CBRE Q2 2003 research shows economy delays real estate market recovery

The continued failure of countries in the EMEA region to show any sign of a sustained economic recovery is delaying recovery of the officemarkets. Especially in Europe, companies are putting off decisions regarding acquisition of new office space until the outlook is more secure and this is keeping take-up at relatively low levels.

The weakness of the recovery is well illustrated by the way in which economic growth forecasts for 2003 have been revised down over the last year. In July 2002, the consensus forecast for 2003 GDP growth in the eurozone was 2.7%. In July 2003, the same consensus forecast was for just 0.6% growth.

At the bottom of the range of forecasts within the EU is Netherlands, with GDP growth of â€"0.1% forecast for 2003, but this is closely followed by Germany where GDP is expected to increase by just 0.1% year on year.

At the top of the range (for the EU at least) are several of thesmaller EU countries, specifically Greece and Ireland. Spain is expected toregister the highest growth of any of the larger countries at 2.2% for 2003.

The lack of activity from the private sector is being compensated in some cities by increased leasing activity from public sector occupiers. Brussels is perhaps the most extreme example of this, with public sector occupiers accounting for more than half of all space absorbed in the firsthalf of the year. There are special circumstances in the case of Brussels, but there are several others where the public sector is currently the most active occupier in the market.

On the supply side, the flow of new development completions is starting to dry up as schemes started in better market conditions are finished. Very little is now being started without substantial pre-lets, so vacancy rates are expected to peak close to their current level in most locations.The expectation is also that occupiers have already put any excess space they might have onto the market and so there will be little additional ’sublease‘space becoming available.

Despite the supply-side trends, weak take-up means that vacancy will remain high for some time, putting further downward pressure on rents.So far in the current cycle, prime rental values have fallen by an average of 13% in the EU from their peak at the end of 2000. As there are almost no EU cities where prime rents are on the increase, and there are still several major markets where rents are on the decline (particularly Central London and most German cities), we expect the average for the EU to remain negative in the immediate future.

Source: CBRE

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