Demand for office space in Europe recovered sharply last year, recovering from the effects of the coronavirus pandemic, which contributed to rental growth and partially compensated for the price correction associated with rising interest rates, according to a Cushman & Wakefield review.
According to the experts, in total 12.6 million square meters of office space was leased in Europe in 2022. The figure rose by 15% compared to the previous year, when many employees of companies worked remotely because of the pandemic.
Rents were up 6.2% in the fourth quarter of 2022 from a year earlier. This is the fastest year-over-year increase since mid-2008.
The strong demand for office space is due in part to companies looking to bring employees back to their offices after the removal of anti-covid restrictions.
“Tenants are focused on taking the best offices in their segment in the most attractive locations to attract and retain employees,” said Nigel Almond, director of data analytics at Cushman & Wakefield.
Companies also want to occupy offices in buildings that meet environmental standards, which have become more stringent, the expert said.
Analysts recorded an increase in activity in 23 out of 30 European markets of office buildings, which it monitors. Meanwhile, it was not active enough to compensate for the increase in the amount of available office space.
According to the company, the total available office space in Europe increased by 0.7% to 22.6 million square meters. The lowest level of availability was recorded in Luxembourg – 4,2%.
The limited volume of gross absorption led to an increase in the level of vacant space by 3.5 percentage points (p.p.), to 21.2% over the third quarter of 2022 compared to the previous quarter, the press service of CBRE Ukraine told Interfax-Ukraine.
At the same time, as follows from a review of office real estate by CBRE Ukraine, in July-September the trend of the two previous quarters of limited rental activity continued. In the third quarter, this figure was only 12,000 square meters, which is 80% less than at the beginning of the year. Most of the transactions involved the extension or renegotiation of contracts and the reduction of existing office space.
“Subleasing is becoming more and more common, with tenants willing to sublease parts of their offices to optimize rent or operating costs due to low occupancy rates. Depending on the terms of the lease, subleasing is most often the solution if leases cannot be terminated. However, the volume of sublease agreements concluded remains low due to limited rental activity in the market,” Diana Kvitchuk, Head of Marketing and Research at CBRE Ukraine, is quoted in the message.
Net absorption has remained negative for three quarters in a row – over the third quarter, it is minus 74,000 square meters.
Analysts at CBRE Ukraine estimate that negative net absorption is likely to persist until the end of 2022, but is expected to slow down towards the end of the year.
In the third quarter, not a single new business center was put on the market, so the total supply of offices in Kyiv did not change and amounted to about 2.11 million square meters. About 23,500 square meters are planned for commissioning by the end of the year – in Unit.City B15 and Unit.City B6.
Low market activity led to rate cuts. The prime rental rate has decreased on average by 8-10%, from $25 to $22-23 per square meter/month since the beginning of the year. Rental rates in class A ranged from $18 to $26 (less by 7% of lower limit), in class B – from $7 to $17 (less by 22% of lower limit and less by 15% of upper limit).
“Requested rental rates are not indicative now, since the actual or effective terms of the agreements are often significantly lower than the declared ones and the difference can be from minus 20% to minus 50% of the declared ones,” Kvitchuk said.
In order to maintain occupancy and income streams, landlords continue to provide discounts, special lease terms or incentives, up to “free” rent, to attract new tenants or keep existing tenants looking to move, she said.
The total supply of Kyiv’s office real estate market in 2020 increased by 7.7% compared to the previous year and reached 2.147 million square meters, and this year, 200,000 square meters have been announced for commissioning, according to the press service of Colliers Ukraine. As noted in the report “Offices. 2020,” in early 2020, developers announced the commissioning of more than 230,000 square meters in Kyiv of office space during the year.
“Development activity, for the most part, did not stop despite the pandemic. As in previous years, some projects were not commissioned on time and postponed to subsequent periods. The actual new supply amounted to 155,000 square meters,” the report said.
At the same time, it is noted that the volume of absorption amounted to 60,000 square meters.
Grade A offices were replenished with a total of 28,300 square meters: business center M8 (8 Moskovska Street, 11,000 square meters), business center Grand (98 Velyka Vasylkivska Street, 8,800 square meters) and business center Hillfort (12 Mykhailivska Street, 8,500 square meters). The new supply in Grade B offices amounted to 126,600 square meters, the largest of them – business center Platform (3 Krolenkivska Street, 19,800 square meters) and business center Avenue 53 (53 Prospect Peremohy, 16,700 square meters).
