Weak fundamentals continue to impact European office rents

The Jones Lang LaSalle European Office Index which tracks the performance of prime office rents across the region has decreased for the fourth consecutive quarter, recording a fall of 0.6% over Q4 2012. It now stands 1.5% lower than a year ago.

Largest quarterly rental falls were recorded in Moscow (-4.2%), Milan (-3.8%) and Paris (-3.1%). These were offset against rental increases in Lyon ( 5.6%), Düsseldorf ( 4.0%) and Munich ( 1.6%).

Nine markets now see prime rents below levels at the end of 2011, including Dublin (-6.3%), Madrid (-5.8%) and Milan (-5.7%). Rents in Paris have also softened by -7.2%. Over the year, eight Index markets saw prime rents increase led by Düsseldorf ( 8.3%), Lyon ( 5.6%) and Luxembourg ( 5.3%).

Dr Lee Elliott, Head of EMEA Research, Jones Lang LaSalle said: “Despite encouraging policy developments to solve the crisis, muted business confidence has meant that  corporate occupiers continued to focus on cost savings and have been relatively subdued in the leasing markets.  However, as securing modern space to enable workplace transformation is becoming a driver of activity for some corporates, we expect prime rents to stabilise over the near-term and rise as market supply further polarises.”

Overall vacancy for the region continues to decline slowly supported by on-going low levels of supply of new office space. The European vacancy rate dropped by -10bps over the quarter (-30 bps y-on-y) to 9.6%. 13 of the 24 Index markets now record vacancy rates below their Q4 2011 levels, led by Frankfurt (-200 bps). Modern office space in good locations is in demand and will be quickly absorbed, but vacancy levels will remain impacted by further releases of second hand space onto the market.

Rita Tuza, Head of Research at Jones Lang LaSalle Budapestadded: Prime office space supply is limited in the Budapest office market and confined to only a handful of buildings. Therefore prime rents are relatively stable as those occupiers who would like to be located at the most prestigious office locations have to pay a premium. Currently prime rents stand at € 20/sq m/month in Budapest. This is in line with the Czech prime rental level (€ 20-21/sqm/month) but lower than the Polish (€ 22-25/sq m/month).

Office transactions dominate despite occupiers not expanding

In Q4 2012, offices accounted for 50% of total European real estate investment volumes – EUR23bn out of a total of EUR46bn. This is an increase of 73% over the quarter, driven partly by strong quarterly activity in France and Germany ( 134% / 98%) and increasing interest in the Nordics, demonstrated by the recent EUR430 million sale of Statoil’s HQ in Oslo to an investor syndicate.

Chris Staveley, Head of EMEA Office Capital Marketscommented: “2012 was a busy year for European office real estate investment. Total volumes reached EUR65.7 billion, up from EUR53 billion in 2011. This means 2012 was on-par with 2004 and 2005 volumes, and is the highest annual level since 2006/7 when the markets accelerated steeply due to debt funding availability.”