EMEA Corporate Occupier Conditions - Q4 2011Falling sentiment increasespressure on CRE teamsThe intensification of the Eurozone crisis has further damagedcorporate confidence. Amid renewed uncertainty, CRE teamshave once again been tasked with driving both cost saving andtransformation agendas.Room for manoeuvre is limited. A lack of quality supply in themarkets is encouraging landlords, having made concessionsduring the global financial crisis, to hold pricing firm.Transformation is also challenging. Development pipelines areimpoverished. Access to quality office space will often requirepre-letting strategies to be employed. Corporate reluctance toauthorise capital expenditure is also a clear constraint.
2 On Point • EMEA Corporate Occupier Conditions – Q4 2011IntroductionBack to the future already been picked. The route to the promised land of real estate transformation and ongoing cost effectiveness requires teams toIt is rare for corporate real estate professionals to look back. Our tread new paths.industry is about preparing for and facilitating the future. It is aboutresponding to operational and organisational changes through the Preparing for the futureeffective use of real estate assets. What happened in the past mostoften remains in the past. A forward looking gaze is the default So next year – an Olympic year – will be a year where teams andsetting for CRE professionals. Yet perhaps now, as we approach individuals will seek to rise above challenges and excel. Butthe closing month of another challenging year, represents a good success will not be guaranteed. Those that have failed to preparetime to look back and reflect. well; are unable to articulate a clear strategy with implementable tactics; or have not taken themselves to the leading edge of bestIt is a year since we conducted an industry first – a truly global practice will be consigned to the role of also-rans.survey of corporate real estate leaders. We were keen tounderstand how the front runners of our industry were facing up to Our dedicated corporate occupier research programme is designedthe unprecedented challenges of a global financial crisis and the first to offer you a competitive edge. Through our thought leadershipglobal recession since World War II. For the record, we identified programme, we will be focusing down on the prime issues in thefour themes that were shaping CRE team strategy and behaviour: development and ultimate success of transformative real estate strategies – workplace productivity. In an environment of limited 1. A strong push towards more productive and better utilised cash and limited market options, how can investment in real estate real estate portfolios be maximised by driving a more productive and ultimately more profitable workplace? Our research programme will outline the 2. The pressures of balancing growth and right-sizing on a global scale opportunity, the options and the obstacles. 3. A further progression towards partnership with outsourced Our market research will remain forensic and focused but we will be real estate service providers enhancing our delivery channels in order to provide you instant and customisable access to the very latest market views. This 4. A battle to access or obtain fresh real estate talent publication, EMEA Corporate Occupier Conditions (Offices) will accommodated within more appropriate CRE team become a six monthly publication, issued in February and structures with stronger mandates November, alongside its counterpart focusing on the industrialA year on and a different but no less significant operational sector. Instead, regular updates of market conditions will bechallenge exists. The intensifying Eurozone crisis, the threat of available though our Global Bespoke Report Generator. This on-sovereign debt contagion and associated market turbulence paints line tool will enable you as the user to focus down on just thoseanother dramatic back-drop for CRE teams and will have lasting markets you are interested in at any moment in time and construct aimpact upon the corporate operating environment. The themes consistent, high quality market report at the touch of a button.highlighted in our survey have taken on even greater importance. Contact those named on the back of this report or your CorporateThey need to be addressed. But they emerge at a time when the Solutions contact for more information on how you can access thisreal estate markets of EMEA offer less opportunity for the occupier innovative and valuable reporting tool.than 12-24 months ago. The shortage of high quality office All that remains is for me to offer you the warmest Seasonssolutions in the markets provides occupiers with little opportunity to Greetings. I sincerely hope that you have a peaceful and enjoyableupgrade their space to deliver productivity gains whilst festive period and look forward to working with you in 2012.simultaneously being cost effective. This same shortage hasencouraged landlords to hold firm on rents and bring-in incentives.Costs are rising or at best static across most markets at a time when Vincent LottefierCRE teams are being charged with a new round of cost saves. Chief Executive OfficerMoreover, many CRE teams have already made cost saves through EMEA Corporate Solutionsrenewal and renegotiation strategies. The low hanging fruit has
On Point • EMEA Corporate Occupier Conditions – Q4 2011 3EMEA Corporate Occupier Market Conditions: SummaryExhibit 1: Current economic fragility reflected in lower but diverse growth trajectories in 2012 • The fragility of the economic recovery in Europe has been in the spotlight since late July. 9 % 2010 2011 2012 8 • Sovereign debt problems and fear of contagion has led to 7 6 heightened financial market turmoil, reducing consumer and 5 business confidence and the downgrading of growth forecasts. 4 3 • Disparities across Europe are extending. While Germany, the 2 Nordics and parts of CEE remain strong, Southern Europe is facing 1 more severe headwinds. 0 -1 Italy Ireland Germany Hungary Netherlands Turkey Belgium UK Czech Finland France Poland Spain Eurozone European Russia Sweden • The continued need for fiscal consolidation in most countries and weak global recovery suggests growth will slow in 2012 and uncertainties about the future outlook remain.Exhibit 2: Corporate confidence trends downwards to early 2010 levels 120 50 • Corporate confidence has taken a hit against this back-drop. • Having rallied previously following blips in sentiment, a more marked 25 downturn in confidence occurred during Q3. 100 • Overall business confidence has returned to levels seen at the start 0 of 2010 and sits marginally below the long-term average. 80 • Declines in sentiment have been particularly marked in the engine- -25 room markets of Germany and the United Kingdom. 60 -50 • Uncertainty and declining sentiment increases the risk of corporate 2006 2007 2008 2009 2010 2011 occupiers putting expansion and portfolio strategies on hold. Economic Sentiment (LHS) Retail Trade Confidence Service Sector Confidence Industrial ConfidenceExhibit 3: Take-up levels were sustained q-on-q but are under downward pressure • Despite a worsening outlook, demand for office space across Europe actually improved q-on-q with 2.9 million sq m of take-up. ’000 m² ’000 m² 14,000 4,000 • This was also an increase of 16% on volumes seen in the market a 12,000 year ago. 3,000 10,000 • More negative sentiment impacted Q3 performance, with many 8,000 leasing deals completed early in the quarter and commenced during 2,000 6,000 Q2 when sentiment was strong. 4,000 • European take-up levels were supported by good quarterly 1,000 performance in Brussels, Hamburg and Paris. 2,000 • Take-up over the period Q1-Q3 is 10% above the same period a 0 0 year ago. We expect total year end volumes to be on a par with 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 2010 given declining corporate confidence. CEE Western Europe 12 Month Rolling (RHA)Exhibit 4: Net absorption trending downwards on the basis of market churn, consolidation & further disposals ’000 m² • Much activity witnessed in Q3 and anticipated for the remainder of 7,000 the year is driven by lease events and will have little positive impact on net absorption. 5,000 • Annual net absorption levels remained positive at 2.9 million sq m 3,000 but this was a decline of 24% compared with Q2 and annual net absorption stands 20% below the 10 year average. 1,000 • Declining sentiment and corporate restructuring will fuel the further -1,000 disposal of surplus assets. This, together with increased consolidation activity, will serve as a negative influence on net Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 absorption. Western Europe CEE Total
4 On Point • EMEA Corporate Occupier Conditions – Q4 2011Exhibit 5: Vacancy rates are stable and reflect the availability of large volumes of poor quality stock • The European vacancy rate remained static at 10.2%. • The Western European aggregate vacancy rate remained unchanged at 9.7% whilst the Central & Eastern European aggregate vacancy rate decreased by 20bps to stand at 14.9%. Vacancy Rates Q1 2011 9.8% 15 – 25% 7.5% 13.1% 10 – 15% • Only two markets within our core European markets recorded 5 – 10% 0 – 5% 10.5% 17.0% increases in vacancy rates – Dublin and Brussels – where the 18.9% 8.6% aggregate rate increased by 10bps q-on-q. 6.3% 17.1% 8.8% 10.3% 8.8% Johannesburg 6.7% • The greatest fall in vacancy was recorded in Prague (-30bps). 10.9% 13.6% 8.4% 12.0% 10.5% Moscow’s rate also fell (-20bps) and there were minor reductions in 6.8% 10.1% 11.8% 10.8% Rotterdam, The Hague, Utrecht and Warsaw. 6.5% 4.6% 20.7% 10.1% 9.5% 16.0% • We expect vacancy rates to remain around current levels at year 11.7% 10.6% 13.4% 22% 3-4% 20% 44% end and be stable throughout 2012. 6.3% 9.1% 35% 12% 15.8% 15% • 2nd hand space released by occupiers following upgrades earlier in the year continues to trade sluggishly and will limit decreases in overall vacancy rates.Exhibit 6: The development pipeline is moderate and could reduce further due to scheme cancellations or postponements Completions (millions sq m) Vacancy rate (%) • Completions of new office space remain low. In Q3 there was 8 12 720,000 sq m of new office space completed. 7 10 • The volume of new space released over Q1-3 was 2.3 million sq m – 6 some 45% below the 10 year average. 8 5 • Western Europe saw a particularly low level of new completions over 4 6 Q3 with the lowest volumes witnessed since the mid 1990s. 3 4 2 • We anticipate 3.6 million sq m of new office space to complete 2 across the region by year end although further cancellations or 1 0 0 postponements of pipeline projects are likely given the economic outlook. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Completions Future Completions Vacancy Rate RHSExhibit 7: Western European Red, Amber, Green Matrix (RAG) • Our RAG charts provide a sense of 5 year forward looking market conditions. 2012 2013 2014 • Based on a combination of prime econometric rental forecasts and Amsterdam local market sentiment we identify whether markets are landlord Frankfurt favourable (red), tenant favourable (green) or balanced (amber). London City • For mature Western European markets future conditions are mixed Milan but, owing to shortages of quality supply, conditions have hardened markedly with prime rental increases likely sooner as limited quality Paris supply is eroded quickly as demand returns. Zurich Landlord Favourable Market Balanced Market Tenant Favourable MarketExhibit 8: CEE and MEA sub-region Red, Amber, Green Matrix (RAG) • In the CEE sub-region, prime rental increases have been marked q- 2012 2013 2014 on-q and this has led to markets such as Moscow and Warsaw Bucharest turning further in favour of the landlord. Moscow • This is very much a function of supply. Despite having reasonably Warsaw large development pipelines, developers do not tend to build large volumes of space at international quality putting such space at a Cairo premium, particularly given improving demand. Dubai • Markets such as Dubai and Abu Dhabi are over-supplied and as Istanbul such underlying conditions remain firmly in favour of the occupier. Landlord Favourable Market Balanced Market Tenant Favourable Market
On Point • EMEA Corporate Occupier Conditions – Q4 2011 5Exhibit 9: EMEA Office Occupier Clock Landlord’s Market Tenant’s Market Rental Growth Slowing Rents Falling Oslo, Zurich, Moscow London City Rental Growth Rents London West End, Helsinki Slowing Falling Paris, Tel Aviv Casablanca Algiers Rental Growth Rents Düsseldorf, Geneva, Lyon, Accelerating Bottoming Out Cairo, Abu Dhabi, Zagreb Stockholm, Stuttgart Gothenburg, Hamburg, Munich Doha, Dubai, Jeddah Athens Berlin, Cologne, Warsaw Antwerp, Barcelona, Lisbon, Riyadh Malmo Belgrade, Brussels, Dublin, Edinburgh, Leeds, Madrid Krakow, Copenhagen, Milan Bucharest, Budapest, Sofia, Amsterdam, Utrecht, Luxembourg, Rotterdam, The Hague, Eindhoven St. Petersburg, Manchester, Rome, Tri-City Western Corridor Birmingham, Bristol, Cardiff, Frankfurt, Glasgow, Bratislava, Kiev, Prague, Istanbul, Johannesburg, Tunis Rents Rising Decline Slowing Western Europe Central and Eastern Europe Middle East & Africa • Prime rents barely changed q-on-q with our European Office Index remaining static q-on-q. • This apparent stability masks upward and downward changes in rents which effectively cancelled each other out in Western Europe. Prime rents increased q-on-q in Stockholm (2.4%), The Hague (2.4%), Hamburg (2.2%) and Milan (1.9%). This contrasts with rental decreases in Brussels (- 3.2%), Dublin (-3.0%), Madrid (-1.9%) and Edinburgh (-1.8%). • Outside of core European markets and across the year to date rents have decreased most markedly in Athens (-11.8%) and Dublin (-8.6%). Y- on-Y rental growth has been strongest in Moscow (41.2%), Oslo (20%), Lyon (17.4%) and Warsaw (13.6%). • The current economic outlook suggests that regional differences together with a wide spread in pricing between prime and secondary rents will remain and intensify over 2012. • As shown by the EMEA Office Occupier Clock above, 39 of the 67 markets covered within this report occupy a clock position at or beyond 6 o’clock and as such reflect conditions of escalating prime rental costs. • 5 markets are positioned at or beyond 9 o’clock indicating that the rate of rental growth in these markets is slowing although rises in prime rents continue.
