The onset of COVID-19 and resultant lockdown measures have clearly disrupted European office markets. Leasing data for the first half of 2020 show the extent to which this may represent a turning point in the cycle but what does this really mean for occupier choice?
In aggregate terms, leasing volumes across the main European markets declined 35% in the first six months of 2020 versus the same period in 2019. And for the full year 2020 we expect a drop of around 40% compared with 2019. However, this is not a uniform trend: geographic disparities have become more pronounced over the last two years and this trend has only been exacerbated through COVID-19. For instance, on a rolling four quarter basis, southern European markets fell 22% on the quarter, western European markets 14% and central and eastern European markets 10%.
As a result, the landscape for occupiers is going to differ markedly across geographies and this will affect their choices when they next have significant lease decisions to make.
Source: CBRE Research, September 2020
Other things being equal, we would normally expect this to lead to an increase in vacancy. Does the current trend mean vacancy is increasing and, if so, to what extent?
Pre-Covid vacancy rates across all major European office markets had been trending down for the best part of five years, with many lying well below their historic averages. Now, with demand pressure easing, we expect vacancy to pick up sharply, with major markets experiencing a 1-2 percentage increase. Paris, for example, is forecast to rise from 6.6% to 8.0% by year-end 2021 before falling to 5.1% in 2022. This growth is the resulting effect of the development pipeline, where high levels of space are due to complete in the remaining six months of 2020; pre-lettings represent a low proportion of this new supply which is edging the vacancy rate closer to previous highs. This trend is notable across some other western European cities, including both Dublin and Milan although parts of central and eastern Europe appear to be more exposed. Cities such as Bucharest and Budapest have recently recorded high levels of vacancy combined with still-high development pipeline, which supports occupier choice even if it may deter investment in the short term.
So, will this increase in supply benefit occupiers?
The volatility in vacancy levels underlines that timing is critical. In the short-term, this is increasing the degree of occupier choice in location and relocation decisions - whether this is driven by lease events or new requirements, occupiers must take advantage of this short window of opportunity before conditions start to tighten again.
This may not be as clear cut as it seems though. As well as the geographic differences, a distinction also has to be made about quality of space, where many occupiers are gravitating towards quality. In our EMEA Occupier Flash Survey, published in the first quarter of this year, 41% of occupiers stated they now have a preference for buildings with WELL/Green features indicating that we are seeing an increased appetite for quality buildings. With health and hygiene remaining a critical element in the Covid era, occupiers are increasingly willing to adapt their future building selection process to place a greater emphasis on their employees.
And while overall choice will expand, not all of the space becoming vacant will meet requirements. In London, for example, there was a 21% increase in the release of second-hand space in Q2 2020 and while this boosts supply it may or may not align with occupiers’ evolving needs. The lesson: don’t assume that rising availability will present occupiers with sufficient choice of the right type of space in the right place. It pays to assess the supply pipeline in detail.
Source: EMEA Occupier Flash Survey, CBRE Research, June 2020