According to developers, new business centers with a combined lease area approximately 200,000 square meters are expected to be commissioned in 2021. In total, projects with a total area of approximately 350,000 square meters are currently under construction with the prospect of commissioning in a few years, according to developers.
Colliers Ukraine in the report cites some of the objects that are being prepared for opening in 2021: Grade A offices are represented by the first phase of business center MAG.NETT (137-139 Velyka Vasylkivska Street, 44,000 square meters), and Grade B offices – business center LUWR (2/10 Illienka Street, 27,000 square meters), business center at 23 Olenivska Street (21,000 square meters), and business center UNIT.City – B15 (3 Dorohozhytska Street, 7,500 square meters).
“Due to the need for social distancing, employee seating density in the workspace will decrease. As a consequence, emphasis on the formation of new office spaces will shift towards an increase. We can predict that the office segment will continue to develop. In all probability, office space will not be reduced but transformed,” Managing Director of Colliers Ukraine Oleksandr Nosachenko said.
Colliers International is a leading diversified professional services provider, including investment management in commercial real estate. The company’s offices are represented in 67 countries of the world.
Amid growing new supply the share of vacant space on the office real estate market in Kyi grew by 4.2 percentage points (pp) in 2019 compared with 2018, to 8.5%, CBRE Ukraine consulting company (Kyiv) has said in a press release. “The highest vacancy rate was recorded in areas with a non-center location (19.2%), due to the Sigma and Wave Tower business centers went live in 2019, which remained unfilled by the end of the year. The Pechersky district had the lowest vacancy rate (2.7%), where in 2019 new areas were not presented to the market,” the report says.
According to the experts, the rental rate for the best office premises increased 8% and by the end of the year amounted to $27 per sq. m. a month, which is associated with a limited supply of quality space.
“In the available class A office space, the declared rental rates varied in the range of $26- $45 per sq. m a month in the fourth quarter, and class B rental rates ranged $14- $30 per sq. m. a month. The significant gap between the lower and upper limits of the range is due to the characteristics of the rental space and the location of an office center, which are the main factors determining the high level of rental rates,” CBRE Ukraine said.
Average vacancy of business centers in Rivne by August 2019 was 3.1%, and by late 2020 it is planned to expand total office space supply by 8,000 square meters, UTG consulting company (Kyiv) has told Interfax-Ukraine.
“The main increase in office space in Rivne was seen in 2000-2004, when 45.1% of the total market supply was built/reconstructed and put into operation (GLA is 41,000 square meters). During 2016-2018, not a single new business center was opened, and in 2019 the total office supply was replenished with the Smart BAU office building located at 41/1, Vidinska Street,(GLA 1,100 square meters) and TOTs located at 11, Zamkova Street ( GLA 370 square meters),” UTG Senior Analyst Oksana Gavrilevich said.
According to her, the active construction of a business center is carried out by the Renome company on Lionokombinatska Street with the first Sport Life club in Rivne (GLA more than 5,000 square meters).
In addition, there are seven office buildings at different stages of construction and installation works; in 2020, offices with a total lettable area of more than 8,000 square meters were declared to open.
“Despite the large volume of the current office supply (per 1,000 inhabitants, it is comparable with the largest regional centers of Ukraine: Odesa, Lviv, Dnipro), the total area of high-quality and professional facilities in the city is no more than 11,000 square meters. About 79% (71,300 square meters of the city’s office premises were commissioned before 2008 and are already morally and technically outdated,” Gavrilevich said.
After the renewed interest of developers in the implementation of office projects in Kyiv, the volume of office space to be commissioned in 2020-2021 is 406,000 square meters, Ihor Zabolotsky, an expert of Colliers International (Ukraine) in the field of commercial real estate, has said. “Developers have become very active. The volume of new supply for 2020–2021 will be about 400,000 square meters. There is, of course, a certain discount that some facilities will not be put into operation on time. But in general, we see a huge amount of new projects,” the expert said at the Open Mind conference held in Kyiv last week.
He explained this situation has arisen due to a very low rate of commissioning new projects in the last five years, as a result of which the vacancy in the market in 2018 fell to 6.5% and still continues declining.
“In 2019-2020, the vacancy will continue falling, i.e. we will be in the lessor’s market. Many corporate tenants have already experienced this in during negotiations both with the current lessors and during the move. Accordingly, rental rates will increase,” he said.
He noted that until 2014 the annual supply in the Kyiv office market was 130,000-150,000 square meters, then decreased by three times.
