European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

OFFICE

DEMAND & VACANCY RATE

A…B…C…D…ESG Labour markets across the region ended 2022 on a positive note. The euro area unemployment rate held at an all-time low of 6.6% in December 2022, whilst employment growth is forecasted to be 2.2% for the year, despite some signs of cooling. Office employment also grew in 2022, with annual growth expected to be around 3.1%, which equates to 800,000 new jobs. Office employment growth was strongest in Finland, the Netherlands and Austria, with ICT, professional and legal, and scientific research subsectors driving headline figures.

EURO AREA EMPLOYMENT (YOY % CHG)

Total Employment

Office-based Employment

4.0

The latest revised EU-wide initiative of tasking all non-residential buildings to perform to a minimum EPC level of F by 2027, and improving to a rating of E by 2030, should encourage more green occupier and investor repositioning, especially with the increasing number of countries looking to address sustainability and overachieve on the EU minimum requirement. The Netherlands and the UK are active examples. Further insight can be found in our recent report, Obsolescence Equals Opportunity. Europe’s progress toward decarbonising office stock and transitioning toward net-zero by 2050 could also give rise to green opportunities at the other end of the office spectrum. The non-Grade-A availability ratio falling by 11 bps QoQ in fourth quarter 2022 may be an early indication for value-add potential and opportunities known as brown discounts amid the current phase of re-pricing. Rising financing and construction costs, along with the structural ramifications of hybrid and remote working remain key challenges for the office sector in the short term. But Europe’s commitment to decarbonization and monetary policy suggests strategic repositioning and repurposing of offices, which poses as much opportunity as does the risk of obsolescence. Source: Cushman & Wakefield Research *Net Absorption and Vacancy data refer to Europe [43 markets], 4-quarter rolling.

Forecast

3.0

2.0

1.0

0.0 YoY % chg

-1.0

-2.0

2018

2019

2020

2021

2022

Source: Eurostat, Moody’s Analytics *2022 Employment growth rates are C&W baseline forecasts.

The relationship between office-based employment and office demand remains tested and has become more decoupled in the wake of hybrid and remote working. However, the office sector registered positive net absorption of 3.5 million square metres (sqm) in 2022, led by Paris (Western Crescent), Copenhagen and Madrid. Despite the outperformance of office-related jobs during the pandemic recovery, the office vacancy rate in Europe still hovers around 8% as of fourth quarter 2022 (unchanged from fourth quarter 2021) and is still 200 bps above the pre-pandemic rate of 6%. However, there are encouraging signs that Grade-A, prime-office vacancy will peak in 2023, as the shift toward hybrid and remote working has largely taken place across most markets. As a result, demand for high-quality offices (with high amenities and desirable locations) will remain strong. Fundamentals, like leasing and rental growth, in such high-quality offices are expected to outperform, as occupiers focus on employee well being and experience, and as they hone in on ESG credentials. Grade-A availability, as a share of total availability in H2 2022, fell by 0.8% compared to H2 2021 on a six-month moving average basis. Prime office rents across Europe and the UK averaged a 5.4% increase in fourth quarter 2022 compared to fourth quarter 2021. Source: Eurostat, Moody’s Analytics, Cushman & Wakefield Research *2022 Employment growth rates are C&W baseline forecasts.

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