6 On Point • EMEA Corporate Occupier Conditions – Q4 2011WESTERN EUROPE: remain stable into and throughout 2012, reflecting a two tiered market of limited Grade A availability and a plentiful supply ofCorporate Occupier lower quality stock which keeps vacancy rates inflated. Limited choice of high quality stock is being sustained by anConditions impoverished development pipeline with Q3 completion volumes at levels not seen since the mid 1990s. The economic backdropThe fragility of the economic recovery has been in the spotlight suggests further downside risk on development completions, withsince late July. Sovereign debt problems and the risk of the prospects of current development projects being cancelled orcontagion has brought heightened turmoil in the financial markets postponed significantly heightened.and is weighing down on consumer and business confidence.Regional economic disparities persist with marked contrasts Aggregate European prime rents hardly changed during Q3 2011between Germany and the Southern European economies. The although there was variance in performance across Westerncontinued need for fiscal consolidation in most countries and Europe. Prime rents increased in Stockholm and The Hagueweak global recovery suggests growth will be slow and moderate (2.4% q-on-q), Hamburg (2.2%) and Milan (1.9%) whereas rentsin 2012 with uncertainties over the future outlook remaining. decreased in Brussels (-3.2%), Dublin (-3.0%), Madrid (-1.9%) and Edinburgh (-1.8%). All other Western European marketsDemand for office space across Europe actually improved q-on-q saw prime rents unchanged q-on-q.with 2.9 million sq m of take-up across the continent,representing an increase of 6% q-on-q and 16% on the sameperiod a year ago. Western European markets contributed to thisimproved picture with good quarterly volumes being recorded inBrussels, Hamburg and Paris. We would however caution thatmany of the deals signed during Q3 occurred early in the quarterand were founded on negotiations that commenced during Q2when sentiment was stronger.There was no change to the overall vacancy rate in WesternEurope with only minor increases being experienced in Dublinand Brussels (+10bps). This was offset by decreases of -10bpsin the The Hague and Utrecht. We expect vacancy rates toExhibit 10: Western Europe Office Occupier Clock Oslo, Zurich London City Rental Growth Rents Slowing Falling Helsinki, London West End Paris Rental Growth Rents Düsseldorf, Geneva, Lyon, Accelerating Bottoming Out Stockholm, Stuttgart Gothenburg, Hamburg, Munich Athens Berlin, Cologne Antwerp, Barcelona, Lisbon Malmo Brussels, Dublin, Edinburgh, Leeds, Madrid Copenhagen, Milan Amsterdam, Eindhoven, Luxembourg, Rotterdam, The Hague, Utrecht Manchester, Western Corridor Rome Birmingham, Bristol, Cardiff, Frankfurt, Glasgow
On Point • EMEA Corporate Occupier Conditions – Q4 2011 7 Amsterdam Athens Cost: € 335 / sq m Competition: 57,000 sq m Choice: 17.1% Cost: € 270 / sq m Competition: n/a Choice: 15.8%Occupier activity picked up slightly in Q3, with leasing volumes GDP contracted by 3.5% in 2010 according to Eurostat and thereaching approximately 57,000 sq m. Volumes were driven by a latest forecasts suggest this trend is likely to continue this year albeitnumber of large transactions, from a wide range of sectors, in the city with a rather broad range, between -3.5% (EU) and -5.9% (Nationalcentre and Zuidas districts, with >2,000 sq m transactions accounting Bank of Greece). Records from Global Insight show severefor around 60% of activity. The largest deal was recorded in the city increases in unemployment of around one in three people agedcentre, where Booking.com signed a lease for 12,500 sq m of prime between 15 and 29 years being unemployed. Choice in the marketoffice space. Competition is strongest for prime space in areas with increased, with a vacancy rate of 15.8%, up 13% compared to thegood transport links and close proximity to amenities. More equivalent period last year. The cost of prime space continued to fallperipheral locations such as parts of South East and Sloterdijk have and compared to pre crisis levels are down approximately 41% atbecome somewhat less desirable, with these two districts accounting €270 per sq m. The highest rents continue to be found in the CBDfor around 50% of total vacancy. Whilst overall supply remained but very few transactions have been recorded given the currentstable over the quarter at around 1.1 million sq m, choice increased climate. Occupier activity has increased more in the north of Athensmarginally in secondary locations. The overall vacancy rate remains and top rents here are €216 per sq m which reflects a 5.3% drop onrelatively high at 17.1%. With the majority of moves involving a ‘trade the previous year. Corporate occupiers relocating to the Northernup’ in terms of building quality; the amount of relatively old, out-of- submarkets are driven almost exclusively by cost cutting objectivesdate stock on the market continues to increase. Prime rents adding momentum to buildings along or off the National Motorway.remained stable at around €280 - €335 / sq m per annum. Costs inperipheral locations are somewhat lower ranging between €175 - Barcelona€215 / sq m per annum. Rent free periods remain the most Cost: € 225 / sq m Competition: 60,487 sq m Choice:13.4%commonly used incentive, with 12 months rent free on a 5-year leaseobtainable in large parts of the market. Demand levels in Q3 reached 60,487 sq m, up 19% q-on-q and up 2% on the equivalent quarter last year. Despite the difficult Antwerp economic situation, demand levels in Barcelona remain strong and the 250,000 sq m forecast for Barcelona at the start of the year Cost: € 145 / sq m Competition: 30,710 sq m Choice: 11.5% remains a realistic figure. On the supply side vacancy rates haveOccupier activity in Q3 reached 30,710 sq m across 30 transactions. begun to trend downwards and stood at 13.4% at end Q3. NoDeals were driven by the public sector with the two largest speculative development is due to come to the market by the end oftransactions accounting for 65% of total take-up. Year to date 2011, reducing further the choice of new space. Rental costsactivity fell 22% compared to the equivalent period last year. After a remained stable during Q3, largely due to a lack of rental evidence,strong 2010, occupier activity for 2011 as a whole is expected to be however our rental outlook has been modified and a gentlenear 10-year average levels. Choice decreased slightly due to the slowdown in costs is now expected to continue into 2012.lack of completions this year, combined with sustained demand.Over 2011, overall choice in Antwerp fell from 12.9% in Q1 to 11.5%in Q3. Development activity is expected to remain very low over thenext few years. Just one project of 5,900 sq m is expected to bedelivered speculatively during Q4 2011 in the Ring district. A furthertwo speculative projects are expected to deliver a total of 15,000 sqm in 2012. Costs remained stable over the third quarter in allsubmarkets. The prime rent currently stands at €145 per sq m forthe Center, and at €136 per sq m in the Ring district. Only verylimited rental growth is anticipated, driven primarily by supplyshortages for the best space.
