European Office Demand Rebounds from Covid to Drive Up Rent

(Bloomberg)—Demand for office space in Europe rebounded strongly last year from Covid-19, helping the segment claim higher rents and partially offsetting the price correction from surging interest rates.

A total of 12.6 million square meters of office space was leased on the continent in 2022, a 15% jump from the previous year when many staff worked remotely because of the pandemic, data compiled by broker Cushman & Wakefield Plc show.

With leasing volumes well above the 15-year trend, rents climbed 6.2% in the final quarter compared with a year earlier, the strongest annualized reading since the middle of 2008, the broker’s data show.

Milan, Warsaw and Madrid Led Europe’s Office Rebound | Growth was evident in 23 out of 30 markets

Fueled in part by businesses eager to lure back staff, the robust demand shows how the operating backdrop for property firms is holding up. Rising financing costs have pushed real estate yields higher, and tighter credit markets create risks of forced sales, putting valuations under pressure.

Companies are also pursuing tougher new climate targets, which has led to a surge in demand for green office space. Supply in the segment is tight as rising inflation and higher borrowing costs deter some developers.

“Occupiers are focused on taking the best-in-class space in the most desirable locations to attract and retain staff,” said Nigel Almond, Cushman & Wakefield’s head of data analytics. Businesses are also keen on securing space in buildings that meet tighter environmental standards, he added.

The broker identified an increase in activity in 23 of the 30 European office markets it tracks. Still, the increase in activity wasn’t enough to offset a slight rise in available space as new projects opened and some companies shrunk their footprint.

The total amount of space available across Europe rose 0.7% year on year to 22.6 million square meters, Cushman’s data show. Luxembourg has the lowest level of availability at 4.2%, followed by Hamburg, Berlin, Munich and Paris.

Rising costs have begun to dent construction activity. There were 4.3 million square meters of space completed in 2022, down from 4.8 million square meters a year earlier. The amount currently under construction is at the lowest level since 2017, the broker’s data show.

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