A “new normal” for corporates across EMEA?

Jones Lang LaSalle has launched its latest EMEA Corporate Occupier Conditions report. Now in its fifth year, this report provides a deep interpretation of conditions across more than 70 EMEA real estate markets, specifically from a corporate occupiers standpoint.

Reflecting on Q4 2011 market data and observations in the early part of 2012, the report points to a continuing caution being shown by corporate occupiers in the markets; the staid nature of the supply pipeline which will pose challenges to occupiers down the line; and growing costs associated with prime office space.   Assessing forecasts for the markets, the report suggests that a “new normal” is emerging for both the markets and corporate real estate professionals.  A normal where activity levels will be more considered and subdued; where supply side challenges will drive occupiers towards either pre-letting strategies, retro-refits of existing poor quality supply or compromised real estate decisions and where costs, particularly rental costs, will increase but with less volatility or extremes than witnessed during the last cycle.

According to Vincent Lottefier, CEO Corporate Solutions, EMEA – The question most occupier clients are asking us – “Are we experiencing a hiatus amidst unprecedented economic times or have we begun on the path towards a “new normal” for corporate real estate which will drive fundamental shifts in market behaviour and the modus operandi for CRE teams? Our view is that the evidence is increasingly pointing to the latter. Despite many occupiers being cash rich, transactional activity in the markets is reserved with many CRE teams focusing instead on making changes in the way they do things.  Productivity, the increasing use of portfolio data, and delivering stronger business cases for portofolio investment are all emerging preoccupations for CRE leaders.”

Corroborating Vincent’s view, Dr Lee Elliott, Head of Corporate research, EMEA opined – “It is clear that uncertainty remains; confidence, whilst improving, is fragile and indicators paint a mixed picture in terms of outlook.  Market supply dynamics are not changing but neither, in many markets, is the demand side.” He goes on to add  – a normal where supply remains constrained; markets are polarised with limited quality and a glut of near obsolete stock; occupier activity is driven by a need to do more with less i.e. productivity. As the year progresses this sense of a new normal appears will gain further credence.

James Berry, Head of Transactionsat Jones Lang LaSalle Hungary said: “Within Budapest we continue to see occupiers actively seeking to maximise value from their real estate. The continued high levels of lease renewals demonstrate the efforts being made by companies to maximise the business value they derive from their real estate. We have also seen an increased number of larger occupiers both contemplating and closing large build to suit projects as a result of a reducing number of readily available large buildings.”

Some of the key statistical insights within the report include:

Around 2.9 million sq m of office take-up was witnessed across Europe during Q4. This was a reduction of 2% q-on-q and 9% down on Q4 2010 and was shaped by reducing corporate confidence and uncertainty during H2 2011. However, some markets are firmly in focus for occupiers, with15 of our core 24 European Index markets saw 2011 take-up volumes exceed the previous year – most notable being Munich and Luxembourg. All CEE markets saw strong occupier demand across 2011, driving gross take-up 21% higher than 2010. Moscow, Prague and Budapest were more active markets q-on-q while a range of 2^nd and 3^rd tier cities within CEE are coming into focus as occupiers seek to make efficiencies through BPO and Shared Service Centre activity.

10 of the 24 core European Index markets shown opposite out-perform the long-term average net absorption rates on an annual basis over the next four years. This dynamic reflects ongoing efforts by corporate occupiers in the region to restructure portfolios and focus down on doing more with less space going forward.  New space will of course be required but greater volumes of older stock will also need to be disposed of.