Central and Eastern Europe with increases in Bulgaria, the Czech Republic and Slovakia. In some 80% of monitored markets, rents and yields were flat.