Signs of a turning point in Europe's office sector were evident during the first quarter (Q1) of 2010, according to the latest research from CB Richard Ellis (CBRE). The CBRE EU-27 office rent index registered a 1.0% increase in Q1 after 18 months of decline. This was largely the result of changes in London and Paris, where the first signs of genuine expansion activity took place. Rental growth is likely to become more widespread later in the year as other markets strengthen across Europe.
Richard Holberton, Director of EMEA Research, CBRE, said: "The severe slowdown in office leasing activity which characterised 2009 appears to be easing across Europe, however most markets continue to be driven by a large number of small and medium-sized deals. London has seen an increase in large deals, however, being the market which has seen the most remarkable turnaround of any European office location over the past six months. The London City financial district registered 10% rental growth this quarter alone and a shift in the overall market is clearly evident as landlords across Central London are now also offering fewer incentives to prospective tenants."
Office vacancy continues to rise across Europe but the rate of increase is now slowing. Further increases are expected at an aggregate level as the overhang of development completions, started before the downturn, comes to a close. However, vacancy is considered to be close to its peak or already beginning to fall in key markets, with demand expected to stabilise or improve slightly this year, accompanied by a reduction in the level of development completions throughout 2010 and 2011. Yet this scenario has the potential to change as more markets stabilise.
Cris Tollast, Head of EMEA Tenant Representation, CBRE, said: "As rents level off and market conditions strengthen in more markets across Europe, it will become more difficult for occupiers to secure rent or lease concessions from landlords. There is increasingly limited choice for major occupiers seeking larger floorplates as the amount of new space to be delivered through 2010 and 2011 is low - occupier choice is likely to expand from 2012. Having said that, landlords' reluctance to cut headline rents means that substantial tenant incentive packages are still on offer in many markets."
Demand is not yet strong enough to trigger the start of the next development cycle in Europe, but the scale of new developments longer-term remains dynamic as many schemes which have been mothballed can easily be restarted. Indeed, there have already been examples of schemes being revived in leading markets. There is potential for more widespread reappraisal of development schemes towards the end of the year as more markets improve. Corporate rationalisation and consolidation do, however, continue to drive most markets across the region and improving economic momentum should see demand expansion.
Matt Pullen, Head of EMEA Global Corporate Services, CBRE, said: "There are considerable differences in the degree of choice for office occupiers across Europe. Occupiers vary enormously in their location and price preferences so much depends on supply patterns and rental gradients in particular local markets, and indeed submarkets. The challenge for occupiers now is that available space is starting to condense, and with many corporates having relocated to better buildings while rents were falling, poor quality space remains and large high quality space in central business districts is now rare. Yet some corporates will be able to accommodate expansion by using existing buildings more intensively."
Gábor Borbély, CEE Research Analyst at CBRE added: "The Budapest market still favours tenants. Although rents are under significantly less pressure than a year ago, rental growth is too early to expect any time soon. High quality office space can be secured at very reasonable price right now as vacancy is peaking on the Budapest market. In the mid term we foresee declining vacancy and no new availability. The best quality space w