Key city office markets in Europe set to be buoyant in next four years, but not London

Office property markets will remain buoyant in Europe’s 20 largest cities from now until 2022 although rents will rise less rapidly than they have in recent years, according to a new analysis.

Berlin is set to see the biggest increase but the yearly growth forecast of 3.5% will be well below the 7.1% average annual increase in the city in 2013 to 2017, says the report from Scope Investor Services.

London is likely to see the smallest increase in office rents, with the firm forecasting a rise of just 1% over the next four years compared with the 4.4% seen from 2013 to 2017, with Brexit affecting the market.

‘A tight labour market in the German capital has helped sharply reduce the amount of vacant office property,’ said Manfred Binsfeld, director at Scope Investor Services. He added that office vacancies in Berlin are down at 2.5%, the lowest of the 20 markets in this study, a steep drop from 9% in 2006.

Favourable economic conditions across Europe and dynamic job creation continue to create strong demand for office space and a vibrant rental market. One consequence is that several cities are experiencing a severe shortage in office space.

Indeed vacancies in 14 of the 20 cities are at 10year lows. In Berlin, Munich and Paris, they are under 3%, below a healthy fluctuation reserve, according to Binsfeld.

He also pointed out that while London’s office rental market has picked up a little from last year at 0.7%, growth is still far behind the average for the last five years of 4.4% a year when the city was a frontrunner in the cycle.

But the impact on sentiment and economic activity of the 2016 vote to leave the European Union and subsequent uncertainty over Brexit put an end to the property boom and skyrocketing rents. Many banks and other financial institutions have moved or plan to move jobs to Frankfurt, Paris, Luxembourg, Dublin or Amsterdam.

Indeed, of the 20 markets in the study, the Dutch city is where rents are accelerating most rapidly, to 3.2% a year over the next five years from 2.5% in 2013 to 2017. This elevates Amsterdam to third place from sixth in Scope’s market ranking.

With the Netherlands economy enjoying sustained growth, Amsterdam is one of most dynamic business centres in Europe. This has contributed to a dramatic fall in vacancies to 8% after years in the double digits.

‘The pressure on office rents remains high beyond 2019 in the absence of significant new office development,’ Binsfeld concluded.