Positive outlook for European commercial market as latest report shows market stabilisation

Prime rents and incentives have stabilised in the majority of markets in the first quarter of 2010, the report from consultants Jones Lang LaSalle shows.
 
Its European Prime Office Rental index, based on the weighted performance of 24 markets, increasing 1.2% quarter on quarter, the first increase since the second quarter of 2008. Prime office rents, however, remain 5.0% below the level seen one year ago.
 
The biggest rise in rents this quarter was seen in Moscow, up 14%, and the City of London where they increased 6%. Achieved rents in Brussels also indicated 17% growth but this was due to one exceptional deal in the Leopold district and not indicative of the wider market, the report shows.
 
However, some markets saw further softening, most notably Dublin where rents fell 7.6%, Madrid down 2.5% and Budapest down2.4%, although in Dublin there has been some stabilisation in the wider market.
 
The figures reflect the range of rental conditions and prospects but also shows how all markets are moving through a bottoming out phase and toward growth, said Chris Staveley, a director in Jones Lang LaSalle’s EMEA Capital Markets team.
 
Signs of economic recovery are beginning to feed through into office demand, but tenants remain cautious and cost sensitive. ‘In the absence of strong economic growth, current market activity remains driven by lease events, portfolio churn and corporate activity including office consolidation and the realisation of space efficiencies rather than expansionary plans,’ he explained.
   
Take up in the first quarter fell slightly to 2.4 million m² across Europe, a fall of 9% on the previous quarter although Staveley said it is worth remembering that the final quarter is usually the strongest. This decline was driven mainly by Western Europe where it was down 12%, whereas take up increased slightly in the CEE region, up 6%.
 
Despite this, overall take up increased 38% compared with the first quarter of 2009 with both Western Europe and CEE seeing annual increases. Overall, nearly half of the 24 index markets showed an increase in demand over the year, with Dusseldorf, Barcelona and Dublin showing the sharpest improvement though these markets rose from very low levels, the report also shows.
 
On the office supply side, completions are beginning to decline from the cyclical high of 2009. In the first three months of 2010, some 1.2 million m² of office space was completed and in London shortages for certain product types and sizes is already being experienced amidst falling vacancy rates, the report points out.
 
Since the credit crunch a lack of speculative finance, a lack of developer confidence and uneconomic development appraisals have combined to prevent new speculative commencements, it says.
 
The European vacancy rate remained stable over the quarter at 10.2%, the first quarter of stability since the second quarter of 2008. This was driven by Western Europe, where the aggregated vacancy rate remained at 9.7% while in the CEE markets vacancy increased modestly, from 16.1% to 16.4%. Over the quarter, vacancy levels decreased in 7 of the 24 index markets led by London. The highest quarterly increase in vacancy was registered in The Hague followed by Luxembourg and Barcelona, however these were exceptions. There remains a significant spread across Europe with the highest vacancy rate in Dublin at 21.9% and the lowest rate at 6.4% in Luxembourg.
 
‘Looking forward, the differentials in the supply dynamic, GDP and employment growth across the EMEA region will accentuate differences in recovery. This will determine the window of opportunity for occupiers seeking to secure prime space or larger floor plates at competitive prices. Tightening supply pipelines will start to stabilise conditions in many markets but, as the office clock shows, risks remain prevalent in others,’ concluded Staveley