European office markets finding stability, despite global headwinds

Colliers’ latest Global Insights & Outlook Office Report finds that varying return to office approaches post-COVID, underlying fundamentals of city functionality, approaches towards ESG-compliance differences and how markets have reacted to shifts in inflation and interest rates have created significant divergence in office investment volumes, pricing, and appetite globally. In Europe vacancy sits at a steady 8.1% and office occupancy rates have largely returned to pre-pandemic levels of 65% on average across Europe.

“The pricing of office assets is moving in sync with key macro factors such as inflation and interest rates, globally. It is also adjusting to market fundamentals where there is a huge divergence in the factors at play,” said Damian Harrington, Head of Global and EMEA Capital Markets Research for Colliers. “Within each region, there is also great diversity in performance and fundamentals across local markets.”

But Europe’s office vacancy figures mask the varying performance within countries. The standout strong performing locations so far in Q2 were London’s west end, which held steady with a vacancy rate of 6.8%, Amsterdam saw a drop in vacancy to 6.1% from 6.5%, and Brussels recorded a fall in vacancy to 7.7% from 8.3%. Other strong locations were Paris where vacancy rose by only 0.6% to 8% and Berlin saw rates creep from 3.1% to 3.7%.

Andrew Thomas, head of International Capital Markets in the London Offices team, added: “Although London vacancy rates are amongst the lowest in Europe, there is little relief for the supply / demand imbalance as high construction costs and the ongoing inflationary pressure from the Russia-Ukraine war continues to hamper development. For the markets, this means there is strong probability of substantive rental growth in the West End, which will reaffirm the area’s premier status as the destination of global capital. The Monopoly like status of London, with its well-known streets continues to interest overseas money, however it will be those who take a longer-term view and see beyond the postcodes which will be the ultimate winners.”

APAC is predominantly mirroring EMEA with vacancy around 10% and occupancy averaging 80%. In contrast, North America rates are sticking at 50% or less, as longer travel times and more comfortable home working environments support this dynamic. Coupled with weak occupier demand, vacancy rates have climbed to 16%+ on average, and landlord incentives to support rents continue to be stretched.

Another key takeaway from the Global Insights & Outlook Office Report is that prime rents across Europe are increasing as the demand for higher-quality space, particularly for assets that are ESG compliant, is significant. “We are seeing pressure to repurpose space that doesn’t meet contemporary demands as a growing proportion of buildings face obsolescence,” said Luke Dawson, Head of Global and EMEA Capital Markets at Colliers. “This is driving a shift in value-add plays across key markets, especially where high importance is placed on ESG, such as the UK and Australia.”

Capital values have been negatively impacted in the past 12 months, as interest rate hikes have forced yields/cap rates out. While most locations are nearing the end of the rate hike cycle, further price adjustments on the capital side are expected. The longer-term economic outlook for each city is generally very positive, but rates of growth vary markedly. Overall, this means some markets stand out as having first mover advantage on the path to value stability and recovery.

“Investing in office real estate has become more complex as the factors influencing markets are so diverse. While broader pricing continues to adjust, it will take time for appetite in offices to re-balance,” concluded Harrington.