According to the Jones Lang LaSalle Q3 European Office Clock prime rental levels stabilized in the majority of European markets in Q3 2009. The European Prime Office Rental Index is based on the weighted performance of 24 markets decreased by only 0.8% over the quarter. Nevertheless, prime rents across Europe are now on average 16% below the level recorded a year ago, representing a rental decline not seen on record before.
Prime rents decreased further in Dublin (-11.1%), Madrid (-6.3%), Prague (-4.5%) and Barcelona (-4.4%). However, headline rents remained at Q2 levels in 16 markets including London and Paris. Commenting on the report, Chris Staveley, Head of Jones Lang LaSalle's Cross Border team, said: "In the cities with stabilizing rental levels, landlords are offering increasing incentives to attract tenants. A number of markets are now approaching the highest rental falls in their cycle proceeding towards a rental stabilization but further limited rental decreases are expected."
Despite the improving economic outlook across most European countries on the back of stimulus packages and governmental interventions, business sentiment is improving only cautiously. Corporates continue to undergo rigid restructuring processes and their focus has been on lease renewals in the last quarter. After a short-run recovery in Q2 when total European take-up improved by 19% after an extremely weak first quarter, gross take-up did not follow an upward trend and stayed stable, slightly below 2.2 million m² from July to September. Compared to the first three quarters of 2008 however, European office demand is 34% lower so far this year and stands nearly 30% below the 5-year average. This stabilization in overall European demand has been backed by some markets that registered increasing take-up over the quarter, including larger markets like Milan (+75%), London (+64%) and Moscow (+17%). However, some major markets, namely Paris and Stockholm, continued to see further declining.
Construction activity is on the decline and completion volumes are expected to decrease over the next few years. However, projects started before the recession continue to be delivered and so far about 5.6 million m² has been completed in the first three quarters of this year.
New completions combined with declining space requirements continue to drive up the European vacancy rate, which increased further over the quarter to 9.7% - a 50bps increase to Q2 2009. Vacancy in particular is an issue in the CEE region, where the average vacancy rate increased by nearly 1,000bps over the last 12 months to 15.6% - an all time high. This oversupply is partly caused by the downturn in the Moscow market, but Budapest, Prague and Warsaw have also seen substantial rises in vacant office space. With an increase of 200bps to 9.2% over the last year Western Europe also faces a supply-demand imbalance. Significant completions and weak demand caused negative net absorption of more than 0.5 million m² for the first time since 2003.
The most significant growth in vacancy rates over the quarter were recorded in Amsterdam (+170bps to 14.6%), Warsaw (+140bps to 7.1%) and Barcelona, The Hague, Moscow and Budapest (all up 110bps). Vacancy rates in Europe range now from 21.8% in Dublin to 4.1% in Luxembourg. Chris concluded, "Though declining, overall Europe remains well supplied with 2.5 million m² due for completion by the end of the year, with one-third of this in CEE, particularly Moscow. Given the fragile prospects on the demand side, vacancy levels are expected to rise further and significant amounts of sub-let space will leave rents under pressure."