Office markets in parts of Europe defying downward trend

Occupier demand is weakening across European office markets and vacancies are beginning to rise but some countries are seeing small increases despite the general downward trend, according to the latest report from analysts.

The CB Richard Ellis second quarter 2008 office report for Europe, the Middle East and Africa, shows that overall rentals rose by 1.7% but that prime rents are static in most markets.

London and Madrid are beginning to see vacancy levels rise for the first time since 2004. However there is rental growth in key Italian markets including Rome and Milan while Vienna, Amsterdam, Warsaw and Athens seeing smaller increases, according to the report.

'Landlords in many markets are now having to offer higher incentives such as rent free periods in order to protect headline rents,' the report says.

Against this background of generally subdued activity Berlin, Frankfurt, Hamburg and Moscow stand out as having stronger take-ups.

The good news is that rising construction costs and fewer finance options means that there will in the future be a shortage of office supply. 'More markets are now seeing schemes at the pre-construction stage being re-evaluated or deferred which reduces long term supply potential,' the report points out.

'This raises the possibility that, with new development starts now very limited, shortages of good quality buildings will begin to re-appear. This would encourage a return to rental growth once the European economy recovers.'

Outside Europe the picture couldn't be more different. Prime rents in Abu Dhabi continue to rise strongly. The market remains undersupplied with vacancy rates at just 1%. In Dubai the office market continues to expand with rents pushing ahead.

Prime rents also rose strongly in Johannesburg, up 12%.