European Office Sector Outlook 2024

Animated publication




NAVIGATING THE NOW TO SOLVE TOMORROW'S CONUNDRUM Since the pandemic, the European office market has shown resilience with positive net absorption¹ since Q3 2021. Renewals have been more common during this period as businesses have sought to gauge the future of in-office balanced with remote work. Subsequently, we are now witnessing a growing utilisation of flexible office spaces as occupiers opt for a short-term approach while they grapple to gain a more accurate assessment of their space needs. Flexible spaces are more adaptable to accommodate changing size and functionality requirements. Furthermore, while employees have embraced hybrid working, a significant portion of them still tend to come to the office on the same days as their co-workers. Consequently, the office space requirements in some markets have remained consistent, as occupancy during peak weekdays (typically Tuesday through Thursday) remains unchanged. Larger corporates are also including what is now referred to as ‘option space’ as a contingency which allows occupiers flexibility in lease agreements. For instance, 18% of lease contracts of 50,000+ sq ft in Central London² signed between 2020 and H1 2023 incorporated expansion options within the agreement and half were secured in advance.

Nonetheless, for 2023, we anticipate a 16% decrease in take-up across Europe due to prevailing economic challenges and the ongoing refinement of space needs. The propensity to work remotely varies significantly from one city to another, with factors like nature of commute, commute times and cost of living strongly influencing the proportion of employees returning to the office on a full time basis. Furthermore, it's evident that most companies, particularly bigger corporates, are either retaining their office space or reducing it, with only a small portion of the market expanding its physical presence. According to a study by McKinsey & Company³, there were lower levels of office attendance in larger companies (typically above 500 employees) and those in the knowledge economy. It's crucial to acknowledge that our office space was not utilised 100% even before the onset of COVID. The average usage in Europe was 60% of the time. Therefore, it's reasonable to not anticipate a return to 100% usage level. As a result, we don’t expect take-up in Europe to get back to 2019 levels by the end of the forecast horizon. While this will vary by location, overall European take-up will remain 19% below the 2019 level in 2027.

Since the pandemic, the European office market has shown resilience with positive net absorption since Q3 2021. "




The office still plays a prominent role as employers embrace hybrid working. The primary office and/ or flex space are critical functions in the way we work. The needs to socialise and collaborate with co-workers are key factors employees like about the office environment across EMEA, according to C&W’s Experience per Square Foot TM (XSF) survey⁴. Additionally, the ability to establish a boundary between work and personal life, along with alignment with the corporate brand, hold significant value. In the competitive landscape for talent, it's crucial for occupiers to provide appealing spaces that strike the right balance. Offering flexible areas, collaborative spaces, private zones, and a supportive environment for staff well-being is crucial. This is not merely an ambition but a driving force behind corporate real estate decision-making.

Leasing of Grade A space, which has not been previously occupied, now represents over half of leasing activity. Whilst overall demand has shrunk across 16 key European cities over Q1-Q3 2023, demand for Grade A space has shown greater resilience. Grade A leasing is down 6% from 2.6m sqm to 2.4m sqm, compared with the same period of 2022. In contrast, demand for non-Grade A space has dropped by 17% over the same period (from 2.9m sqm to 2.4m sqm). Whilst the amount of space occupiers require might be less, the focus on quality is paramount. This bifurcation in the market will remain entrenched for centrally located, sustainable, well-connected buildings, expected to attract the most demand.

This aligns with our perspective on high-quality buildings where top rents are attained. As a result, we have seen upward revisions to prime office rents for 2023, with prime rental growth expected to average 4.5% across Europe, compared to 3.3% previously. We do anticipate potential challenges in the next 18-24 months due to the relatively modest decrease in demand, leading to a moderation in rental growth rates in the medium term. ¹ The net change in total occupied space over a certain time period ² The sensible ‘option’: building in growth flexibility in offices ³ Empty Spaces and Hybrid Places, The Pandemics Lasting Impact on Real Estate, McKinsey Global Institute, July 2023 ⁴ Rethinking Irish Real Estate



Whilst the amount of space occupiers require might be less, the focus on quality is paramount.













Source: Cushman & Wakefield Research Growth from 2019 Q4 to 2023 Q3






Assessing office space through a grading system, which spans from A to C, has become an acceptable method in the real estate sector. This grading can impact both the value of a building and the probable rental rate an occupant might pay. Factors affecting office grades typically involve the building's age, location, and construction quality. More recently we have seen the growth in various rating systems to cover environmental performance, connectivity and wellness. Despite this, there isn't a universally accepted industry definition for these grades, and certain factors influencing the grading can be subjective. Grade A space generally denotes top-tier office spaces, either newly constructed or recently renovated. The definition of Grade A can differ between markets, however, meaning that a Grade A office building in London might differ significantly from a Grade A building in Warsaw.

