Tracking the recovery in Europe's office markets
Making sense of the latest trends in property and economics from around the globe.
5 minutes to read
The recovery in Paris
The European office market recovery gathered pace through 2021. Early data for the first quarter suggests the rebound is becoming entrenched.
Occupiers leased 550,000 square meters of office space in Paris during Q1, an increase of 44% compared to the same period a year ago and up 6% compared to the ten year average. There is some nuance - while take up of spaces up to 5,000 square meters has risen rapidly, leasing of larger areas remains below the long run average.
There have been some significant deals, most notably ENEDIS for 25,000 sq m in La Défense, GRDF for 23,000 sq m in Saint Denis and the Ministry of Finance for 21,725 sq m in Romainville, however "they would undoubtedly have leased larger areas a few years ago," says our man in the city David Bourla.
Still, the data suggests that the hangover from the worst of the pandemic that stretched into the early part of the quarter and Russia's invasion of Ukraine has had little impact in the leasing market. Meanwhile, Emmanuel Macron holds a 12 percentage point lead in the French presidential election ahead of the runoff ballot on Sunday.
The European context
The Munich office market has had a similarly strong start to the year. Occupiers leased 191,000 square meters in Q1, almost double the amount leased in Q1 2021. The vacancy rate has stopped rising and now stands at 4.9%. We expect that to contract over the course of the year.
It's still early days. The rise and fall of Covid-19 variants has hampered the reoccupation of offices in cities around the world and there is a degree of inertia amongst occupiers who, in the absence of any true signals from their offices over the last 18 months, are unclear as to how much floor-space they might require over the longer-term.
As Shabab Qadar noted in The London Report 2022, the reoccupation is an essential second stage in the “great global workplace experiment” spawned by the pandemic. The attitudes, behaviours and engagement of staff as they return to the office will provide occupiers with essential signals as to what the longer-term form, function, quantum and qualities of the office might look like.
This process is particularly urgent in London, where 24.5 million square feet of lease expiries are due by the end of 2025.
Consumer confidence
We've talked in various notes about the resilience of the UK consumer in the face of the fastest rate of inflation for 30 years. Sentiment held firm, which has translated into spending. ONS data reveals visits to retail and recreation locations were at 91% of their pre-pandemic levels in the run up to the Easter holidays. Bookings at restaurants were their strongest for seven months.
New data shows sentiment plunged in April. Gfk's reading of consumer confidence measured its second-lowest reading since records began nearly 50 years ago. This was to be expected - as the Bank of England hiked the base rate for a third consecutive time in March, officials appeared much more dovish over the prospects of further hikes, suggesting energy prices would eventually stop rising and the squeeze in real incomes will put "significant downward pressure on domestically generated inflation."
The crucial question is when the latest drop in sentiment leads to a contraction in spending. Borrowing costs will probably have to rise further because consumer demand is unlikely to fall soon enough to stop businesses from pushing through price increases, BoE rate-setter Catherine Mann said during a speech yesterday.
Governor Andrew Bailey was relatively coy on the issue as he warned about the risks of persistent inflation during talks on the fringes of the IMF and World Bank spring meetings yesterday. "We are walking this very, very fine line,” he said according to the FT. The next base rate decision is due on May 5th.
Repricing in the mortgage market
To see how shifting sentiment and tightening monetary policy is landing in the UK residential market, Anna Ward is joined by Knight Frank Finance managing partner Simon Gammon and head of UK Residential Research Tom Bill for the latest edition of Intelligence Talks.
Products are being repriced each week in the mortgage market, which is creating significant uncertainty among borrowers, according to Simon. Rates on the best deals have doubled in the past 6 months, though at 2% they remain very low by historic standards.
The cost of living squeeze hasn’t hit home in the sales market yet, but will feed through into decisions of buyers and lenders later this year, according to Tom. We expect house price growth to slow to 5% in 2022, before falling to 1% in 2023. Listen here, or wherever you get your podcasts.
Meanwhile, HMRC figures released yesterday revealed there were 110,990 UK property transactions in March, the highest they have been for the month in ten years.
Moving to LA
Prime house price growth in Los Angeles hit 19% in 2021, making it one of the top performers in the 2021 results of the Prime International Residential Index which benchmarks luxury residential prices across 100 of the world’s top markets.
Shrinking inventory was a concern prior to the pandemic and robust sales activity has left the shelves pretty bare, according to Kate Everett-Allen. Construction delays as a result of Covid-19 exacerbated the situation and inventory levels fell 51% in 2021 year-on-year, according to Miller Samuel.
The pool of buyers is rising rapidly. Los Angeles is home to 7,337 ultra-high-net-worth individuals, the fifth highest of any city globally. The figure increased by 12% in 2021 and is forecast to rise by 25% by 2026. This supply demand imbalance is unlikely to be resolved quickly and will underpin further growth in house prices in the meantime.
In other news...
Matt Hayes on Earth Day 2022: how can commercial real estate occupiers play their part?
Elsewhere - English cities warn ‘unrealistic’ housing targets threaten economic growth (FT).