European Office Leasing Market Q2 2024: Performance Analysis and Key Trends.

The European office leasing market in Q2 2024 displayed ongoing recovery in leasing activity, albeit with notable regional differences. Total take-up for the quarter reached 1.6 million square meters, a 9% increase compared to the previous year, indicating the market's resilience amidst hybrid work arrangements and economic uncertainties. However, the leasing market remains 3% below the five-year average, as certain sectors continue to struggle with adapting to new workspace models and facing overall cost pressures.

Key Trends Driving Office Leasing in Q2 2024:

1.     Flight to Quality: Across Europe, there is a consistent trend of companies seeking high-quality office space. With sustainability now a primary consideration for many companies, occupiers are increasingly prioritizing energy-efficient and flexible work environments. This has led to increased demand for premium Class A buildings in prime office locations, while older, less energy-efficient properties are experiencing higher vacancies.

2.     Southern Europe Outperforming: Southern European cities such as Lisbon, Barcelona, and Madrid experienced significant growth in leasing activity. Lisbon led the market with a 40% year-on-year increase, driven by demand from international firms looking for more affordable yet high-quality office spaces. Madrid and Barcelona followed suit with 9% and 11% increases, respectively.

3.     Diverging UK Performance: London's office market demonstrated mixed performance. Office take-up in the City saw a 24% increase, mainly due to high demand from financial services companies. In contrast, the West End experienced a 24% decline in leasing volumes due to a shortage of large, premium spaces and reduced activity from technology firms. This disparity underscores the ongoing challenges in less central submarkets, where occupiers are seeking better value.

4.     German Market Stability: Major office markets in Germany, including Berlin, Munich, and Frankfurt, maintained relatively stable leasing activity. Vacancy rates in these cities remained below 6%, reflecting continued demand for prime, modern offices, especially those with high sustainability credentials. However, the office market in Germany also experienced slow growth, as tenants exercised caution amid a less favorable economic backdrop.

Vacancy Rates and Rent Dynamics

In the second quarter, European office vacancy rates slightly increased to 8.8%. This was mainly due to excess supply in secondary office stock and slower adaptation to hybrid work in certain markets. However, prime office spaces in cities like Paris, Berlin, and Munich continued to experience strong demand and limited vacancies. Paris CBD in particular saw sustained demand with vacancy rates at just 6%.

Prime rents in core markets such as Paris, Berlin, and Munich continued to grow due to occupier demand for high-quality office space. Paris CBD now commands some of the highest rents in Europe, reaching €1,067 per square meter. This reflects the trend of tenants willing to pay a premium for sustainable offices.

Market-Specific Insights

-       London: The City of London saw a 24% rise in take-up driven by occupier demand from finance and legal sectors. However, the West End is struggling with demand, particularly from the tech sector, with leasing volumes falling sharply. The ongoing shift to flexible work arrangements is prompting firms to reassess their real estate needs.

-       Paris: Paris remains one of the most resilient office markets, with high demand for premium office space keeping vacancy rates low. Rental growth has been robust in the city’s core business district.

-       Germany: Berlin, Munich, and Frankfurt have experienced stable demand, but overall leasing activity is slowing due to companies exercising caution in the face of economic headwinds. Vacancy rates in these cities remain below 6%, indicating strong demand for future-fit office spaces meeting sustainability criteria.

-       Southern Europe: Lisbon, Barcelona, and Madrid are experiencing the fastest recovery, driven by corporate demand for affordable, flexible workspaces. Lisbon’s office take-up increased by 40% year-on-year, while Barcelona and Madrid also posted solid leasing activity gains of 11% and 9%, respectively.

Outlook for the Remainder of 2024

The European office leasing market is expected to continue recovering, although the pace of recovery will vary across regions. Core markets such as Paris, Berlin, and Munich will likely maintain strong demand for high-quality, energy-efficient spaces, while secondary markets and older office stock may face elevated vacancy rates.

Southern Europe’s momentum is expected to continue, driven by international demand and relatively lower rents compared to Northern Europe. Anticipated interest rate cuts later in 2024 may also provide a further boost to leasing activity, particularly in markets already showing strong demand, such as Lisbon and Madrid.

Conclusion:

Keeping abreast of trends and understanding regional dynamics is crucial as European office leasing markets evolve. Companies are increasingly prioritizing flexible, sustainable spaces, while secondary markets are facing growing challenges. For investors and occupiers, now is the time to reassess office space strategies to align with these shifting market conditions.

To navigate the complexities of the commercial real estate market and fulfill your workplace needs, consider partnering with Hoxton. Our team of experts can provide tailored solutions, leveraging our extensive market knowledge and industry insights. To learn more, get in touch!