Europe's economies continue to recover from the global economic crisis and business sentiment has now improved over four consecutive quarters, according to Jones Lang LaSalle's European Office Clock. Chris Staveley, Director in Jones Lang LaSalle's EMEA Capital Markets team, said: "A time lag still remains between the wider economy and occupier markets, although positive signals have increased."
Jones Lang LaSalle's European Office Clock reveals that prime rents and incentives continued to stabilize in the majority of European markets in Q1 2010, with the European Prime Office Rental index, based on the weighted performance of 24 markets, increasing 1.2% quarter on quarter, the first increase since Q2 2008. Prime office rents, however, remain 5.0% below the level seen one year ago. The biggest rise in rents this quarter was seen in Moscow (14%) and the City of London (6%). Achieved rents in Brussels also indicated 17% growth but this was due to one exceptional deal in the Leopold district and not indicative of the wider market. Some markets saw further softening, with the greatest falls in Dublin (-7.6%), Madrid (-2.5%) and Budapest (-2.4%), although in Dublin there has been some stabilisation in the wider market. Chris continued: "This quarter's office clock not only reflects the range of rental conditions and prospects, but also shows how all markets are moving through "rents bottoming out" and toward growth. This quarter, the City of London entered the "rental growth accelerating" quadrant and several markets were at, or approaching, 6 o'clock."
Signs of economic recovery are beginning to feed through into office demand, but tenants remain cautious and cost sensitive. In the absence of strong economic growth, current market activity remains driven by lease events, portfolio churn and corporate activity including office consolidation and the realisation of space efficiencies rather than expansionary plans. Take-up for Q1 fell slightly to 2.4 million m² across Europe, a fall of 9% on the previous quarter although it is worth remembering that the final quarter is usually the strongest. This decline was driven mainly by Western Europe (-12%) whereas take-up increased slightly in the CEE region (+6%). Despite this, take-up for Q1 2010 was 38% up on Q1 2009 with both Western Europe and CEE seeing annual increases. Overall, nearly half of the 24 index markets showed an increase in demand over the year, with Dusseldorf, Barcelona and Dublin showing the sharpest improvement though these markets rose from very low levels.
On the office supply side, completions are beginning to decline from the cyclical high of 2009. In Q1 2010, some 1.2 million m² of office space completed and in London shortages for certain product types and sizes is already being experienced amidst falling vacancy rates. Since the credit crunch a lack of speculative finance, a lack of developer confidence and uneconomic development appraisals has combined to prevent new speculative commencements. Across most EMEA markets developers are still subject to the above conditions and so remain hesitant to commit to new space. This will help to ease the imbalance between supply and demand and may even create a "supply gap" of new space in the medium term.
With declining completions and the first signs of improving demand, the European vacancy rate remained stable over the quarter at 10.2% - the first quarter of stability since Q2 2008 (7.1%). This was driven by Western Europe, where the aggregated vacancy rate remained at 9.7% while in the CEE markets vacancy increased modestly, from 16.1% to 16.4%. Over the quarter, vacancy levels decreased in 7 of the 24 index markets led by London. The highest quarterly increase in vacancy was registered in The Hague (+160 bps), Luxembourg (+110bps) and Barcelona (+90bps); however these were exceptions. There remains a significant spread across Europe with the highest vacancy rate in Dublin (21.9%) and the lowest rate at 6.4% in Luxembourg.
Chris concluded: "Looking forward, the differentials in the supply d