“Recent events surrounding Greek debt re-negotiations have obscured what has become a sustained, if uneven, recovery in European economies and this is starting to feed through to Europe’s big office occupier markets. In many cities, office development is not keeping pace with growing demand and almost all major office markets are expected to show falling vacancy rates and rental growth over the next five years, driven by employment growth. ‘Recovering’ cities dominate the employment growth tables for the next five years as corporate confidence grows and expansion plans are executed. As a result a period of sustained rental growth is expected in most markets”, Dr Neil Blake, Head of EMEA Research, CBRE, commented.

Office-based employment in major cities is increasing at approximately double the growth rate of total employment across Europe. The cities forecast to experience the fastest growth in office-based employment over the next five years are Istanbul, Warsaw, Madrid, Barcelona, London, Lisbon and Bucharest. Istanbul remains at the top of the employment growth league despite potential short-term economic and political instability due to the longer-term growth forecasts for Turkey’s economy.

While almost all major office markets are forecast to report rental growth, in cities such as Warsaw, Istanbul and Prague, recent development activity and new stock coming on stream will soften rental growth prospects considerably. London and Dublin, which are currently experiencing the fastest rental growth, are also major markets that are responding to demand with increased development. This may lead to rental growth moderating and possibly even easing back towards the end of 2020.

The aggregate vacancy rate for major cities has already fallen from a peak of 9.6% at the end of 2010 to 8.9% now. By mid-2016, CBRE expects this to reduce to 8.4% (equivalent to June 2009 levels) with a further fall to 8.1% forecast by the end of 2020, a 10-year low. Falling vacancy will be accompanied by a pick-up in leasing activity. Taking 2015 and 2016 together, leasing volumes are forecast to expand by almost 12% in Europe’s major cities with an increase of 20% in Madrid, Barcelona, Munich, Vienna, Brussels and Warsaw.

High vacancy rates will persist in cities such as Amsterdam, Budapest, Dublin, Madrid, Prague and Warsaw. However, rental growth is still expected in these markets as empty stock becomes economically redundant due to outdated design or location issues. Vacancy rates in London will actually be higher in five years’ time than they are now as new buildings come on stream.

Rental growth is forecast to be strongest in Madrid, Barcelona and Moscow (with caveats) with an expected increase of over 4% p.a over the five years to end Q3 2020. Prime office rents in Madrid are currently €306 psm, up 4.1% from their low point a year ago. They are expected to reach €321.3 psm by March 2016 and €441.8 psm by the end of 2020.

 “The positive economic backdrop and employment picture means that nearly all European office markets are forecast to report improved returns for investors in office properties. The extent of optimism around the recovery can be seen in the fact that we expect London, one of the lowest yielding markets, to see a further 50bps drop in yields over the next year. However, over the next five years we expect greatest returns to occur in markets such as Budapest, Rome, Madrid and Milan as well as Moscow”, Dr Neil Blake added.
“Political risk is the greatest issue for market outlook over the next few years. From Russia/Ukraine to Greece, and the outcome of the Spanish elections, ongoing growth could be jeopardised on a number of fronts. However longer term volatility in equity and bond markets is unlikely and we see no reason for sustained impact on property markets in the rest of Europe.”