8 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Berlin Bristol Cost: € 252 / sq m Competition:129,500 sq m Choice: 8.8% Cost: €328 / sq m Competition: 6,500 sq m Choice: 13.0%Competition continues to strengthen. Over 410,000 sq m of deals Occupier demand remains relatively subdued with leasing volumeshave been recorded in the first three quarters of 2011, the highest down 38% on the equivalent period last year. Looking ahead, wevolume of the last 10 years and 40% ahead of 2010’s total and 25% expect annual take-up in Bristol city centre to be around 38,090 sqahead of the five year average. This was primarily driven by deals in m, some 10% below the level achieved in 2010 and well below thethe 1,000-1,500-sq m segment and from activity in the business five-year average of 52,000 sq m. The amount of Grade A choice inservice sector (25% of volumes). Another strong quarter of activity Bristol city centre rose slightly during Q3. The market alsocan be expected in Q4. This will present further challenges to continues to offer a steady stream of second hand space although itoccupiers with overall vacancy remaining at 8.8% - the lowest rate is unattractive to most occupiers. The two speculative schemesfor three years. Space is most freely available in the Innercity East under construction in the city centre are both due to complete byand Innercity West sub-markets, where 41% of all supply is based, year-end, with Bridgewater House already completed to shell &but most of this space is of average quality. Both the prime rent and core. Prime rents remained stable at €328 per sq m. Incentivesthe weighted average rent increased significantly year on year. By remain generous in the city centre at up to 18 months on a five yearthe end of the year, we expect a further slight increase in the prime term and up to 36 months on 10 years, although this is deal specific.rent due to the continued demand for high quality space. For most With Grade A supply continuing to fall, we expect incentives to movespace let, rental prices of between €10.00 and €15.00 per sq m per in over the next 12 months.month were paid. Prime values of €21 per sq m per month wereunchanged q- on-q but reflect a 5% increase y-on-y. Brussels Cost: € 300 / sq m Competition:120,350 sq m Choice: 10.9% Birmingham Occupier activity improved over Q3 with volumes surpassing the Cost: € 356 / sq m Competition: 20,500 sq m Choice:20.1% total achieved during H1 2011. This was due to a major transactionCompetition held up well in Q3 with over 20,000 sq m let, up 40% of 46,000 sq m by the EU administration. While we have seen somecompared to Q2 2011. Occupiers demonstrated a clear preference activity from the public sector, there has been a slow down in activityfor competitively priced Grade B space, which accounted for 63% of from the corporate sector. There were no new speculativeQ3 leasing volumes. The most significant inner-city deal this quarter completions during Q3, resulting in further erosion of choice. Overallinvolved the relocation of Vax to 2,200 sq m at 2 Colmore Square vacancy rates fell to 10.9% and to 6.3% in the CBD. Developmentfrom an out of town location into refurbished space within the City activity remains constrained and this will further limit occupiercentre. Choice increased slightly with vacancy rates reaching highs choice, particularly in the CBD. Prime rents fell slightly to €300 perof 20.1%. Any space re-entering the market is largely second hand sq m in the prime district, the Leopold district, and to €195 per sq mor refurbished. In contrast occupiers face a diminishing range of in the North district. Costs remained stable in all other districts,choice within the Grade A market with vacancy rates falling to 3.6%. ranging from €165 sq m in the Periphery to €230 sq m in theThere is just 11,000 sq m of space scheduled to complete Pentagon or in the Louise district. The top quartile and weightedspeculatively over 2012-13 which may force pre-letting. Rental costs average face rent for Brussels remained relatively flat at €222 andstabilised at €356 per sq m, although rents remain heavily supported €177 per sq m respectively.by incentives with typically around 36 months rent free on a 10 yearterm. Weighted average rents fell slightly, due largely to the higherproportion of Grade B lettings in the third quarter.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 9 Cardiff Copenhagen Cost: € 250 / sq m Competition: 11,100 sq m Choice: 10.8% Cost: € 242 / sq m Competition: n/a Choice:8.6%Leasing volumes remained strong over Q3. The amount of space Whilst Q3 saw a slight dip in occupier activity, sentiment remainstaken during the first nine months of the year stands at 37,210 sq m upbeat. Competition is strongest for prime CBD space with a– a level up 81% on the 5-year annual average. Activity was driven number of domestic occupiers looking to expand. In secondaryby 118 Ltd’s sub-let of 3,298 sq m of space from Zurich at Fusion locations the public sector is the biggest driver of demand as cost-Point. Supply fell by 12.3% q-on-q to stand at 111,480 sq m of saving measures have pushed a number of public sector occupiersavailable office space. As with many regional city centres, there towards more peripheral districts such as Valby and Glostrup, westcontinues to be a shortage of high quality or new Grade A space of the city centre. The majority of activity in the prime segment in Q3available. Confidence is however returning to the development came from the financial sector, illustrated by a new lease of aroundmarket with two speculative schemes starting on site during Q3 – 5,250 sq m by “Finansiel Stabilitet”. On the supply side, choicenamely Capital Quarter (7,060 sq m) and Vision Court (3,298 sq m). increased by around 70 basis points to stand at 8.6%. However,Prime headline rents remain unchanged with the city centre at £226 supply in the prime segment remains tight, with the majority ofper sq m and out-of-town at £161 per sq m. Typical incentives vacant premises Grade B and C. Construction activity remainsremain at 12 months for a five-year term and 24 months for 10 relatively low, although there are several projects in the pipeline foryears. 2012 and 2013. Prime CBD rents remained stable at DKK 1,700- 1,800. Rents for secondary CBD space were also static at around Cologne DKK 1,000-1,125. Incentives are still widely used and include rent free periods, step rents and fit out contributions. In particular the Cost: € 258 / sq m Competition: 45,000 sq m Choice:8.2% offered step rents can be steep, providing a significant discount inOccupier activity decreased in Q3 after a strong first half of 2011 the first two to four years of occupancy. Rental levels in peripheralalthough this reflects a lack of larger transactions with occupier locations vary considerably. In areas such as Glostrup and Valbyinterest still dominated by medium sized companies. Year to date prime rents stand at around DKK 1,000 -1,100, while secondarythere has already been more activity than the whole of 2010 – up rents range between DKK 600 -700.8%. Cologne City is the preferred location of end users and haswitnessed the most deals. However, the increased shortage of high- Dublinquality space in this part of the market is causing some occupiers to Cost: € 344 / sq m Competition: 38,200 sq m Choice:18.9%widen their search area. Choice is further constrained by the verylimited vacancy of new space across the market with just 2,000 sq For the fourth consecutive quarter overall supply fell in the Dublinm presently available. Projects under construction will ease this office market. At the end of Q3, overall vacancy rates stood atsituation somewhat but in the meantime older, outdated, space still 18.9%, down from 23.0% at the beginning of the year. Weaccounts for almost a third of vacancy. Around 45% of deals anticipate choice will continue to reduce as completions of newcompleted over Q1-Q3 2011 were for rents of between €10.00- office buildings have ceased entirely. Large occupiers seeking units€14.99 per sq m per calendar month, while 38% were for rents in excess of 10,000 sq m will be faced with a steadily diminishingbetween €5.00-€9.99. This was reflective of both the shortage of range of choice, with only eight buildings in the city centre andhigh-quality space and a continued cost consciousness amongst suburbs able to satisfy these requirements. Building on a strongoccupiers. first six months of the year, occupier activity increased again in the third quarter, up 25% compared to the equivalent period last year. Demand was primarily driven by companies expanding (42% of deals). There is already a significant volume of deals expected to transact in Q4 (c. 30,000 sq m). Prime rents fell slightly, down 3.0% to €344 per sq m. Incentives have tightened over the course of 2011 for leases of five to ten years with around 9-12 months rent free achievable. Further incentives are achievable for longer lease terms and larger deals.
10 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Dusseldorf Eindhoven Cost: € 282 / sq m Competition: 91,300 sq m Choice:11.9% Cost: € 185 / sq m Competition: 7,400 sq m Choice:13.2%Deal volumes are running at average levels, but the number of deals Occupier sentiment worsened in Q3 with a number of occupiersis 25% ahead of average as we are seeing more activity, particularly removing their requirements from the market. Whilst the 3,000 sq min the 1,000 sq m to 5,000 sq m market. The City was the most deal by IT company 2B interactive in the Western periphery ofsought-after sub-market and accounted for 17 % of all activity. The Eindhoven boosted activity, leasing volumes were downamount of choice continued to erode but is still above the 1-million considerably on the first half of 2011. Overall vacancy increased tosq m mark with 800,000 sq m available in Düsseldorf city alone. By around 13.2%, up from 12% in Q2. Choice increased in both thethe end of the year a further 33,000 sq m of office space will be built, Grade A and C segment over the quarter. However, Grade A officeof which 27 % will be available, but we still expect choice to decline space remains particularly tight with a vacancy of around 1.2%.next year. In terms of costs, prime rents have remained stable for Availability of Grade B and C space is higher at 9.4% and 2.6%the last six months after increasing twice in succession. Due to respectively. The development pipeline remains limited with just acompetition for high-quality space, a further increase to €24.00 per small amount of speculative office space being developed at Strijpsq m per month is expected by year end. For most spaces, rental S. Costs remained unchanged in Q3, with prime city centre rents atprices are between €10.00 and €15.00 per sq m per month. around €175 - €185 per sq m. Whilst no significant increase in rental levels is expected in the foreseeable future, the tight supply and Edinburgh limited development pipeline should support prime rents at their current level. Prime rents for office space in secondary locations Cost: € 337 / sq m Competition: 13,790 sq m Choice: 6.0% range between €120 and €160 per sq m per annum. Rent freeCosts softened slightly in Q3 as occupier demand remained periods have remained unchanged at 12 – 15 months assuming a 5cautious. Prime rents fell 1.8% over the quarter, with incentives still year lease.generous at around 32-36 months rent free achievable on a 10 yearterm. Rents are expected to remain broadly stable but, as the level Frankfurtof supply gradually declines, we could see further upward pressure. Cost: € 396 / sq m Competition: 88,600 sq m Choice:13.6%Deal volumes were boosted by FNZ, who consolidated threeexisting properties into 1,600 sq m of space at Tanfield. Improved Occupier activity slowed in Q3 with deal volumes of around 88,600occupier activity drove down the level of available supply. Supply sq m. Sentiment is still strong, however, and the deals donealso fell as a result of some Grade B space being withdrawn for illustrated the preference for quality space: 60% of volumes wererefurbishment. Overall vacancy rates fell to 6.0%, with Grade A “high-quality”. Geographically, occupier preference has been for thesupply falling to just 3.2%. Within the city centre, there are just four City, Banking District and Westend (all with double-digit percentagebuildings capable of satisfying Grade A requirements of greater than shares this year). The largest deal in Q3 was the 18,400-sqm letting5,000 sq m. Despite this, there has been little change to the by Deutsche Lufthansa in the Squaire at the airport. All other dealsdevelopment pipeline, with Site HI, scheduled to complete in 2013, remained below 10,000 sq m. The amount of choice fell withthe only scheme under construction speculatively. vacancy rates dropping from 14.3% to 13.6%. Around 36% of supply is considered high quality, and this percentage has remained more or less unchanged this year, however only c.35,000 sq m of high-quality space will be brought onto the market in 2012, so we expect further reductions in choice. While demand for quality remains high, enquiries in the prime segment have dropped off somewhat and the prime rent therefore remained unchanged at €396 per sq m per annum. Rents across the sub-markets also remained stable with average rents from Frankfurt at c. €227 per sq m per annum.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 11 Geneva Gothenburg Cost: € 862 / sq m Competition: n/a Choice: 0.3% Cost: € 250 / sq m Competition: 25,500 sq m Choice: 8.2%Demand for the best office space remains high in the Geneva office The occupational market recorded a strong Q3, with leasingmarket particularly from financial institutions, wealth managers and volumes reaching 25,500 sq m, up 45% on Q2. Occupiers from theassociated service providers as well as international organisations IT- and Telecom sector accounted for a large share of activity,such as the Red Cross and the United Nations. Supply remains mainly due to large transactions by ÅF, EA and Saab Security. Thetight, however, particularly in the limited CBD area. The few public sector also remains an active market player. With noopportunities that exist are usually in the range of up to 250 sq m completions in Q3, overall vacancy declined to 8.2%, down fromwith units of more than 500 sq m being extremely rare. Office 8.7% in Q2. A further reduction in choice is anticipated in Q4, withvacancy rates in the city centre are at levels of sub 1% and there no new developments due to be completed in 2011. As at the end ofare limited development opportunities, compounded by a restrictive Q3 2011, around 52,000 sq m of new office space is underplanning process. Some companies are considering peripheral construction, the majority of which is due to be delivered in the nextlocations in order to secure larger and less expensive space. New 12 months. Costs for prime CBD space continued to rise q-on-q withspace is predominantly constructed south of the CBD and around prime rents up 2.2% to stand at SEK 2,300 per sq m. In the widerthe airport. The most notable project is the “SOVALP” – a large city centre, costs for Grade A office space moved up as well andscale development that will provide some 100,000 sq m once range between SEK 2,000 – 2,200 per sq m. Rental levels for officecompleted in 2014. Competition for space remains high and finding space in more peripheral areas range between SEK 1,200-1,500 persuitable space solutions, especially for larger unit sizes, can be sq m. The number of speculative schemes currently underchallenging. The existing shortage in the central areas is expected construction should ease competition for prime space.to drive prime rental growth. Prime rents in the CBD currently standat CHF 1100 per sq m per annum but office space overlooking Lake HamburgGeneva usually trades at a premium to this. Cost: € 282 / sq m Competition: 172,700 sq m Choice: 8.8% Glasgow Occupier demand is expected to remain strong throughout this year with an annual volume of 500,000 sq m expected. However the Cost: € 344 / sq m Competition: 8,560 sq m Choice: 10.6% ongoing euro crisis and potential effects on the economy couldOccupier activity increased in Q3, totalling over 8,500 sq m. The damage sentiment. Occupier activity in Q3 was driven by businessmajority consisted of churn in smaller deals. Economic uncertainty service providers, followed by public administration – with the Statecontinues to constrain decision making however and we anticipate Ministry for Urban Development and the Environment’s move toyear end leasing volumes to be in line with 2010. The Banking and Wilhelmsburg representing a considerable 45,000 sq m transaction.Finance sector dominated in Q3, accounting for 73% of occupier Preference remains on the city centre (Innenstadt) and the adjoiningactivity. Overall vacancy rates increased slightly to 10.6% but sub-markets of City South (core area), Habour and HafenCity. InGrade A choice remains far more constrained with vacancy rates terms of supply, the SPIEGEL building among others wasfalling from 3.3% to 3.1%. Occupier controlled space increased by completed in HafenCity and total completions over the year to date10% over the quarter to 58,000 sq m, with the likes of Shell now amount to 120,000 sq m. A further 68,000 sq m is in thereleasing c.2,000 sq m at 141 Bothwell Street. Construction has pipeline for the remainder of the year, of which around half isresumed at the speculative Copenhagen building, which is on track speculative. Development is expected to remain stable until the endto deliver c. 6,000 sq m by early 2012. Prime rents remained stable of the year. Prime and average rents grew further in Q3 to reachat €344 per sq m, although rent free periods remain generous at €282 per sq m per annum and €167.76 per sq m per annumbetween 24-30 months based on a 10 year lease. Incentives respectively. Further increases can be expected next year.remain under pressure for the very best space. As the supply ofGrade A space begins to decline we expect incentives to hardenfurther and prime rents to slowly rise.
