JLL Office Property Clock: 2Q strongest European office take-up on record

European office take-up in the second quarter was the highest on record, driven by an extended cycle in occupier markets, according to JLL’s Office Property Clock published last week.

In the second quarter, European office take-up increased to 3.4m sqm, an increase of 5% y-on-y. As a result, at 3.4%, 2018 European office rental growth is forecast to outpace the five-year average (2.1%), according to JLL.

Rental growth beating 10-year average

In a sign of how buoyant many European office markets have become, 10 of the 24 Index markets benefitted from rental growth last quarter and, at 4.1%, annual European rental growth continues to exceed the 10-year average of 0.3%. JLL’s European Office Rental Index rose by 0.7% q-o-q in the second quarter.

Subsequently, the 2Q 2018 Office Clock underlines JLL’s view of an extended cycle with occupier markets continuing to perform well. As at 2Q 2018, just one city – Istanbul - is located in the ‘negative rental growth’ section of the Office Clock. At the same time, most markets have now moved into the ‘rental growth slowing’ phase. This does not mean rental growth is a thing of the past, highlighted by the performance of most German office markets in recent years. For example, Munich, which has been located between 9 and 12 o’clock for 24 consecutive quarters, recorded 23% prime rental growth in the same period.

In Germany, prime rents increased in Munich (+1.4%), Berlin (+1.6%) and Frankfurt (1.3%), but held stable in Hamburg and Düsseldorf. Elsewhere, prime rents remained unchanged. Looking ahead, solid occupier activity and limited development will continue to restrict the availability of high quality space, driving up rents as a result. European prime office rental growth is expected to total around 3.4% in 2018, followed by 1.9% in 2019. And despite uncertainties regarding London’s macro climate, prime rents remained unchanged in the second quarter, highlighting the continued robustness of the occupier market despite Brexit. Elsewhere in the UK, prime rents continue to see healthy growth, with Edinburgh recording a 3% increase on the first quarter 2018.

Rental growth in the last quarter was strongest across the Netherlands, led by Utrecht (+6.0%) and Amsterdam (+2.5%) on the back of tightening Grade A supply and strong demand for prime space. Rental growth across Southern Europe continued apace, with Barcelona (+1.0%), Madrid (+3.1%) and Milan (+1.7%) the standout performers.

Anticipated slowdown in Germany fails to materialize

Despite a slow start to the year, the anticipated slowdown in office take-up in Germany failed to materialize in the second quarter. The ‘Big 5’ office markets saw a combined take-up of 785,000 sqm, up 7% y-o-y, which was mainly due to strong take-up in Munich (+52% y-o-y) and Düsseldorf (+16% y-o-y). In Berlin (-14% y-o-y), Frankfurt (-12% y-o-y) and Hamburg (-4% y-o-y) take-up slowed in the second quarter.

Central and Eastern Europe also recorded a very strong second quarter (+33% y-o-y), led by a significant increase in activity in Budapest (+81% y-o-y), Moscow (+52% y-o-y) and Warsaw (+17% y-o-y). Other notable performances included Stockholm (+38% y-o-y) and Milan (+27% y-o-y). As demand for office space continues to strengthen across Europe, JLL has increased its full-year take-up forecast for 2018 to around 13.2m sq m – below 2017’s record result but still 18% above the 10-year average.

Vacancy rates are falling

European office vacancy decreased by 30 bps to 6.7% in the second quarter, the lowest level since 2002, according to JLL, with strong leasing activity offsetting development completions in most cities. Across Europe, 19 of 24 Index markets recorded a decline in vacancy in the second quarter. In four markets, vacancy remained stable and one – Dublin - saw an increase (+140bps to 8.5%). The largest falls were recorded in Moscow (-110 bps to 12%), Prague (-100 bps to 6.2%) and Utrecht (-90 bps to 6.9%).

Office completions picked up significantly in the second quarter, up 77% from the first quarter to 1.1m sqm in Europe. Nonetheless, that marks a 9% decrease on the 10-year average in the second quarter. In total, Munich, Paris and London account for 40% of the total 2H pipeline this year. Still, completions in 2018 and 2019 are unlikely to address the supply shortages in many European office markets. (ssk)