Prime office rents in Europe increased for a fifth year in a row in 2017

Rents for prime offices in Europe increased by an average of 6% in 2017, marking a fifth consecutive year of growth and they show no sign of abating for at least another three years, new research suggests. Since 2010 the average prime rental growth across Europe’s CBDs has been rising constantly in Core markets by 2.4% a year and 5.4% a year in the Nordic region, according to a report from international real estate advisor Savills. In addition to rising rents, vacancy rates in Europe’s CBDs hit historic lows in the third quarter of 2017 at an average of 6.6%, meaning that there is very little choice of high quality space for occupiers. ‘Following at least four years of rising demand and cautious lending conditions for new construction, the availability of office space has been shrinking,’ said Eri Mitsostergiou, director of Savills European research. ‘As a result, these conditions have long been most favourable to landlords of high quality buildings in Europe’s cities but very unfortunate for those occupiers who are competing for limited stock and dealing with rising costs,’ he added. There are now a number of European cities where prime office rents are considerably higher than the pre GFC peak in 2007. These include Stockholm up 49%, Berlin up 35%, Oslo up 26%, Munich up 16% and London up 14%. ‘The economy in these markets has gone from recovery to rapid expansion and with a strong GDP growth forecast for the next few years, continued business expansion will sustain positive rental growth across Europe’s CBDs,’ said Matthew Fitzgerald, director of European tenant representation at Savills. Savills has analysed that the overall amount of space in the pipeline for 2018 to 2019 across Europe’s CBDs is around 10.5 million square meters and this corresponds to about one year’s take-up, based on the long term average. As it should take some time before demand and supply rebalance, upward pressure on prime CBD rents will be sustained and for 2018 Savills forecasts an annual increase of 2.5% a year on average. Notably Oslo, Madrid, Barcelona and Copenhagen are likely to encounter annual rental growth of over 4% a year and there is speculation around how high rents can go in some of these markets. ‘Occupiers are expanding and the competition to hire the best talent is driving demand for prime space in the CBD. For key industries, the race to attract the smartest workforce has overtaken cost concerns relating to location,’ Fitzgerald explained. ‘This is a trend which is likely to continue unless we see another dip in business sentiment across Europe, and property costs again become too much of a burden on company balance sheets,’ he concluded.