King Sturge: Research highlights better times ahead for the majority of European office markets (EU)

King Sturge's new European Office Property Markets research highlights better times ahead for the majority of European office markets. The survey provides an assessment of relevant macro-economic, occupier and investment trends and includes commentary and analysis of Europe's most important office markets.

"Economic growth in 2010 provided the necessary platform for a general improvement in Europe's office markets. Modest economic forecasts in 2011 should support continued, but unspectacular growth across the majority of markets and could keep occupiers focused on consolidation and lease renegotiation," comments Emma Jackson, Senior Research Analyst at King Sturge.

Top performing European office markets include London, Paris, Berlin, Warsaw and Moscow which all recorded double digit rental growth in 2010. However, rents have fallen in other markets such as Dublin, Athens and Prague.

Moscow recorded the strongest rental growth over the year at just over 40%, followed by the City of London and Paris at 24% and 15% respectively. In Moscow, prime rents have seen a strong recovery from their trough in late 2009 on the back of rising demand for Central Business District (CBD) office space coupled with an increasing shortage of grade-A space and limited pipeline development. The same can be said for London and Paris where take-up in 2010 and the first months of 2011 has been robust, particularly for large floor plates.

A number of factors should ensure a reasonable outlook for office occupier markets in 2011 including:

  • The supply/demand imbalance will intensify in some core markets as the supply pipeline remains limited and vacancy rates are set to reduce in most markets over the next year or more. Speculative development is unlikely to return in the short term, with rents low and banks still reluctant to lend. This will result in prime rental growth in the most affected markets.
  • Economic recovery is expected to continue, though at a slow pace in most of Europe. Western European core markets, such as Germany, UK and France are forecast to achieve modest growth in 2011, with stronger economic growth forecast in the emerging economies, such as Russia, Poland and Turkey. But the outlook remains weak in Spain, Portugal, Ireland and Greece.
  • The growth in office-based employment – The outlook for 2011 is generally better than it was last year and this will support office floor-space demand over the medium to long term, although there remain patches of weakness, including Portugal, Italy, Greece, Spain and parts of the CEE where the revival in output is not matched by jobs.

"Economic forecasts suggest we will see continued modest improvement in most European office markets," comments Emma Jackson. "Potential hotspots in the short to medium term include the German cities, Bucharest, Budapest, and Central London where the highest level of jobs growth is forecast."

Investment markets
Investor demand in the office sector picked up considerably in 2010, with total volumes, reaching just over €44 billion for the year, up by around 15% compared to 2009. Nevertheless, overall volumes have remained far below the exceptional investment years of 2006-07. The narrow investor focus on the most liquid markets continued in 2010. The UK, Germany and France again recorded the majority of activity, accounting for around 65% of total investment volume.

Overall, investors remain cautious with demand concentrated on prime buildings in core markets. Whilst regions such as the Nordics and Central Europe recorded much stronger investment activity compared to 2009, they remain relatively small investment destinations at approximately 11.4% and 2.3% of total office investment in Europe in 2010.

Looking forward, King Sturge European Research Associate, Alexander Colpaert said: "We expect investment activity in the office sector to strengthen towards the end of 2011, following a buoyant 2010. The first signs are good with preliminary figures indicating around €11 billion being transacted in the off

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