The unemployment rate is trending below pre-GFC levels and the composition of supply and demand is manifestly different than in 2008. This makes it increasingly challenging for companies to attract talent. Shortages of skilled workers – particularly in knowledge-intensive industries such as the tech sector – continue to fuel competition for the highest quality office space in the best locations. Companies that want office space that ticks all the boxes have to pay up as desirable space is becoming scarce. Furthermore, companies realise that in order to compete, they need to attract and retain skilled primarily young, people who are unlikely to relish traditional office environments. There is great variety in the adoption of flexible offices across Europe. Amsterdam and London are ahead of the pack where flexible offices represent about 5% of the stock. German cities have lower exposure, but particularly cities such as Berlin are catching up fast.
A renewed low interest rate environment and expectations for further monetary easing has bolstered European commercial property investment, with offices continuing to attract capital from myriad sources. After a lacklustre start to 2019, European office investment bounced back with a flurry of large transactions, particularly in Paris. From a pricing perspective, the European average office yield witnessed its sharpest quarterly fall (-10bps) for nearly two years at the end of Q3 2019—thanks in part to the renewed monetary stimulus from Central Banks. At market level, yields were flat in Q3 in most cities, but they have continued to track down in the top German cities and in Paris. Looking ahead, we expect yields to remain low for longer, especially in core markets. In the case of flex space, limited exposure to date has had low impact on yields. While we estimate that flexible space could account for upwards of 30% of large multi-tenanted offices by 2030, investors need to ensure that any commercial portfolio is diverse enough to withstand any changes to workplace trends.