12 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Helsinki Lisbon Cost: €294 / sq m Competition: n/a Choice: 10.0% Cost: € 228 / sq m Competition: 14,040 sq m Choice:11.7%Occupier activity remained fairly stable in the third quarter of 2011, Portugal’s economic woes continued to impact on occupieralthough competition from international occupiers decreased confidence. Activity remained weak resulting in just 14,040 sq m letsomewhat in reaction to the European debt crisis and fears in Q3. Year to date leasing volumes are 63% below five yearregarding the economic recovery. Whilst prime space in the CBD is average levels. The majority of activity was concentrated in Zone 6,most popular with occupiers, choice remains limited. Large floor which accounted for around 40% of total floor space let in Q3.plates are virtually non-existent, increasingly driving occupiers to the Activity continues to be driven by an increase in renegotiations andbusiness park hubs in areas such as Ruoholahti, Keilaniemi and renewals. There were no new completions in Q3. Consequently,Leppävaara. Furthermore, new developments in the bay area occupier choice fell with vacancy rates moving from 11.9% in Q2 toadjacent to the CBD (Töölönlahti) have attracted strong occupier 11.7%. Despite the weak dynamics, prime rents held up at €228 perinterest. The overall vacancy rate remained relatively stable q-on-q sq m over the third quarter. However, landlords continue toat around 10%. Choice in the CBD is much lower at around 4.5%. compete by offering generous fit out packages and increasing levelsThe development pipeline is considerable at 230,000 sq m for 2012 of incentives. Incentives for prime space are in the range of 1 to 3and 2013. However, competition for this new space has been strong months rent free, based on a three to five year lease. Across theand overall these schemes are expected to be around 90% prelet on wider market incentives are more generous with around 3 to 6completion. Prime CBD rents remained stable at €24.50 per sq m months rent free achievable on a three to five year term. Rents inper month. In the more peripheral office districts, rents range the secondary market also remained stable, however we dobetween €192 - €204 per sq m per annum. However, if competition anticipate downward pressure on secondary rents from thefor space in the new developments slows, rents will most likely see beginning of next year.some falls. London City Leeds Cost: € 688 / sq m Competition: 88,900 sq m Choice: 7.6% Cost: € 323 / sq m Competition: 10,770 sq m Choice:10.6% Occupier activity improved upon Q2 levels but was still weak andOccupier choice fell slightly over Q3, but remains inflated at 6.1% represented the lowest Q3 total since 2003. Although 1.4 million sqabove the level at the end of 2010. While there was little change to ft remained under offer, with confidence subdued, occupiers areoverall supply, the availability of Grade A space fell much faster with likely to delay decisions into 2012. Active requirement volumesvacancy rates falling from 5.6% in Q2 to just 4.9% at the end of Q3. continued to increase, however, with demand from the ServiceWork has commenced at 2 Bond Court which is due to deliver industry dominating volumes. Choice increased 10% as severalaround 1,500 sq m of space on a speculative basis by 2012. The refurbished and a new build scheme (Cannon Place, EC4) camesigning of a pre-let to Clarion in Q2 for 1,500 sq m, has also allowed online. As a result, overall vacancy rates increased to 7.6% withdevelopment to start at Elizabeth House which will deliver around Grade A at 4.4%. Prime rents remained stable, with rent free1,000 sq m speculatively. The most significant deal in Q3 involved periods assuming a 10 year term at 22 months. With the lack ofthe acquisition of 2,400 sq m by Yorkshire Housing at Dyson quality prime space, we do anticipate further rental growth, howeverChambers. Prime rents were stable at €323 per sq m. Incentives expectations have been tempered significantly by economicremain stable but generous with around 30 months rent-free uncertainty.achievable on a 10 year term. We expect some hardening ofincentives as the availability of Grade A supply begins to tighten,however this is somewhat dependent on the level of new demand.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 13 London West End Lyon Cost: € 1187 sq m Competition: 60,500 sq m Choice: 4.4% Cost: € 270 / sq m Competition: 43,970 sq m Choice: 6.5%There was 60,500 sq m let across 42 deals in Q3, which represents There was a slowdown in occupier activity in Q3 with just undera 22% decrease q-on-q. This brings the total for the year-to-date to 44,000 sq m let, a 40% reduction on the very strong Q2. Year to198,100 sq m which is 22% lower than the equivalent period last date volumes are slightly softer than 2010 – a modest 2% reduction.year and reflects a more cautious sentiment in the market. The most The amount of choice for occupiers has continued to decline withnotable deal of the quarter was Debenhams plc’s 13,470 sq m pre- supply dropping 3.6% over the quarter and volumes over 6% lowerlet at British Land’s 10 Brock Street (Regent’s Place), NW1.The than the end of 2010. Vacancy rates are now 6.3%, down from theService sector again dominated take-up accounting for 54% of take- cyclical high of 6.8% reached in early 2010. Prime rents in Lyonup across 18 deals, with the TMT sub-sector accounting for 22% of have remained at €270 per sq m for the second successive quarterthe total. Overall demand decreased slightly to 410,200 sq m, and after the market witnessed very strong growth in H1. The annualthe TMT sub-sector dominated this also, accounting for 25% of the rate of rental growth remains at 17.4%. In the wider market weightedtotal with new requirements from Linkedin, O2 and Gamesys. With average rents are around €150 per sq m and have been relativelylimited moderate take-up and limited development completions, flat this year reflecting a widening differential. Incentives have alsooverall supply fell by -5% to 369,950 sq m, which equates to a been flat, at around 6 months for a 6-9 year lease.vacancy rate of 4.4% (from 4.6% last quarter). Grade A vacancyalso fell to 2.2%, its lowest level since mid-2007. Overall, the volume Madridof space under construction speculatively remained stable at Cost: € 312 / sq m Competition: 71,579 sq m Choice:10.6%173,400 sq m with the Debenhams’ pre-let offsetting newcommencements at 79-97 Wigmore Street, W1, and 6 Agar Street, Leasing volumes were typical for Q3, the quiet quarter of the year,WC2. Prime rents stabilised at €1,187 / sq m, while rent-free periods and stood at 71,579 sq m (excluding high-tech space). Fiveremained at 16 months, assuming a 10-year lease. We expect rents transactions of greater than 5,000 sq m completed and accountedto increase again in the latter half of next year. for 42% of total take-up in Q3. The Periphery dominated demand with occupiers focusing on well-located and good quality business Luxembourg centres. The average size of space leased ranges between 800- 850 sq m. Overall office vacancy increased slightly during Q3 to Cost: € 456 / sq m Competition: 38,470 sq m Choice: 6.7% 10.6%. However, the CBD saw a slight decrease in choice as noOccupier activity over the year to date increased 51% compared new product is on the market and the level of demand in this marketwith the equivalent period last year. Pre-lets and acquisitions area has remained relatively strong. New supply is concentrated inaccounted for around a third of all take-up activity in 2011, which the Periphery (Julián Camarillo area) and Satellite market areas.underpins confidence in the market. The business services sector, We expect a trend of occupiers moving towards the periphery whichtogether with Banking & Finance were responsible for 72% of deals. would impact on vacancy rates in the CBD. There is limited futureThere were no new completions during Q3 and occupier choice supply in the pipeline as projects are being delayed and there is adiminished further with vacancy rates falling to 6.7%. The lack of defined schemes from 2013 onwards. Prime rents continueddevelopment pipeline remains constrained with just 24,000 sq m to decline over Q3, down 1.9% to €312 per sq m, because of thedue to be delivered speculatively over the remainder of 2011. disequilibrium between supply and demand, even for the bestThereafter, the development pipeline is expected to decrease further quality products.to a low level of 48,000 sq m in 2012, of which 33,000 sq m isspeculative and this will drive choice lower. Costs remained stableacross all submarkets in the third quarter, peaking at €456 per sq min the CBD. We expect the prime rent to remain relatively flat over2011, however incentives have begun to tighten. Given declininglevels of supply, we expect upward pressure on prime rents,although forecasts currently remain modest.
