Indications that EMEA markets are switching to a neutral or tenant-friendly position
New research from global real estate advisor, Colliers International, reveals that demand for office space in EMEA was strong in the first half of 2018, sustained by continuously growing rates of employment and a pronounced shortage of good quality Grade A office space in prime locations close to city centres.
Collier’s EMEA City Office Q2 2018 Snapshot also reveals that the first signs of a market slowdown are beginning to show, as impending global trade wars, ‘end of cycle’ sentiment, political challenges and labour capacity constraints start to dent confidence and activity across Europe.
Demand for office space, driven by strong job creation and robust occupier sentiment, was confirmed by positive net absorption rates across every big city with the sole exception of Bristol.
Annual absorption rates were greatest in Amsterdam (50%) and Stuttgart (48%) relative to overall availability, resulting in very low vacancy rates of 6.2% and 2.2%. Manchester (46%), Prague (43%) and Berlin (31%) also posted very high absorption rates relative to availability, with Berlin posting the lowest vacancy rate of all markets, at 1.7%.
“By end H1 2019 the number of landlord-favourable markets is expected to drop marginally to only 46% of locations, from 51% today. As markets switch to a neutral or tenant-friendly position, the next 12 months will most likely confirm that we have reached the peak of the market,” said Damian Harrington, Head of EMEA Research at Colliers International.
Vacancy rates fell in 60% of markets in the six months to June 2018, in line with strong demand, but the number of cities reporting a rise in vacancy levels has started to creep up from 21% in Q1 to 26% of markets in Q2 2018. Cities with the sharpest vacancy rate declines include Madrid, Leeds, Amsterdam, Vienna and Frankfurt.
Demand for good-quality Grade A office space far outstrips supply. As a result, prime headline rents are growing at a faster rate than secondary rents, as occupiers compete fiercely for new developments close to the CBD. Prime headline rents were stable or growing in every EMEA city with the sole exceptions of Istanbul, Tbilisi, Riyadh, Belgrade, and Bratislava.
Pre-letting activity is on the increase, confirming the optimistic sentiment and expansionary drive of corporate occupiers looking for Grade A space. This means that a significant portion of good-quality office space is already taken long before it is released into the open market, with some tenants signing leases years in advance. In London – West End, for example, 45% of floor space set to complete by end of 2020 had already been pre-let or pre-sold by end of H1 2018.
Development pipelines strongest in Eastern European cities
However, construction activity is not responding to occupier demand, signalling risk aversion among developers. Although several markets continue to suffer from a lack of quality space, only a few are addressing this via an increase in the development pipeline. In Eastern Europe, in markets such as Warsaw, Budapest, Bratislava and Prague, construction is robust and plenty of Grade-A offices are due for completion in the next few years.
By contrast, many Nordic and German cities (with the exception of Frankfurt) have very weak pipeline numbers. Stockholm, Copenhagen and Oslo all have a very small proportion of floor space under construction when compared with existing vacant space.