Occupiers face tough leasing market despite European development at a five-year high, says Savills

Agnieszka Giermakowska Savills
Agnieszka Giermakowska, Senior Consultant, Research Department, Savills.

Occupiers looking for quality workspace in Europe will face tough competition for the best space in the leasing market despite the most active period of new office construction in half a decade, Savills predicts.

Newly developed offices set to complete in the region this year will provide 26% more space compared with 2020, says the European Office Development report. However, average vacancy rates across many cities in Europe – including Berlin, Stockholm, Amsterdam and Paris – will be below 6% making them some of the most competitive leasing markets.

A new building supply of 5.2m sq m, which is distributed across 24 markets in the region, is due to be completed this year, with a similar amount of supply (5.1m sq m) due in 2022. This is the highest level of new supply in five years.

But Savills predicts that with half of this space already committed – 54% of new offices in 2021 already pre-let and 39% in 2022 – any new prime space will be absorbed, based upon known levels of demand.

Prime offices will be most scarce in Berlin, which is set to have a 2.3% vacancy this year, with other German cities seeing very little spare capacity. In 2021, Cologne’s vacancy rate will be 2.9%, while Hamburg’s will be 4%.

Pre-let figures are below those in previous years (which were between 55% and 60%), however Eri Mitsostergiou, director, European research, Savills, says: “Quality workspace is a priority for occupiers, and as this is expected to continue, supply remains tight.”

Savills is also seeing space constraints in Stockholm, which is registering vacancy of 5%, and in Munich, where unleased office space will be 4% of the market. Lisbon’s will be 7.2%, London’s West End will be 7.3%, while Barcelona will experience 8.5% vacancy.

The European Office Development report predicts that an increase in secondary supply is expected to cause an overall increase in the average vacancy rate across the survey area, however much of this may not be attractive in meeting current occupier requirements, particularly in relation to ESG and digital suitability.

Savills forecasts the number of vacant offices will lead to an 80 basis point shift upwards, making empty space on average 7.5% of the total area surveyed. European markets predicted to have the highest vacancy rates are expected to be Warsaw (11%), Bucharest (11%) and Paris La Defense (13.5%), says Savills.

With new office supply at close to 350,000 sq m in 2021, Warsaw is likely to see its vacancy rate climb to approximately 11%. However, as many developers have revised their plans for new projects, among other things, due to the Covid-19 pandemic, an undersupply is expected to be seen in the capital in the coming years.

“Tenants looking for office space to lease in Warsaw in the next 6-12 months have a wide choice of options, including traditional, flexible and sublease offices. However, as the city’s total new supply scheduled for delivery in 2022 and 2023 is expected to remain below 400,000 sq m, vacant space will be gradually absorbed amid decling vacancy rates, especially in 2023. Due to the expected undersupply, occupiers, particularly those looking for larger offices, will have a more limited choice,” says Agnieszka Giermakowska, Senior Consultant, Research Department, Savills.

The report echoes the sentiment of Savills latest Impacts publication, which was released last month. Impacts identifies that the transition to a hybrid workforce is the biggest challenge businesses will face in the next five years. “Given low office availability in many locations, it’s better to start looking sooner rather than later to find space that will work for you in a hybrid model,” it says. Businesses are likely to redesign spaces around wellness and safety requirements as workers gradually return to their office desks.