14 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Malmö Milan Cost: € 228 / sq m Competition: 12,500 sq m Choice: 7.1% Cost: € 530 / sq m Competition: 58,460 sq m Choice:10.1%The occupational market registered a drop in activity in Q3, with Occupier activity this year has been broadly in line with 2010. Q3leasing activity totalling at around 12,500 sq m. Nevertheless, so far witnessed few large deals, with the most significant deal of thein 2011, competition has been significantly higher compared to 2010 quarter involving AXA, who acquired 10,000 sq m in the Semi-centreand year-end leasing volumes are forecast to be up over 50% on a area. IT company, Reply also leased around 8,000 sq m in they-on-y basis. The high activity can partially be explained by choice - Lorenteggio area. Prime rents increased by 1.9% over the quarternew developments offering modern and highly efficient office space. to €530 per sq m. Rental levels remain high in the centre,Occupiers from the IT sector have been particularly active in Q3, particularly for transactions involving banks. Despite this, aroundaccounting for a large share of volumes. On the supply side, no new 70% of deals in Q3 were at rents of below €300 sq m andchoice was added to the market in Q3 2011, although in the Lund transactions involving rents of over €500 per sq m, accounted fordistrict a 7,400 sq m project is due to be completed in Q4. In 2012 only 14% of the total deals. Q3 witnessed around 30,000 sq m ofaround 60,000 sq m will complete. Consequently, the overall new completions. Consequently the vacancy rate increased tovacancy rate of 7.1% should increase next year. Prime CBD rents 10.1% over the quarter, however, this was driven primarily byremained stable in Q3 and range between SEK 1,800 – 2,100 per increasing supply in the Periphery and Hinterland. Occupier choicesq m. Furthermore, occupiers are often offered substantial within the Centre remained broadly stable. There have been noincentives such as rent free periods (depending on lease length) or new development commencements.rebates. Rental levels for good quality space in the peripheral officedistricts remained stable at around SEK 1,200 – 1,500 per sq m. MunichSome further upward pressure at the very prime end of the market is Cost: € 360 / sq m Competition: 233,100 sq m Choice:10.1%expected towards the end of 2011. Occupier activity remains very strong with 230,000 sq m let and a Manchester year to date volume the strongest since 2001. Many lettings were driven by expansion leading to a net reduction in choice. Most Cost: € 379 / sq m Competition: 14,570 sq m Choice: 11.9% activity has been witnessed in the city centre and across all unitOverall choice in Manchester city centre fell 5.2% over the third sizes. Industrial corporate occupiers have been the largest takers ofquarter, to 245,700 sq m. Vacancy rates were down from 12.5% in space this year, while business service providers closed the largestQ2 to 11.9% at the end of Q3. This was driven by declining levels of number of deals. In the third quarter there was again evidence ofboth Grade A and Grade B supply which fell by 4.0% and 7.0% occupiers pursuing prelet options, such as the NUOFFICE project inrespectively. Grade A choice, remains far more constrained, Schwabing-North. Following high levels of building activity in thereflecting a vacancy rate of just 2.9%. There was little change to the period from 2008- 2010, when up to 300,000 sq m was completeddevelopment pipeline over Q3, with no new speculative starts and per year, completions will be much lower this year and especiallynothing under construction on a speculative basis. However, we do next year and further restrictions in choice can be expected. Primeanticipate construction to commence soon at 1 St Peters Square on rents and incentives have remained stable at €360 per sq m butthe back of a 6,000 sq m pre-let to KPMG. Activity was modest due further increases can be expected next year. Average rents endedto the absence of any larger deals, with just two transactions over the quarter at €164 per sq m.1,000 sq m. There are just two schemes currently capable ofsatisfying Grade A requirements of greater than 5,000 sq m. Givendeclining levels of supply, prime rents increased by 5.3% over thequarter to €379 per sq m. Incentives however remain generous with30 months rent-free still achievable on a 10 year term.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 15 Oslo Paris La Defense Cost: € 457/ sq m Competition: 172,000 Choice: 7.5% Cost: € 590 / sq m Competition: 20,650 Choice: 5.0%Occupier activity increased considerably with leasing volumes up The La Défense market was one of the few European markets to23% on Q2. Competition is strongest for prime office space in the show strong rental growth in Q3 with prime rents increasing 7% toCBD and western fringe of Oslo. There is a drive, in particular from reach €590 per sq m. Average second hand rents ended the quarterthe larger occupiers, towards more efficient office space, which can at €492 per sq m, a 17% discount to prime reflecting a moreusually only be found in new developments. Besides ministries, standard quality of accommodation in this submarket. The rentaloccupiers from the IT and oil related sectors are the main drivers. increases were driven by further erosion in choice, with vacancyOn the supply side, Oslo has seen a relatively low volume of new rates declining from 5.4% to 5.0% - the lowest level since Q1 2010.construction in 2011 with just 60,000 sq m of office space added to The leasing market, however, has seen a relative lack of large dealsthe market. Consequently, choice has gradually declined over the and volumes are down 14% compared with last year with just overyear, with an overall vacancy rate of around 7.5%, the lowest in 20,000 sq m let in Q3. Demand remains fragile and going forwardalmost two years. 2012 is expected to see around 300,000 sq m of prospects of an economic slowdown are encouraging participants tonew office space added, however choice is expected to remain be cautious as well as extremely selective. A difficult end to the yearrelatively constrained with the majority of the development already is therefore expected generally, but the lack of choice in the Lapre-let. Prime rents remained stable in Q3 2011 at NOK 3,600 per Défense market will support pricing and incentives although thesq m. Strong demand for prime office space has pushed up rents by growth witnessed in Q3 is unlikely to be repeated next year.15% over the year. Secondary locations did not record any rentalgrowth over the last 12 months. Rents for good quality space in the Romecity centre range between NOK 2,800 – 2,200 per sq m. Cost: € 420 / sq m Competition: 29,900 sq m Choice:6.3%Competition for prime space in the CBD is considerable andincentives in this part of the market are low to non-existent. Outside Occupier activity reached almost 30,000 sq m in Q3, down on thethe CBD rent free periods of 6-12 months are achievable. start of 2011 but year to date volumes were up nearly 50% compared to the equivalent period in 2010. Occupiers continued to Paris CBD focus primarily on the CBD and central areas, with around 50% of Q3 take-up in these areas. The remainder of activity was focused Cost: € 750 / sq m Competition: 115,840 sq m Choice: 4.5% on the EUR area. Occupiers demonstrated a clear preference forWhile occupier activity in Greater Paris increased significantly in Q3, Grade A space. The most active sectors in Q3 were the Servicesit was driven by deals completing that had been in negotiations for and Manufacturing sectors. The Public sector, which hassome time and the CBD region itself, although it witnessed an 11% traditionally played a leading role in Rome’s office market,q-on-q increase, is running around 2% below the Q1-3 volumes of substantially reduced the amount of space taken up, a reflection oflast year. Deals were constrained by the low amount of choice in the the necessary rationalisation of the public real estate portfolio. ThisCBD. Vacancy declined to just 4.5%, the lowest amount since 2008. is likely to have a significant impact on Rome’s office market. TheIn addition to a lack of choice impacting occupiers’ ability to move, vacancy rate increased to 6.3%, due largely to the release ofthe effect of austerity was increasingly felt, particularly for large second hand space in the Tiburtina area. The development pipelinecompanies, which are looking to curtail their real-estate costs and remains relatively stable, with several completions expected in Q4,consolidate locations. Prime rents were unchanged at €750 per sq but there are no new significant projects to add to those alreadym and there is a sense that the market will become quieter with envisaged out to 2014. Prime rents and incentives are generallyoccupiers increasingly hesitant given the Eurozone concerns. stable, with the prime rent remaining at €420 per sq m.Average second-hand rent was recorded at €501 in the CBD region,a 33% discount to prime. Rent free periods have been unchangedall year at between 9 and 15 months assuming a 6-9 year lease.
16 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Rotterdam Stuttgart Cost: € 195 / sq m Competition: 20,100 sq m Choice:16.3% Cost: € 216 / sq m Competition: 78,100 sq m Choice:6.5%Occupier activity decreased by around 52% in Q3. This was mainly The Stuttgart market has not reflected the cooling economic mood.due to the absence of any large scale transactions, rather than a While deal volumes declined on Q2, on a y-on-y basis take-upshift in sentiment. The upturn in competition seen in 2011 can, to increased by 71% to 200,000 sq m. Generally, small deals havesome extent, be explained by the levelling in prices (headline rents dominated leasing volumes and the majority of deals were ofand / or incentives) in some segments of the market between the average quality. Since certain large requirements remain active, wewider Rotterdam region and some smaller, more regional cities. expect take-up to remain strong over Q4 and forecast total volumesChoice increased for the fifth consecutive quarter. The overall of around 250,000 sq m for 2011 as a whole. Occupier activity hasvacancy rate stands at 16.3% as at the end of Q3, up from 15.7% in driven a further decline in the vacancy rate by 0.5 percentage pointsthe previous quarter. The development pipeline remains significant. in the third quarter. The prime rent remains unchanged at €216 perWhilst most developments have high pre-let rates, there are a sq m, with average rents showing little change at €138 per sq m.number of speculative schemes expected to be added to the market Around half the year to date completion volumes occurred in Q3. Inin the second half of 2012. Rental levels remained virtually Q4 further completions of around 40,000 sq m are expected. Nextunchanged with prime rents at €195 per sq m and no change in year we expect vacancy rates to stabilise.incentives. The only rental movement recorded in Q3 was in the‘Modern Scheepvaartkwartier’ district, where rents edged up by The Hague2.9% to stand at €180 per sq m. Costs in the peripheral office areas Cost: € 215 / sq m Competition:5,488 sq m Choice: 10.9%North and South of the city remained stable with prime rents ataround €150 - €170 per sq m. Rental conditions are expected to Overall occupier sentiment remained relatively subdued in Q3, withremain stable in the foreseeable future. leasing volumes down on the first half of the year. Competition is strongest for Grade A office space in the city centre districts such as Stockholm the Beatrixkwartier, with occupiers in the public administration, transport and education sector most active. On the supply side, Cost: € 456 / sq m Competition: 73,050 sq m Choice:10.5% choice continued to increase with overall vacancy at a record high ofLeasing volumes of just over 73,000 sq m were recorded in Q3. 10.9% at the end of Q3, although the majority of available supply isWhilst down on H1, sentiment remains relatively strong, with of Grade B quality. Choice was more or less unchanged for Grade Aoccupiers from the recruitment and staffing sector particularly active. properties, with only a modest increase to 2.3%. The tight market forOn the supply side, choice continued to decline with no new office Grade A is underlined by the split in leasing transactions by quality,space added to the market. The overall vacancy rate decreased to with just three small sized Grade A occupier transactions recorded10.5%, down from 11.4% in Q2. Vacancy in the CBD remained in 2011 so far. Rental costs for the prime end of the marketparticularly tight at a record low of 3.7% with occupiers having increased over the quarter. Prime rents for Grade A space in thedifficulties securing large, efficient floor plates in central locations. Beatrixkwartier increased by 2.4% to stand at €215 sq m perWhilst choice in peripheral locations remains plentiful, available annum. Costs remained unchanged across all other submarketsspace is expected to remain low in central locations with a limited with prime rents for office space adjacent to the city centre rangingamount of speculative space in the pipeline for the next few years. between €175 - €205 sq m per annum. Incentives were stable overPrime rents increased for the second consecutive quarter, from SEK the quarter with rent-free periods remaining at 9 - 18 months,4,100 per sq m to SEK 4,200 in Q3. Some further rental growth is assuming a 5-year lease.expected, with prime rents forecast to edge up to SEK 4,300 per sqm by the end of the year before stabilising in 2012. Rental levels inperipheral office locations such as Kista and the adjacent suburbsremained stable at around SEK 1,400 – SEK 2,000. Incentivescontinue to be under pressure in prime locations with rent freeperiods of 3-6 months achievable on a 5 year lease.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 17 Utrecht Zurich Cost: € 220 / sq m Competition: 22,400 sq m Choice:13.9% Cost: € 902 / sq m Competition: n / a Choice: 4.6%The occupier market recorded a relatively slow quarter with six Strong demand for office space in recent quarters has led to risingtransactions reported. However, the total leasing volume was up by rents and low levels of availability. The market will also see a largearound 60% over the quarter, due to the 18,000 sq m transaction by volume of new supply. Over the next four years around 400,000 sqDanone in the Rijnsweerd district. Competition for the best office m of new office space will be delivered mainly in Zurich West andspace in the city centre continues to be strong, in particular from Zurich Nord. Much of the new space has been taken by occupiersbanking, finance and public administration sector occupiers. present in the market already which are currently actively relocatingHowever, the absence of choice holds back activity with vacancy to this new, modern space from their CBD locations and graduallyestimated at just 2%. Choice is not expected to increase in the short releasing their former space. The new supply is expected to easeterm in the city centre. In the wider market choice increased in Q3, competition for space and increase choice in the CBD. Hence, thewith around 22,000 sq m of new office space added to Utrecht. Zurich CBD will soon face vacancies of an unprecedented quantityOverall vacancy increased to 13.9%, the highest level ever which will put pressure on cost. Prime rents are at around CHF 1100recorded. The majority of choice is located in peripheral locations per sq m. Expectations are that rents might see a further slightsuch as the Papendorp district which accounts for roughly 20% of increase towards the end of the year but this may be short-lived.total vacant office space. Whilst costs remained stable at the prime Outside the prime segment, rents range from CHF 350 to CHF 800end, office space in secondary locations became less expensive in per sq m depending on location and quality, with second-handQ3. Prime rents in the city centre range between €190 - €220 per sq space seeing the biggest discounts.m. Rental levels in the secondary/ peripheral locations such asKanaleneiland, Overvecht and Lage Weide/ Catesiusweg saw afurther 3%-4% decrease to range between €125 – 145 per sq m. Western Corridor Cost: € 330 / sq m Competition: 55,900 sq m Choice:13.8%The level of active named occupier requirements stabilised in Q3 atc.300,000 sq m and continues to be dominated by theManufacturing and Services sectors, which together accounted foraround 88% of named enquiries in Q3. Deal activity improved toreach 55,925 sq m, 9% higher than the five-year quarterly average.Supply levels continue to be slowly eroded, driven in particular bydeclining Grade A stock. This is most pronounced in the WestLondon submarket where the vacancy rate stands at just 2.9%, thelowest level for nearly 10 years. There is currently around 33,305 sqm of speculative space under construction, with only 3,902 sq m dueto complete before year-end. Prime rents increased marginally,driven by upward pressure in Reading town centre and Chiswick.Incentives were stable at 30 months rent free on a 10 year lease inthe Thames Valley and 24 months in West London. We expectannual prime rental growth of 1.4% over 2011 as a whole.
