- European office leasing activity in Q3 well above 15-year average
- Availability of Grade A space demanded by occupiers remains low and below 2% of total office stock in many key markets
- Around half of current space under construction is already committed
- Occupiers prioritising Grade A assets to futureproof occupational strategies
London, 17 November 2022 – Continued strong demand for the highest quality workplaces drove prime headline office rents across Europe up by 1.8% during Q3, pushing annual rental growth to 5.3%, according to research from global real estate services firm Cushman & Wakefield. This is nearly 11 times the rate of annual growth – just 0.5% – recorded across the same period a year ago.
Overall leasing activity across Europe’s leading cities totalled 2.97 million square metres (m sqm) in Q3 2022, a 7% jump on the same period a year ago. For the 12-month period up to and including Q3 2022, leasing totalled 12.7m sqm, representing a 29% leap on the 9.86m sqm leased from Q4 2020 to Q3 2021. During the most recent 12-month period, several of Europe’s leading cities including Brussels, London, Madrid, Munich, Paris, and Warsaw have seen leasing activity grow by more than 50% compared with the preceding 12-months.
The 12.7m sq m figure reflects the sustained recovery in European office leasing activity since the lifting of coronavirus restrictions, sitting comfortably above the 15-year average of 10.4m sqm and not far off the 13.2m sqm leased across the last full pre-pandemic calendar year of 2019.
Nigel Almond, Head of Data Analytics at Cushman & Wakefield, said: “The pandemic highlighted the need for occupiers to have space that is attractive to employees and creates the right working environment to support a flexible working strategy, collaboration, and staff wellbeing, as well as ensuring access to amenities within, or near to, the office. That is no longer simply an aspiration, it is driving decision making and feeding through into the data and the ongoing bifurcation of the office market.”
The Availability Picture
Having shrunk to below 6% prior to the pandemic, Europe’s availability ratio – the amount of total office stock that is available currently to lease – rose to just over 8% in Q3 2022, its highest level since Q2 2015, despite the strong leasing activity. The rise in part reflects the cumulative impact of new office scheme completions during the pandemic at the same time as leasing activity was subdued. The Grade A availability ratio was not immune and has risen to 2.6% in Q3 2022 from 1.5% in Q4 2019. For context, the amount of space reported as being under construction each quarter, has averaged 16.4m sqm a year over the last three years. Over the same period, we have seen the level of new office completions average of 1.2m sqm each quarter.
A clear polarisation in the market is emerging. At the European level, Grade A availability ratio has remained stable at 2.6% quarter-on-quarter. Indeed, in several markets, including Brussels, Lisbon, Munich, and Paris the ratio of Grade A availability to total office stock sits below 2%. However, the availability ratio for non-grade A climbed to 5.5% in Q3 2022 from 5.2% in the previous quarter.
Consequently, the proportion of Grade A space as a percentage of available European office space has shrunk from 35% to 32% over the last two quarters. While still relatively high by historic standards, several factors including a flight to quality and slowing construction activity are expected to exert downward pressure on Grade A availability, both as a ratio with total stock and as its proportion of available space.
Nigel Almond added: “Occupiers want modern space, with greater flexibility and space utilisation, that meets the latest environmental, wellbeing and digital connectivity standards. With regulations coming into force across Europe requiring certain minimum standards to be met to lease space, the focus on Grade A will intensify as these assets are fit for purpose today and for the future. As occupiers relocate, and in some cases downsize, we see a release of Grade A stock back to the market, hence driving higher the amount of non-grade A space and overall availability ratio.
“We’ve also seen signs in the last quarter of construction activity slowing. Just 15.4m sqm of space is currently under construction, of which less than half is on a speculative basis, while office completions totalled 0.97m sqm in Q3 2022. Both these measures are below the three-year average, a slowdown which may be a response to rising construction costs and economic headwinds. Regardless of the cause, it will ensure the amount of grade A space remains restricted which will in turn support price levels.”
‘Grade A’ and ‘Non-Grade A’ Availability
Source: Cushman & Wakefield Research