European office market recovery stagnates

The Jones Lang LaSalle European Office Index reflected a third straight quarter of negative movement, with a -0.4% fall compared to Q2 2012 and -0.5% fall compared to Q3 2011.

Among major European markets, prime office rents decreased in Madrid (-2.0%), Milan (-1.9%) and Paris (-1.9%). The decline in Paris masked rental growth recorded in the central business district.

The Jones Lang LaSalle European Office Clock, which visually represents how prime office market rental values sit within their individual rental cycle, highlights that increasingly European city markets are grouped at 12 o’clock and 6 o’clock. Milan and Zurich office rents have now passed 12 o’clock, which means rents are expected to fall throughout the rest of 2012.

Leasing activity in Europe softened slightly over the quarter. Office take-up reached 2.3 million sq m in Q3, a decrease of 5% over the quarter. For almost half of the 24 European Office Index markets, Q3 was the weakest quarter of 2012. However, the forecast for full-year take-up is -10% of 2011 volumes, but still in line with the 10-year average.

Commenting on the leasing market, Dr Lee Elliot, Head of EMEA Research said “Occupiers across all of Europe are adopting a holding pattern. The current uncertainty about the economic outlook means companies are cautious and conservative on decision making. Expansion plans are on hold whilst activity is increasingly being driven by lease events.”

Vacancy ticks-down

Overall vacancy levels in Europe dropped by 20bps in the last three months, supported by on-going low levels of supply. Vacancy in Moscow reduced by 140bps and there was also by reduced vacancy rates in all German markets and Paris. London and Warsaw recorded the largest increases in vacancy, both up by 70bps.

The Budapest office market did not manage to recover from the deep freeze it entered after the crisis. The vacancy rate increased further on and became the highest in the EMEA region with 21.5%. In total, 95,590 m² office space was leased between July and September, which was in line with the previous period of 2012 but, was 14% weaker than the volume recorded in Q3 2011. Prime office rents remained unchanged at 20 €/m²/month and headline rents are also stable.

European development activity up 10% on 2011

While the latest forecast for full year 2012 development activity is an increase of 2011 volumes by 10%, this is still expected to be 30% down on the 10 year average.

Offices transactions dominate European investment volumes

During Q3 2012, office investment volumes reached €13 billion and accounted for 50% of the total amount across all sectors (offices, retail, logistics & industrial, hotels). Whilst a decrease of 14% compared to Q2 2012, the cumulative year to date volumes recorded in 2012 are 18% higher than in 2011, driven by high levels of activity in the liquid markets of London, Paris and German cities as well as the Nordics.

Prime yields have remained stable in most markets, with only four of 24 Index markets showing movements. Yields moved out in Barcelona ( 25bps) as well as The Hague and Utrecht ( 15bps) as investor concerns over the economic outlook were sustained, whereas yields in Paris compressed by 25bps.

Chris Staveley, Director of European Office Capital Markets, Jones Lang LaSalle added:

“Despite a softening rental market, the capital value index increased by 0.5% over the quarter. This was driven by yield compression in Paris which was a result of ongoing investor interest in the most liquid European centres and rental growth in markets with more robust economic market conditions. Capital values will remain stable for the short-term, however, yields in peripheral European markets such as Greece, Italy, Portugal and Spain may come under upward pressure as we move into 2013.”