18 On Point • EMEA Corporate Occupier Conditions – Q4 2011Western European Corporate Occupier Markets at a glance Competition Choice (% Vacancy Rate) Costs (Rents EUR / sq m / pa) (Take-up as a % of stock) Market Q3 2011 12-month outlook Q3 2011 12-month outlook Prime, Q3 2011 12-month outlook WE Amsterdam 0.9 17.1 335 Antwerp 1.6 11.5 145 Athens n/a 15.8 270 Barcelona 1.0 13.4 225 Berlin 0.8 8.8 252 Birmingham 1.3 20.1 356 Bristol 0.4 13.0 328 Brussels 0.9 10.9 300 Cardiff 1.1 10.8 250 Cologne n/a 8.2 258 Copenhagen n/a 8.6 242 Dublin 1.1 18.9 344 Dusseldorf 1.0 11.9 282 Edinburgh 0.6 6.0 337 Eindhoven 0.5 13.2 185 Frankfurt 0.7 13.6 396 Geneva n/a n/a 0.3 862 Glasgow 0.6 10.6 344 Gothenburg 0.8 8.2 250 Hamburg 1.2 8.8 282 Helsinki n/a 10.0 294 Leeds 0.9 10.6 323 Lisbon 0.3 11.7 228 London City 0.9 7.6 688 London West End 0.7 4.4 1187 Luxembourg 1.2 6.7 456 Lyon 0.8 6.5 270 Madrid 0.5 10.6 312 Malmö 0.6 7.1 228 Manchester 0.4 11.9 379 Milan 0.5 10.1 530 Munich 1.2 10.1 360 Oslo n/a 7.5 457 Paris CBD 1.7 4.5 750 Paris La Defense 0.5 5.0 590 Rome 0.2 6.3 420 Rotterdam 0.6 16.3 195 Stockholm 0.6 10.5 456 Stuttgart 1.0 6.5 216 The Hague 0.1 10.9 215 Utrecht 0.9 13.9 220 Western Corridor 0.7 13.8 330 Zurich n/a n/a 4.6 902
On Point • EMEA Corporate Occupier Conditions – Q4 2011 19CENTRAL AND levels in the CEE region are a third higher than in the same period last year, and volumes are anticipated to be well aboveEASTERN EUROPE: 2010 levels by the end of the year. How long this demand will be sustained, in light of recent macroeconomic turbulence isCorporate Occupier uncertain. Across Europe, uncertainty and declining sentimentConditions are increasing the chances of corporate occupiers putting expansion and relocation plans on hold. Strong domestic demand will be crucial if CEE is to maintain current activity levels.The intensifying Eurozone crisis, the threat of sovereign debtcontagion and associated market turbulence continues to With development finance still severely constrained, internationaldominate news flow across Europe and set the back-drop for occupiers continue to face challenges in CEE sourcingcorporate real estate teams operating across the EMEA region. appropriate Grade A product in central locations. DevelopmentAgainst this backdrop, Central and Eastern Europe has pipelines in Moscow and Warsaw in particular look well-stockedcontinued to perform strongly. Forecasts point to a continued over the medium term, but in the short term, prime optionsdivide in the pace of growth between advanced and emerging remain much more limited than headline vacancy rates suggest.economies. While GDP growth in the Eurozone has deceleratedand other activity indicators have worsened markedly in Q3, Prime rents remained stable over the quarter in all Central andgrowth in Emerging Europe has been better than anticipated, Eastern European markets. However this stability comes afterpartly due to the strong performance of CEE economies. Poland double digit percentage increases earlier in the year in Moscow,in particular is forecast to see GDP growth at 4.2% in 2011, well Warsaw, and St Petersburg. Expectations for 2012 are likely toabove the European average, with the Czech republic and be dampened by the ongoing Eurozone crisis. DeflatedHungary anticipated to record 2.0 and 1.0 % GDP growth confidence levels are beginning to feed through to net absorptionrespectively this year. Russia too, is forecast to see solid GDP and leasing volumes in Western Europe, although the impactsgrowth of 3.8% in 2011. have so far been uneven. An escalation of sovereign debt and financial sector troubles to the core euro area would be likely toAcross Europe and despite a sombre economic backdrop, undermine growth in Central and Eastern Europe, given tightdemand for office space has held up well. The overall European financial and economic linkages. But to date, both economicmarket is on track to at least match last year’s total take-up. growth and demand for office space have proven more resilientHowever, the demand picture is becoming more mixed. Take-up in CEE markets than in their Western European neighbours.*Central Europe and the BalkansExhibit 11: Central & Eastern Europe Office Occupier Clock Moscow Rental Growth Rents Slowing Falling Rental Growth Rents Accelerating Bottoming Out Zagreb Warsaw Belgrade Krakow Bucharest, Budapest, Sofia St. Petersburg Tri-City Bratislava, Kiev, Prague
20 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Belgrade Bucharest Cost: € 186 sq m Choice: 22% Cost: € 228 / sq m Choice: 16.0%Occupier activity remained fairly stable in Q3 2011, with a handful of Occupier activity reached almost 65,000 sq m in Q3 with mosttransactions pushing total leasing volumes to around 4,500 sq m. activity in the centre north (including CBD), capturing 32% of take-Competition is strongest for floor plates up to 700 sq m in the New up. Office activity (including renewals and renegotiations) so far inBelgrade business district, where most of the Grade A stock has 2011 reached 212,000 sq m, the same levels as the whole of 2010.been delivered in the last six years. Small to medium sized legal and No new completions were delivered to the market in Bucharestmedia firms have been particularly active in recent quarters. On the leaving stock levels close to 1.85million sq m. In the last quarter wesupply side, the overall vacancy for Grade A and B office stock expect the completion of an additional 54,000sq m of space from sixdeclined to 22%, down from 23% in Q2. Prime rents remained buildings (50% being already pre-leased). The pipeline in 2012 isstable at €15.50 per sq m per month for Grade A space in the limited to 120,000 sq m (50% preleased) comprising of someDowntown area. Rental levels for Grade B space in the wider city projects delayed from 2011.The cost of prime space is still in thecentre also remained unchanged at around €10 - €13 per sq m per region of €19 per sq m per month with no major fluctuationsmonth. Incentives are still widely used with 3-months rent free (on a expected over the next three quarters.. The overall vacancy rate5-year lease) achievable. Furthermore, reduced parking fees or the dropped to 16% with large leases being signed in existing buildingsallocation of free parking lots are increasingly used incentives to located in decentralized submarkets. Choice will continue to declineattract occupiers. due to the limited pipeline over 2012 to H1 2013. The overall incentive package is mainly applicable to large pre-leases which is Bratislava crucial for any project to attract finance and commence construction work. Cost: € 198 sq m Choice: 10.8%Occupier activity decreased over the quarter, with total leasing Budapestvolumes of 21,100 sq m, down 32% on q-on-q. However, at 64,500 Cost: € 240 / sq m Choice: 20.7%sq m for the year so far, competition is strong compared to 2010.Occupiers in the IT and telecommunications sectors have been Office activity increased by 39% q-o-q in Budapest to 65,950 sq mmost active, accounting for almost 40% of leasing volumes. On the with the highest demand recorded in Pest Central South submarket.supply side, just over 40,000 sq m was added in Q3, with the There were no new completions released on to the market. Despitecompletion of the Westend Square project (17,800 sq m) in the lack of new supply, choice remained relatively stable with aBratislava IV and the City Business Centre III – V (22,600 sq m) in vacancy rate of 20.7% at the end of the quarter. The highestBratislava II. Choice increased to 10.8% but the polarisation availability is still registered at the Pest Non-Central submarket,between Grade A and B space continues to increase with choice for however the vacancy rate managed to decrease the most in thisGrade A space much more constrained. Whilst Q4 will not see any submarket (by 200 bps to 32%). The lowest speculative officespeculative completions, there are several projects currently under vacancy rate is registered at Buda North at 17.4%. Prime officeconstruction for next year, increasing choice in a number of districts. rents have been stable, standing at €20 per sq m per month.Costs for prime office space in Bratislava’s best locations remained Average headline rents are in the range of €10-13.50 per sq m perstable in Q3, with rents ranging around €14 - €17 per sq m per month depending on location.month. Rental levels in the Inner City zone range between €10.5 -€12.5 per sq m per month, while rents in the Outer City district havestabilised between €8 -€10 per sq m per month. Costs are expectedto remain stable in the short term.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 21 Kiev Moscow Cost: € 313 / sq m Choice: 12.0% Cost: € 894 / sq m Choice: 16.6%Occupier activity was relatively stable compared to last quarter with Moscow continued to witness strong demand in Q3 2011, 30%take-up levels reaching 22,934 sq m. Activity was dominated mainly higher than the equivalent period last year. Despite the recentlyby international companies with the manufacturing and business announced city-centre construction restrictions, the current pipelineservice companies the most active. Demand for office space is still is relatively high compared to other European cities with 2.5m sq mprice sensitive in the Kiev market, with the highest demand for still planned to come into the market by 2014. However InternationalGrade B stock. There has been a steady increase in total office occupiers looking for core prime space still have limited options asstock over the last few years and in Q3 2011 the volume of only 20% of the current pipeline located is inside the CBD. In termscompletions was 31,950 sq m. There were four new Class B of choice, the vacancy rate decreased slightly to 16.6%, 20bpsbusiness centres delivered to the market and still potential for further down from the previous quarter. The cost of prime space alsooffice stock development. The largest will be Premium Centre remained unchanged at US$1,000- 1,200 per sq m per annum(36,000 sq m) located on the “Right Bank”. Choice declined with the (excluding operational expenses and VAT), Class A base rentsvacancy rate falling 50 bps to 12.0% driven by increased market amounted to US$600-850 per sq m per annum; Class B+ base rentsactivity. Prime rents remained stable at US$420 / per sq m per amounted to US$400-600 per sq m per annum; and Class B- baseannum and no change is expected before the end of 2011. rents were US$300-400 per sq m per annum. The less competitive buildings attract occupiers by additional incentives given by Krakow landlords that include lower rental rates for the first year; a rent free period (4-6 months) and partial fit-out compensation. The average Cost: € 180 / sq m Choice: 8.4% lease length is currently 5-7 years.Krakow witnessed an increase in occupier activity in Q3 2011. Therewere rising numbers of enquiries from occupiers seeking new office Praguespace with a short notice period of around 3-6 months. High levels Cost: € 252 / sq m Choice: 11.8%of demand are therefore anticipated in the next two quarters.Occupiers’ enquiries are also focused on space under construction. Occupier activity was fairly subdued with volumes of 27,323 sq m,The largest recent transaction signed was for 6,700 sq m in Bonarka down 10% from the equivalent period last year. Six new properties4 Business, building B. Choice is relatively stable, however over were delivered to the market in Q3 2011, totalling 47,980 sq m. A60,000 sq m is currently under construction. The cost of prime further 161,000 sq m is now under construction with completionspace in Krakow’s core central locations is stable at €14-15 per sq scheduled between Q4 2011 and Q1 2013. The cost of prime spacem per month. Effective rents remain lower than headline rents by has remained stable over nine consecutive quarters, although thereapproximately €1.50 – 2.50 per sq m per month, especially for pre- are some signs that landlords of the very best space are consideringlets. Additionally, occupiers may receive cash contributions, moving higher asking prices. For the time being prime rents stand at €252.cost coverage and fit-out contribution depending on the initial Rental levels on non prime buildings have also remained stable withstandard of a building and individual clients requirement. Inner City projects commanding between €14.90-17.50 per sq m per month and Outer City locations ranging between €13-14.50 per sq m per month. Second hand products in all submarkets stand at approximately €1.50 below the above mentioned ranges. The pressure to provide incentives differs significantly from property to property, depending on both the situation within the submarket and the length of vacant period in the property itself.
