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Eurozone Debt Concerns Dragging on Europe's Office Rents, First Rate Softening Since 2009

Eurozone Debt Concerns Dragging on Europe's Office Rents, First Rate Softening Since 2009

Commercial News » Europe Commercial News Edition | By Michael Gerrity | April 26, 2012 11:40 AM ET



According to Jones Lang LaSalle European Office Index, Europe is now recording slight reductions in office rents for the first time since Q4 2009. Prime office rents fell by 0.3% in Q1 2012.

The net reduction masked both rises and falls across several prime office rental markets. Falls were recorded in Brussels (-5.0%), Madrid (-1.9%), Barcelona (-1.4%) and Paris (-1.2%) whilst rental increases were recorded in Luxembourg (+5.3%), Stockholm (+2.4%) and Hamburg (+2.1%).

Stable rental markets to continue

In the wake of the adjusted economic outlook for the region as a whole, growth forecasts for 2012 have been revised downwards. Markets with more robust economic conditions such as the UK and Germany are likely to perform well, while struggling economies such as Greece, Portugal, Spain and Italy will see on-going strains in occupational markets and rents. The Jones Lang LaSalle office clock shows the spread between markets across the region, with the first market (Amsterdam) reaching 12 o'clock, indicating its next move will be rental reductions, whereas 14 markets still remain at or before 6 o'clock, indicating that rents still bottom out or stabilize.

Steady leasing volumes but 2012 to be down on 2011

Office occupiers are expected to remain cautious in the short term and current expectations are for leasing volumes over 2012 to be slightly lower then 2011 - but in line with long term averages. Take-up in Q1 2012 totaled 2.3 million sq m, 15% below Q1 2011 with leasing volumes in Germany decreasing from the high levels of last year and an 18% reduction in Paris.

Absorption down 16% on Q1 2011

Annual net absorption, representing the change in occupied stock, totaled 3.1 million sq m which is 16% lower than in Q1 2011. Levels in Western Europe increased driven by strong performance in the German markets whereas absorption slowed in the CEE region.

Vacancy rate stable at sub 10% despite low level of completions

The European vacancy rate remains unchanged at 9.9% over the quarter with stable aggregated vacancy in Western Europe, but increasing vacancy in CEE markets driven by occupiers releasing second hand space back into the market. Budapest showed the highest increase with an increases of +110bps to 20.3%.

Bill Page, Director, EMEA Offices Research at Jones Lang LaSalle tells World Property Channel, "Vacancy levels will decline slowly on aggregate throughout 2012. This will be supported due to the very low volume of new space being added to the markets. In the first quarter of this year, only around 600,000 sq m of office space completed in Europe which is yet another record low and 54% below the five year average. The development response that would usually be expected to this is expected to be sluggish as the availability of finance remains low. In addition many projects currently developed on a speculative basis could face postponement or cancellation, while stock coming on the market is often already pre-let."

Office investment transactions hit €13 bn in Q1 2012

Office transactions accounted for almost €13bn of the Q1 2012 volumes (€21.6 bn), up 27% on Q1 2011. The weighted European office yield remains unchanged at 5.27%, with movements in only two markets: Yields moved up by 50bps in Budapest as investor confidence declined over the economic outlook whereas strong investor demand for core product in Hamburg led to 10bps compression.

Jones Lang LaSalle's Chris Staveley, Head of EMEA Office and Industrial Capital Markets added, "When compared with Q1 2011 capital values have increased by 3.8%, which, along with stability in yields and demand represents steady progress. Any growth we see across Europe will be driven by rental increases in sought after prime buildings as interest in secondary product continues to remain weak."



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