Take up in the first quarter of the year was close to 2.8m sq ft, which was 18% down on Q4 2018, but 2% up year-on-year (yoy) and 23% above the 10-year long term average, according to Savills data. This reflects a steady demand particularly for high quality, well-located offices. Brussels (189%), Dublin (111%) and Barcelona (50%) showed strong annual rises.
The most significant drops were noted in Frankfurt (-37%), Warsaw (-29%) and Paris LD (-26%). These compare to strong activity last year and they still remain above long-term averages. Volatility of large deals also affected the market, while smaller deals remained a strong driver. Flexible office providers once again were quite acquisitive, as in many cases they offer temporary solutions given the supply constraints in most markets.
Savills said the average vacancy rate across the survey area dropped for another quarter from 6.1% to 6% and is 100bps below Q1 2018. The tightest markets in terms of vacancy are Berlin and Paris CBD with 1.5% vacancy rate. On a quarterly basis, Stockholm and Prague experienced the steepest decreases of available space, from 4% to 2.6% and from 5.1% to 4.3% respectively. The most significant annual changes were noted in Lisbon (from 8.3% to 6%) and Barcelona (from 7.0% to 5.1%).
This reflects a low supply reserve across markets (ratio of available space over 3-year take-up average), according to Savills, which corresponds to less than a year’s take-up and ranges from about four months in Berlin and Prague to 27 and 29 months in Madrid and Brussels. As a result, companies find temporary solutions to accommodate their property needs, either in their existing space or in flexible office spaces. Generally they do not compromise in quality and location, which are important factors for the attraction of new personnel.
Eri Mitsostergiou, a director in Savills commercial research, explains:
“While deliveries scheduled for 2019 and 2020 are expected to offer more choice to tenants, we do not expect a significant upswing in Grade A supply or in vacancy rate, as about 45% of this space is already committed. There is about 10m sqm under construction (2019 and 2020 pipeline), which can satisfy about 12 months of demand and corresponds to 4% of stock.
“The volume of development completions is rising compared to the previous years and in 2020 will reach a similar level as the past cycle peak (2008-2010). Continued strong demand combined with tight supply continues to press rents upwards. Prime rents increased by 5.1% yoy in the CBD and 1.9% in non-CBD locations. Cologne (13.7%), Berlin (10.1%) and Barcelona (12.5%) all registered double digit annual growth after London, which rebounded strongly in the first quarter of the year with a 26.5% quarterly rise.
“Regarding prime non-CBD rents we also noted a significant rise in Berlin (15.9% yoy) and strong recoveries in Barcelona (15%), Madrid (10.6%) and Athens (9.1%). Supply constraints have also allowed landlords to command higher rents for reasonably well-located secondary buildings. Secondary rents increased by 4.8% yoy in the CBD and by 6.8% in non- CBD areas across the survey area. Berlin and other German cities were once again amongst the locations with the highest annual upward changes, as well as Paris, Amsterdam and Athens.”