22 On Point • EMEA Corporate Occupier Conditions – Q4 2011 St Petersburg Warsaw Cost: €410 sq m Choice: 13.1 % Cost: € 300 / sq m Choice: 6.7%The total volume of new choice entering the market in Q3 was Occupier activity in Q3 2011 reached 95,000 sq m, 22% up from the67,200 sq m, the highest since the beginning of 2011. Six new office previous quarter. Demand is strong in the city with pre-leaseprojects were delivered to the market in the last three months, agreements also picking up, with a 24% share this quarter. In termsincluding the speculative part of a large-scale Class A project St. of choice, around 60,000 sq m was delivered to the market.Petersburg Plaza (37,600 sq m of leasable space). The future office Although this may seem fairly robust, in reality 2011 is likely to seeprojects currently under construction are limited with 100,000 sq m the lowest number of completions for six years with only 130,000 sqscheduled for completion by the end of 2011 and only 150,000 sq m m delivered in total. Some new developments have been initiated onis scheduled for completion next year. Occupier activity was a speculative basis as developers become more confident. At thesubdued in Q3 2011, reflecting the seasonally quieter summer end of Q3 2011, approximately 6.7% of the modern office stock inmonths. Choice in the market has risen slightly with a vacancy rate Warsaw was vacant (7.0% in the CBD, 7.3% in the City Centreof 13.1%. This upward movement is temporary and we expect the Fringe and 6.4% in Non-Central locations). In spite of a slighttrend to start falling as space is absorbed, although rental growth is increase in choice this quarter, Warsaw’s vacancy is still expected toexpected to remain limited amidst the high vacancy levels. Costs continue the downward trend. Prime headline rents remainedremained stable in Q3 with only minor changes explained by unchanged this quarter and prime office space in Warsaw Citycurrency rate at US$330-400 for Class A and US$250-320 for Class Centre can now be secured from € 22 to € 25 per sq m per monthB office buildings. although some exceptional buildings are quoting rents even higher than this. The best Non-Central locations, such as Mokotów, are Tri-City being leased at € 15.00 to € 15.50 per sq m per month. Cost: € 144-174 / sq m Choice: 10.3% ZagrebAlthough office leasing activity is slightly ahead of last year most of Cost: € 180 / sq m Choice: 9.5%the take up now is from relocations from older buildings into newerstock rather than into the City from outside. Only one new office Sentiment remains subdued, with just a handful of small leasebuilding of 1,550 sq m was released to the market in Q3 2011, transactions and renewals recorded in Q3. Occupiers are focusedleaving the level of choice relatively stable at 10.3% compared to on better quality / more efficient space, rather than actual10.2% last quarter. Vacancy is expected to remain stable in Q4 expansion. On the supply side, choice increased to 9.5%, up from2011; although it may increase slightly in 2012 as five buildings 8.5% in Q2. Furthermore, choice is likely to increase in the next twoproviding over 30,000 sq m of available space are planned for years, with around 157,000 sq m currently under construction ofdelivery in 2012. Prime rents are falling but we expect them to which approximately 23,000 sq m will be delivered before the end ofbottom out shortly. In Gdynia, prime rents are at ca. €14 per sq m 2011 with the completion of the Green Gold office building. Choiceper month. Sopot and Gdansk are slightly cheaper at €12 -€13 per is considerably lower in prime CBD locations as competition issq m per month. strongest for modern office space in central locations. Costs remained stable in Q3, with rents for Grade A office space ranging from €12 per sq m per month in the out-of-town locations to around €17 per sq m per month for the best space in prime CBD locations. Landlords remain reluctant to offer any tenant incentives, but with an improved position, occupiers are now able to achieve rent free periods of up to 2/3 months on a 5-year lease as well as contributions towards fit out costs. The occupier negotiating position is set to strengthen further in 2012, with choice expected to increase amidst stable completion.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 23Central & Eastern Europe Corporate Occupier Markets at a glance Choice (% Vacancy Rate) Costs (Rents EUR/sq m/pa) Market Q3 2011 12-month outlook Prime, Q3 2011 12-month outlook CEE Belgrade 22 186 Bratislava 10.8 198 Bucharest 16.0 228 Budapest 20.7 240 Kiev 12.0 313 Krakow 8.4 180 Moscow 16.6 894 Prague 11.8 252 St Petersburg 13.1 410 Tri-City 10.3 144-174 Warsaw 6.7 300 Zagreb 9.5 180
24 On Point • EMEA Corporate Occupier Conditions – Q4 2011MIDDLE EAST AND education. These are translating into new expansionary office demand. In Riyadh for example, the General Organisation forAFRICA: Corporate Social Insurance is negotiating for a single tenant deal for some 80,000 sq m. A similar situation is apparent in Doha. Against aOccupier Conditions backdrop of the Arab Spring, GDP growth of 13% and substantial exports of liquefied gas, the state is equipped to spend. Government agencies and affiliated companies continue to controlThe region is very mixed in terms of economic and market outlook much of the new and high quality stock and maintain rents at highwith political and social unrest hampering business investment. The levels.UAE has generally positioned itself as a safe haven from thetroubles and is better protected than most due to its oil output and The markets in the UAE remain oversupplied and there is no clearincreased government spending. The finalisation of Dubai’s debt end to this dynamic, although the future supply pipeline continues todeal has also improved confidence and lifted the outlook. GDP diminish. Many development projects are delayed given thegrowth is forecast to be 5.1% over 2011 and 5.0% next year. In economic environment. It should also be noted that much of theEgypt, the Interim Government which took power in February is emerging supply is located in areas outside of the well-connectedfacing up to serious social and policy challenges which are creating inner city areas demand by international occupiers or the licenseda difficult operating environment for business. GDP forecasts have sub-markets that are a pre-requisite for many financial occupiers.been dramatically lowered to just 0.3% growth for 2011 comparedwith a forecast of 5.8% at the start of the year. Forecasts have also Real estate costs are also varied across the MEA region. Twobeen downgraded in Morocco as regional unrest creates markets, Casablanca and Istanbul, are predicted to witness rentaluncertainty. growth over the next 12 months. Four of the sub-regions markets are likely to witness rental stability whilst oversupplied markets suchIn a number of the regions markets, demand levels have been as Abu Dhabi, Doha, Jeddah and Riyadh will see rents underinflated by an active government sector. The Kingdom of Saudi downward pressure.Arabia continues to display strong public spending and isgenerously funding public services such as health care andExhibit 12: MEA Office Occupier Clock Rental Growth Rents Slowing Falling Tel Aviv Casablanca Algiers Rental Growth Rents Accelerating Bottoming Out Cairo, Abu Dhabi Doha, Dubai, Jeddah Riyadh Istanbul, Johannesburg, Tunis
On Point • EMEA Corporate Occupier Conditions – Q4 2011 25 Abu Dhabi Cairo Cost: € 355 / sq m Choice: 20.0% Cost: € 367 / sq m Choice: 35%While estimations of the future supply for the market continue to be The Cairo office market is expected to see high volumes ofscaled back as developers cancel or delay projects, more than 1.1 completions, increasing stock from c. 700,000 sq m now to over 2.9million sq m of additional office space could still enter the market million sq m by the year 2015. New choice will continue to be addedbefore the end of 2013. Overall choice increased to approximately to the new, preferred satellite areas. These areas have grown in20% and is expected to rise further. Government entities and state- popularity and see the majority of demand as they offer modernowned occupiers currently comprise the majority of competition for office stock, access to business services, amenities for staff,large requirements. However, this has limited impact on demand in enhanced security and the opportunity to avoid the congested andprivate developments as they typically occupy purpose built sites. polluted downtown areas of Cairo. However, accessibility is vital andCompetition for private sector buildings is dominated by the dedicated business parks on the outskirts of Cairo continue to seeprofessional services and financial sectors, along with engineering vacancies because of poor access. While activity is returning itand construction firms and those in the energy sector. In the short continues to be focused on upgrading and yet many occupiersterm, occupier activity will be driven by existing occupiers upgrading remain in a “wait-and-see” mode until the medium future becomestheir space but many occupiers are also delaying decision making more obvious. As choice increases the balance of power has shifteduntil the market has adjusted for further supply deliveries. Overall more towards the occupier, evident in increasing flexibility ofcosts decreased over the quarter, with Grade A rents down in Q3 to landlords on rental terms. Asking rents for the Nile City Tower are atAED 1,750 per sq m per annum, while rents for Grade B space US$50 per sq m per month and at US$44 per sq m per month for theremained unchanged in Q3 (AED 1,300 per sq m per annum). Whilst Star Capital building. However average Grade A rents in Centralrents for both grades are expected to decline, Grade B quality rents Cairo are around US$41 per sq m per month and around US$22 perare likely to drop at a greater pace. The expanding choice of high sq m per month in New Cairo.quality space is making Abu Dhabi’s office market increasingly tenantfavourable and this will lead to further rental incentives and Casablancainducements. Cost: € 220 / sq m Choice: 10% Algiers The market continues to lack international Grade A quality space, with the majority of new supply of Grade B or A- quality and designed Cost: € 480 / sq m Choice: 4% to suit local demand. While the supply situation is likely to improveDemand for office space is starting to become increasingly driven by over the medium term, a lack of quality stock continues to be aestablished foreign companies and those looking to hurdle the market constraint and it remains difficult for occupiers to find largerlegislative and authority constraints in setting up a business. single floor plates. Larger lots are more frequently available in largerInternational Grade A office space still remains very scarce and developments such as the Marina or Anfa Place, which will besupply of new space is often limited to residential conversions. The developed on euro-norm standards, alongside some singularcentre of Algiers continues to suffer from a poor operational developments in the area of Sidi-Maârouf. The latter continues to beenvironment. Modern space is sporadic around the city apart from a popular office area alongside isolated developments in the CBD.Bab Ezzouar, which is moving slowly towards a financial and The first deliveries of the Casablanca Marina are expected in 2012business hub benefiting from good infrastructure, modern office but the pricing may be prohibitive to many given high costs of landspace and good accessibility. The ongoing construction of additional acquisition. Occupier demand remains high especially for larger andtowers will increase choice and bring larger floor plate availability. high quality space, but also as an effect of the decline in theThere are also signs of new, fully serviced properties starting to be business confidence in other countries in the area. In the core areasplanned around the Les Pins area as well as the Bab Ezzouar area. rents are around MAD 210 per sq m per month and continue to grow.Overall Grade A office space is available at rents of DZD 3,500 - Rents for new Grade A new space in non-central areas have4,200 per sq m per month. Good Grade B space which continues to remained at marginally to MAD 150 per sq m per month.compete with Grade A space given its low availability remains atlevels of DZD 2,500-3,000 per sq m per month.