C&W’s XSF analysis reveals productivity is a primary concern for numerous leaders, and in the past, employee office presence was considered crucial to maintaining productivity. Nevertheless, recent analysis indicates that merely being present in the office does not in and of itself ensure productivity. In reality, other workplace factors like the ability to concentrate, minimise interruptions, and sustain energy levels significantly influence productivity. The adoption of activity-based working (ABW) and biophilic designs is on the rise, and both are now recognised as factors contributing to enhanced productivity and employee morale. ABW ensures workspaces are designed to support specific tasks, while biophilic design refers to incorporating natural features into the office design. A building’s interior design has a considerable influence on employee’s health and well-being as we tend to typically spend approximately 90% of our time indoors⁵. Multiple studies, including research conducted by MSCI⁶, have demonstrated the emergence of a premium for buildings with sustainability ratings compared to those that have not yet obtained such ratings. On average the ‘green’ premium ranges between 25-35%.

Looking ahead a number of years, sustainability will be the standard, not the exception. Tenants will be less willing to pay extra for green buildings as they become increasingly common. Hence the real estate sector is looking to exploit the green premiums now by seeking out value-add opportunities, finding “brown” buildings and upgrading the sustainability to take advantage of the premiums to secure longer-term rental values. Furthermore, due to the increasing legislation, sustainability will be expected. The UK Minimum Energy Efficiency Standards (MEES)⁷ from April 2023 state that it is unlawful for landlords to let a building with an EPC under E. There is a whitepaper under consideration that will raise the required EPC level to a C by 2027 and a B by 2030. In the Netherlands, a building must currently meet a rating of C or above, with aspirations to raise it to an A rating by 2030. We can expect increased regulation in the sector in a growing number of markets in the drive to cut carbon emissions and improve sustainability credentials alongside other asset classes.




With the growing emphasis on sustainability, the adoption of hybrid working models has led to the emergence of ‘green leases.’ Green leases refer to conventional office occupancy leases that allow landlords and occupiers to work together, incorporating commitments to operate the building in alignment with environmentally sustainable principles, including carbon emissions, waste reduction, and adherence to energy efficiency regulations. It's important to highlight that these clauses within green leases are not completely legally binding; rather, they serve as mechanisms to motivate both parties to fulfil their responsibilities. Green leases are also gaining prominence as property owners aim to safeguard the enduring value of their new real estate developments.

However, we are now seeing more investors targeting value-add prospects, aiming to capitalise on the European real estate sector's faster repricing. The lower level of transactions in a number of markets has led to slower price discovery, particularly for the office sector. But we are beginning to see quicker price adjustments in more liquid markets such as in the UK and the Netherlands. Our forecasts now show that office yields across Europe will have the largest outward movement with yields moving out on average by +166 basis points (bps) over 2022-2023. ⁵ European Commission: Indoor air pollution - new EU research reveals higher risks than previously thought ⁶ MSCI: London and Paris Offices: Green Premium Emerges ⁷ RICS: Minimum Energy Efficiency Standard We are now seeing more investors targeting value-add prospects, aiming to capitalise on the European real estate sector's faster repricing. "

Investment volumes across Europe have been falling for seven consecutive quarters since the first quarter of 2022. In the period Q1-Q3 2023, overall investment activity decreased by 52% compared to the same period a year ago. While no sector remained unaffected by this slowdown, the office sector has been particularly hard hit and falling the most, with a 61% reduction as investors pause on purchases and assess their strategy towards the sector. The office sector accounted for just 29% of all investment over the last twelve months, its lowest share on record. Fewer office properties were traded than during the GFC.




Even with hybrid work models, offices will remain the primary workspace. High-quality offices with strong ESG credentials represent one of the most significant opportunities in today's market.

Even with hybrid work models, offices will remain the primary workspace. High-quality offices with strong ESG credentials represent one of the most significant opportunities in today's market, evident in the rising proportion of grade A offices being leased. Given real estate's nature as a long-term investment, it faces significant exposure to ESG-related risks. Consequently, ESG investing is shifting from being considered optional to becoming the standard approach in this sector. As investors grapple with elevated debt costs, the popularity of 'green loans' is on the rise. These loans primarily fund real estate projects dedicated to advancing environmental goals. Typically, the margins on green loans are expected to be lower in most instances. Supported by research conducted by Moody's⁸, sustainable project finance loans are considered less risky compared to non-sustainable projects. Due to the interpretive nature of green loans, however, there is a risk that loan terms could be susceptible to 'greenwashing'. The crux of the green washing problem⁹ is the difficulty in identifying it and the lack of standardisation – it therefore, requires a clear understanding of the true meaning of "green" and, in time, the establishment of industry-wide performance measurement standards.

In the long-term, office buildings falling short of established sustainability benchmarks pose a risk not just for the borrower but also for the lender. Across Europe, office markets face the potential of a substantial portion (76%) of office inventory becoming obsolete¹⁰ by the decade's end unless proactive measures are taken. There is widespread acknowledgment that the consequences of inaction may outweigh any upfront investment, or there is a risk that buildings are just left to go obsolete. Buildings and particularly office buildings have a role to play in generating a positive social impact¹¹. The changing culture of work provides opportunity. ⁸ Global Capital: Moody's finds evidence sustainable projects are less risky 9 Cushman & Wakefield: Greenwashing and the sustainability disclosure requirements 10 Cushman & Wakefield: European Obsolescence Equals Opportunity 11 Cushman & Wakefield: Re-working the Workplace



Nigel Almond Partner

James Young Head of Investor Services, EMEA & APAC

Sukhdeep Dhillon Head of EMEA Forecasting Research

Data & Analytics Research, EMEA

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit

Made with FlippingBook Online newsletter creator