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EMEA Office Outlook 2017: The Occupier Takes the Wheel

by | Jan 12, 2017

By any reasonable measure 2016 was an unusual year, with political events on both sides of the Atlantic dominating the news. Nevertheless, there were a number of positive indicators emerging in European office markets, some stemming from the cycle and others from corporate organisational influences.

So we enter 2017 with office leasing markets reflecting the effects of a fairly weak economic recovery and sharp differences in market cycles; and the evolution of occupier strategies around talent attraction, workspace management and technology. These factors will continue to affect the corporate agenda in 2017; indeed their effects will become clearer as the year unfolds.

Office leasing volumes across Europe rose by around 4% in 2016 and will increase modestly in 2017 by around 2-3%. This will keep overall leasing levels at least 20% above those recorded in the post-GFC dip of 2009-13 and, with development still subdued, produce further downward pressure on vacancy rates. Markets will be increasingly supported by a growing prominence of smaller and mid-sized deals.

Big cyclical differences between markets will be a feature of 2017. In particular we will see demand differences between the UK, and especially London – where signs of late-cycle slowdown are already evident – and some of the major continental European markets.  There are two distinct sub-groups in this second category – already strong risers, such as Berlin, Stockholm and Amsterdam; and those where delayed recovery will gain traction, notably Paris but also Milan and Frankfurt.  These city differences will also be reflected in rental growth patterns over the coming year, with a background of mildly positive growth overall.

The cycle won’t be the only influence on markets though. There are issues on the corporate agenda relating to the selection, use and management of office space which will come to the fore in 2017.  Some of these are not necessarily new but, with only modest tailwinds from the economy, the focus on driving efficiency gains from corporate real estate will intensify.  Occupiers will become more activist.

Firstly, the role of technology as a source of leasing demand in its own right will continue, as will its influence on building selection, workplace change and innovation in corporate real estate processes. The impact of these trends on tenant-appeal, obsolescence profiles and value patterns will grow.

Secondly, the twin goals of talent attraction and cost-base management will drive more reshaping of corporate portfolios. With unemployment falling and the working age population effectively static, the search for key skills will widen.  Expect more focus on redistribution of mid-office functions between core and satellite locations.

Finally, with more political and regulatory uncertainty affecting sectors of the occupier market, particularly banking and tech, we expect a higher premium for flexibility. This will come about through demand for shorter leases, more frequent breaks and a growing focus on shared co-working facilities across more markets and occupier types.

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