Market Trends of Europe Office Real Estate Industry
Offices Remain a Core Sector
Although the COVID-19 pandemic has changed the way people work, there is still a high demand for office space. According to INREV, a European organization that shares knowledge of the non-listed real estate business, offices are still a favored asset category for European investors, particularly those headquartered in France and Germany.
Prime office yields increased by an average of 19 bps during Q1 2023, led by Amsterdam (+40 bps), Frankfurt (+40 bps), and Berlin (+30 bps). On an annualized basis, yields have moved out by +90 bps, reflecting an average of -22% capital value fall since the peak in Q1 2022.
In percentage terms, the core markets of Amsterdam (-33%), Berlin (-33%), Cologne (-32%) and Paris (-31%) have observed the most significant capital value adjustments-clearly, the previously lowest-yielding markets have been most impacted by the rising debt costs. Previously higher-yielding markets, including Lisbon (-11%), Dubai (-10%), and Stockholm (-9%), have observed a smaller correction so far. Pricing currently remains resilient in Stockholm, given the CPI-linked rental agreements.
Rise in Rental Prices of Office Properties in European Cities
The office market has historically been the most popular asset type among real estate investors, accounting for 40-50% of the total investment volume. The major share of European investment activity is concentrated in Paris and London, as well as Germany's big four (Berlin, Frankfurt, Munich, and Hamburg).
The rental prices of prime office spaces per square meter varied greatly across different European cities in 2022, ranging from over 1,700 euros in London to less than 200 euros in Riga. Prime office properties typically meet specific criteria, including a good location in major commercial centers, public transport accessibility, and energy efficiency. London, England, had the most expensive prime office spaces with the West End, Marylebone, and Knightsbridge/Chelsea submarkets commanding the highest prices. Other European cities with high-end office rents included Paris, Milan, and Dublin.
Frankfurt and Munich were the German cities where rental costs for prime office real estate were the highest in the first quarter of 2023. In the capital city, Berlin, the square meter rent was 43 euros - just two euros below the rental rate in Frankfurt and Munich.