26 On Point • EMEA Corporate Occupier Conditions – Q4 2011 Doha Istanbul Cost: € 435/ sq m Choice: 20 % Cost: € 360 / sq m Choice: 9.1 %Recent turmoil in other countries in the region has not affected The Istanbul office market continues to see high volumes of newDoha. Total city-wide office stock is currently estimated at 3.4 million supply. Since the beginning of the year 227,000 sq m has beensq m with the majority of Grade A stock, approximately 1.2 million sq added, compared to a mere 62,000 sq m in the same period lastm, located in the Diplomatic District and West Bay. Office buildings year. For the rest of the year, another 190,000 sq m is expected toin these areas continue to lead the prime market, housing major complete with a total volume of new supply of 793,000 sq m.government bodies, financial institutions, oil and gas and other 242,000 sq m of this will be located on the Asian-side and 551,000multinationals and can command a cost premium of up to 35% sq m on the European side. On the demand side, take-up remainsabove average asking rental rates. Despite Qatar’s strong economic strong with 18,000 sq m leased in Q3. The total take-up for Q1-Q3fundamentals, the market continues to see oversupply due to a 2011 reached 85,000 sq m, 46% higher than in the same period lastmarked slowdown in competition and smaller requirement sizes. year. Despite this, the increase in demand wasn’t able to absorb theChoice in West Bay has increased significantly and rents are under high levels of supply and vacancy rates increased further. While thepressure. The overall vacancy rate stands at around 20%. vacancy for the overall market now stands at 9.1%, vacancy in theGovernment sector activity has led to some stabilisation in costs CBD remains low at 3.2%. Prime rents remained stable at €30 perwith prime office rents now QAR 190 per sq m per month. Although sq m per month and are expected to remain stable until mid 2012.government entities will continue to provide the major proportion of The completion of a few landmark projects are however expected tooffice demand, we will see an increasing number of construction, lead to an increase in prime rents.engineering and professional services occupiers setting up in Dohato expand their regional operations, to service the large amount of Jeddahinfrastructure work in advance of the 2022 World Cup. Cost: € 209 / sq m Choice: 15% Dubai The office market continues to see new completions with 15,000 sq m completed in Q3. The current estimate for completions by end Cost: € 328 / sq m Choice: 44% 2013 is approximately 1.1 million sq m. However, actual deliveriesThe future development pipeline has reduced significantly but might be lower as projects continue to be cancelled and delayed.despite the welcome slowdown, the future supply pipeline for 2012 Nevertheless, the market will experience a major increase in supplyand 2013 still totals 1.3 million sq m, though consisting largely of in 2012 when Zahran business centre and Headquarter will bestrata-title properties in non-CBD areas. Despite increased supply, completed. Most of the pipeline supply will increase the availabilityoverall choice remained relatively unchanged at 44% city-wide (27% of quality space and increase competition amongst landlords forfor CBD Single Ownership Properties) indicating positive absorption tenants resulting in further incentives. The private sector remainslevels. On the demand side, foreign occupiers continue to be the major driver of competition which is focused on the CBD. Choicecautious and delaying decision making. Occupiers remain selective in the CBD decreased from 29% in Q2 to 26% in Q3. However,preferring single-ownership buildings in well-connected CBD citywide choice averaged at more or less same level of 15% duringlocations. Competition in the short term will remain driven by Q3 2011. The high volume of supply is certainly not being able to beoccupiers looking to upgrade to better quality and / or locations at absorbed by future demand and vacancy is expected to increase.lower rents. Costs remained unchanged on the quarter, with prime Office rents remained stable in Q3. Overall, Grade A rents arerents in the CBD stable at AED 1,615 per sq m per annum although around SAR 1,050, per sq m per month while Grade B rentsthe range of buildings being able to attract these rents has average SAR 882 per sq m per month. Average city-wide rentsdecreased. Rents in the DIFC remained stable, too, at AED 1,615- stabilized around SAR 700 per sq m per month during Q3 2011.2,370 per sq m per annum. Space outside the CBD or DIFCdecreased to AED 1,060 per sq m per annum in Q3 2011. While thelower end of asking rents remained stable, the higher range reducedin many parts as landlords compete aggressively for occupiers,offering generous incentives which continues to widen the gapbetween asking and achievable rents.
On Point • EMEA Corporate Occupier Conditions – Q4 2011 27 Johannesburg Tel Aviv Cost: € 205 / sq m Choice: 10.5% Cost: € 307 / sq m Choice: 3-4%Competition for office space in Q3 2011 was strongest in secondary Israel’s economy continues its expansion course despite the weakersub-markets which offer a rental discount relative to prime. prospects for the Eurozone and the US. The worries about theAccessibility remains a key factor and nodes within reach of the new outlook for the Eurozone and the US are mainly of relevance for aGautrain transport network, are expected to see an increase in few international occupiers that are reviewing earlier expansiondeals, with enquiries already increasing. Office supply in plans. However these headwinds have not had any effects on localJohannesburg increased by 97,000 sq m, to total nearly 8.5 million businesses or developers and the market for commercial propertiessq m. In the current climate, the new stock offers occupiers remains characterised by ongoing strong demand for office spaceincreased opportunities to upgrade. Vacancies in Q3 demonstrated and low volumes of new supply. Supply – existing and new - is verya marginal decline from 11.1% to 10.5. Choice varies between tight, especially in the City centre and occupiers struggle to findnodes with areas such as Illovo, Morningside, Houghton and Milpark Grade A space especially if looking for larger floor plates. At ILS 125witnessing rates below 6% with more secondary nodes (notably the per sq m per month, prime rents increased slightly over the quarter.Johannesburg CBD and Randburg) with rates as high as 15%. However landlords face increased reluctance from occupiers to payAverage gross rents for Grade A offices range around ZAR 140 - these levels. Rents in areas such as Herzliya or Ra’anana in the150 per sq m per month. Occupiers are increasingly focussed on North of Tel Aviv offer modern office space too, but at a significantconsolidation, increased space utilisation and in some cases are discount to prime with ILS 70-80 per sq m per month and ILS 65-70prepared to relocate from prime to secondary nodes in an attempt to per sq m per month respectively. These areas prove particularlyalleviate the increasing cost of occupancy. Gross rentals for Prime popular with occupiers from the software and high-tech industry.A+ office space appear to have reached a ceiling in 2010 andcorporate occupiers have offered strong resistance in 2011 to move Tunisbeyond that level, particularly as costs for utilities continue to Cost: € 80 / sq m Choice: 12 -15%increase. Prime rents in Q3 2011 remained at ZAR 185 per sq mper month. Tunis is in the early stages of evolving towards an office market of international standard and many developers have restarted Riyadh development projects. The majority of the existing stock does not meet international standards and only a fraction of the market is Cost: € 397/ sq m Choice: 12% available for lease as the dominating local private developersOffice space in Riyadh increased by 20,000 sq m over the quarter continue to prefer selling a building after completion for ownerand the market is expected to experience a supply shock of c 1.4 occupation. While this is likely to persist over the near future, leasingmillion sq m when Granada Business Park, KAFD, and Olaya Tower is now becoming an accepted practice considered for internationalcomplete in 2013/2014. Actual deliveries may be lower or delayed occupiers. The main area for new construction of Grade A officeas developers are finding it difficult to meet their deadlines due to space remains around the “Lac de Tunis” which is increasingly seenthe huge work load for contracting firms. On the demand side, as the new prime office area offering a more secure environmentRiyadh is usually heavily influenced by public sector activity and is seen as the main business location. Vacancy in the “Lac dealthough the private sector was more active over Q3. Choice Tunis” area in the past has been considerably lower than in otherremained at Q2 levels, with city-wide vacancies of 12% and parts of Tunis and will be more so given the operational advantagevacancies inside the CBD decreasing to 16%. Office rents were of the area. This will accelerate possible business relocations fromalmost at the same level as Q2 with average rents paid for CBD the city centre and also the development of other neighbouringspace are c. SAR 1,060 per sq m per month with prime Grade A business centres of around Lac de Tunis. For the short term, rentsspace commanding asking rents of SAR 2,000 per sq m per month are expected to remain unchanged at around TND 160 per sq m percompared to high quality space which usually trades around SAR annum with current occupiers cautious about timing.1,300 per sq m per month. Grade B rents average SAR 1,075 per sqm per month. With new supply being delivered early next year,rental levels are likely to face further downward pressure.
28 On Point • EMEA Corporate Occupier Conditions – Q4 2011Middle East and African Corporate Occupier Markets at a glance Choice (% Vacancy Rate) Costs (Rents EUR/sq m/pa) Market Q3 2011 12-month outlook Prime, Q3 2011 12-month outlook MEA Abu Dhabi 20.0 355 Algiers 4 480 Cairo 35 (Grade A: 5) 367 Casablanca 10 220 Doha 20 465 Dubai 44 328 Istanbul 9.1 360 Jeddah 15 209 Johannesburg 10.5 205 Riyadh 12 397 Tel Aviv 3-4 307 Tunis 12-15 80