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Rent for prime office space in Europe creeping up

Jones Lang LaSalle’s European Office Index revealed a 2.1% increase over the second quarter of the year based on rental growth in eight index markets.

This was led by a strong performance in Moscow, up 20%, Warsaw up 13.6% and Lyon up 8%) with more modest rental growth witnessed in some of the German markets such as Munich up 3.4%, Berlin up 2.4% and Hamburg up 2.2% as well as London’s West End up 2.7% and Stockholm up 2.5%.
Debt pressures and significant austerity measures continued to place downward pressure on office rents in markets such as Madrid, Barcelona, Dublin, and especially Athens, which saw further rental decline. Utrecht also experienced a rental decrease, whilst other index markets saw stability or growth.
‘Europe’s economic recovery has continued throughout the second quarter but the ongoing, and increasing, uncertainty about the euro zone debt crisis and potential associated risks have softened the short term economic outlook. This, plus wide national economic variations, is mirrored in Europe’s office markets with a two speed market now in place,’ said Bill Page, head of EMEA Office Research at Jones Lang LaSalle.

Around 2.7 million square meters of office space was leased in the second quarter of 2011 across Europe, 2% higher than the first quarter and 4% higher compared with the same period last year. Jones Lang LaSalle confirms that leasing activity in the second quarter was 8% higher than the 10 year average and expects total take up for 2011 to be at similar levels to last year, around 10 to 11 million square meters.

Second quarter leasing volumes were stronger in CEE, which saw an increase of 8% quarter on quarter, driven by improving demand in Moscow and, also significantly, in Warsaw and Prague markets which have shown encouraging activity so far this year. In Western Europe office take-up levels remained practically unchanged.

However, the German markets exhibited further growth in leasing volumes, except for Düsseldorf after a strong first quarter. Volumes in London and Paris, two of the most significant drivers in Jones Lang LaSalle’s index, remained modest with volumes in Central London so far this year significantly lower than in the same period of 2010.

‘Office market conditions across Europe continued to vary widely and reflect the underlying economy. The Nordics, Germany and increasingly France support the emergence of expansionary demand, whereas occupiers in Greece, Portugal, Spain and Ireland remained very cautious, with demand in these office markets driven by lease events, consolidation and cost containment,’ said Page.

Net absorption over quarter two was positive but fell by 7%, some 39% lower than the 10 year average, and turned slightly negative in the CEE region due to an increase in second hand supply in Moscow. Annual absorption decreased too and now stands at 3.3 million square meters which is only 12% below the 10 year average.

European vacancy rates continued their downward trend but fell by just 10 bps to 10.2%, having remained in the double digits since the fourth quarter of 2009. Jones Lang LaSalle highlights that the availability of prime space in some markets, notably London, Paris and Moscow, still remains limited and this has driven rental stabilization and growth. Much of the supply is second hand stock released by occupiers who have upgraded over recent months and this grade of space continues to trade at a significant discount to prime.

In the second quarter only about 670,000 square meters of new office space completed across Europe which is a record low and more than 50% below the 10 year average. Completions in the Moscow market dropped below 100,000 square meters, in London only 8,000 square meters of new space was added and in nearly all European markets, volumes were way below long term averages.

‘For the full year we expect about 3.9 million square meters of office space to complete which includes pre-lets. This is the lowest volume in more than a decade and this factor is expected to drive rental growth further in many markets and keep absorption healthy,’ explained Page.

According to Tomasz Czuba, head of Office Agency in Poland similar market trends can be observed in Poland. ‘Prime headline rents in Warsaw are growing, while the demand side has improved and the vacancy rate dropped. At the same time, the office completions remain limited. Prime office space in Warsaw city centre can now be secured from €22 to 25 per square meter per month. However, there are some A+ developments quoting rents even higher than this,’ said Czuba.