The combination of an uncertain rental outlook and constrained access to development finance will delay the start of the next European office development cycle, according to a new report by CB Richard Ellis (CBRE).
Recent indicators have suggested a measure of improvement in the European office markets: rents have stabilised, vacancy rates are peaking at lower levels than in previous cycles, and leasing activity has increased from its mid-2009 lows. Despite this improvement, analysis of development pipelines in the major European markets shows that the absence of new starts, in the face of an uncertain market outlook, will cause a sharp drop in completions next year and that, by 2012, completions will be running at less than half their recent peak.
Richard Holberton, Director, EMEA Research & Consulting, CB Richard Ellis, said: "The delivery of new space across the main Western European office markets peaked in 2008/09 and is set to slow progressively over each of the next three years. The forward development pipeline until the end of 2012 is mainly comprised of schemes already in progress. Sentiment towards the reactivation of schemes that were mothballed in the early stages of the credit crunch is quite hard to assess but, other than in London, there seems little sign of a shift in developers' attitudes.
"London is currently the only major market where there is any substantial evidence of interest in reactivating delayed schemes for delivery beyond 2012. There are some isolated examples of renewed interest in development in other European markets, but these reflect specific building circumstances rather than a broader shift in momentum. Indeed, the recent Euro crisis has the potential to cause further banking loses and hence further restrict the appetite of banks to lend on property developments," Holberton continued.
By historical standards, the current development cycle has been relatively subdued as a result of weaker rent signals and sharp reductions in leasing activity and debt availability. Aggregate completions from 2007-10 in Western Europe are expected to amount to around 14.5 million m², compared to more than 17 million m² in the 2000-03 period and over 22 million m² between 1989-92.
So what would need to happen for the current weak development scenario to change, and what are the potential consequences if it doesn't?
Holberton commented: "Clearly an accelerated economic recovery would help to spur the next development cycle in Europe, but current forecasts suggest employment in financial and business services across Europe may not return to previous peak levels until 2012-13. Therefore with demand-side pressures on rents remaining subdued, it could take considerable time in some markets for speculative development to resume, even if finance availability improves. If developers remain cautious and look to secure pre-lets before initiating schemes, occupiers could be significantly impacted, needing to forward-plan large new requirements as choice becomes more constrained."