Very little risk of oversupply in the office sector in Europe

17 October 2018

Office completions across the 17 European top cities that international real estate advisor Savills monitors are set to reach approximately 3.2 million sq m by the end of 2018, before increasing by 28% to 4.1 million sq m in 2019. However, there is little risk of oversupply.

According to Savills more than half (51%) of the space under construction (H2 2018 and 2019 anticipated completions) is already committed to specific occupiers, the equivalent of 58% of this year’s completions (H2) and 40% of 2019’s completions. As a result, available supply both in existing and new buildings will only account for about 7% of office stock across European cities (including next year’s speculative developments). The markets where tenants should be able to find most options to actively satisfy their needs are Warsaw, Dublin and Madrid.

Development activity in Warsaw is rather high with approx. 740,000 sq m of office space under construction, but that space will be delivered to the market over the next three years, as some of them are scheduled for 2021. Majority of 2018s new supply (in total ca. 235,000 sq m) was already delivered in the first half of the year, with only 60,000 sq m to be delivered in the second half of the year. New buildings due in 2019 will deliver another 255,000 sq m of office space.

In Warsaw, availability of office space in projects currently under construction is estimated at ca. 80%, meaning 145,000 sq m was already committed. As availability of office space in projects scheduled for H2 2018 and 2019 stands at ca. 65% and leasing activity remains high, vacancy rate in the city is expected to decrease in the coming months.

The average office vacancy rate across Europe’s top cities is at a historic low of 5.9%, reports Savills, but according to its projections the rate is set to fall even further to just 5.6% of stock by the end of the year across the 17 cities analysed.

The most undersupplied markets are Berlin (1.4% vacancy projection by year end), Paris CBD (2.1%) and Munich (2.5%) says Savills. The lack of space in key markets has constrained take-up as businesses have been unable to find buildings that match their requirements. Take-up has risen an average of 5% pa since 2013, exceeding 9.9 million sq m in 2017, as a result of growing employment and business expansion, but the pace of growth has now slowed due to lack of supply and Savills says take up could fall below 9 million sq m this year. 

Matthew Fitzgerald, Director, International Tenant Representation, Savills, comments: “Current development activity will result in more choice for occupiers in certain cities, but it’s a long way from creating oversupply in the market. 2019 is set to continue to be a very competitive market for occupiers, resulting in rising rents for prime stock and delays as companies postpone making property decisions as they hold out for new space. Pre-lets will continue to be a good option to mitigate risk and flexible office space will remain a popular solution to satisfy immediate needs.”

Eri Mitsostergiou, Director of European Research, Savills, adds: “Office based employment is forecast to continue to grow across Europe, with Oxford Economics predicting an additional  180,000 office based jobs next year across the 18 markets of our survey area. This corresponds to more than 2 million sq m of traditional office space and therefore, theoretically, will comfortably absorb all the non-committed new supply that is expected to come on to the market next year, which we estimate at about 2m sq m. Even taking into account that some of the current pre-lets have already accounted for some of this anticipated growth, the fact that total speculative supply does not exceed the estimated needs for business expansion is a sign of balanced demand and supply conditions.”

Daniel Czarnecki, Head of Landlord Representation, Office Agency, Savills, says: “In Warsaw, there are many new office projects in the pipeline in the belt between ONZ and DaszyƄskiego roundabouts. Those buildings, however, won’t come onto the market before 2020 with a resultant supply gap in the city at the moment. Tenants seeking office units of more than 3,000 sq m at new projects have little choice now and have to focus on existing buildings for renegotiations or relocations. Despite the expected market reshuffle after 2020, developers should not fear to break ground on new projects given the robust occupier demand and volumes of space leased under pre-lets in new office buildings.”