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CBRE GROUP

CBRE Group, Inc. is the world’s largest commercial real estate services and investment firm, with 2018 revenues of $21.3 billion and more than 90,000 employees (excluding affiliate offices). CBRE has been included in the Fortune 500 since 2008, ranking #146 in 2019. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

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The Real Estate Investments division is led by
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BLOGS

Regularly released content on the state of the real estate and infrastructure industry are produced by our subject matter experts and shared on their blogs. A selection of them can be found below.

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EUROPE WATCH

Germany narrowly avoided a technical recession in Q3, indicating the European economy is seemingly back to normal. Although economic output remains subdued by a slowdown in manufacturing, this has yet to negatively impact the services sector. This is a positive for offices, although slowing employment gains will dampen performance for the sector. Over the last few weeks, the office sector has repeatedly captured headlines stressing turmoil in flexible offices. Reminiscent of a period of oversupply following the dot-com bubble, this has raised concerns about the long-term viability of the business model of flexible office operators and the impact that this could have on office occupancy rates in case of a downturn. While the feasibility of the business model remains up for debate, worries over the extent to which this is a systemic risk to the office market are largely overblown. Estimates vary, but according to the major international real estate advisors, the proportion of the European office stock occupied by flex offices is between 1% and 2%. No immediate cause for alarm, but plenty of reason for this month’s Europe Watch to take a closer look at the office sector and assess the health of its supply and demand dynamics.

OFFICE SPACE IS KEY TO ATTRACTING TOP TALENT

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.

DECEMBER 2019

3,702.58

2.7%

Euro Stoxx 50

0.00%

=

ECB Policy Rate

-0.360%

4 bps

10-yr. German Bond

$62.43

3.7%

Brent Crude

Data points through end of November 2019. Change represents month-over-month change.

EUROZONE EMPLOYMENT VS. OFFICE RENT INDEX
PRINCIPAL CONTRIBUTORS:
 
Alimou Bah
Raphael Rietema
Karine Woodford
NEW OFFICE DEVELOPMENT IS WELL BALANCED

Europe’s office market fundamentals remain healthy in most cities despite a slowing economic environment. Demand for office space is holding strong, with leasing volumes continuing to increase in key markets, as well as in some secondary cities. Business sentiment has been unfettered by cooling economic activity, and London is a good example of resilience. Indeed, despite the uncertainty around potential Brexit outcomes and the commensurate weakness of the UK economy, office demand has been robust in London. The rising influence of flexible office operators has undoubtedly helped to boost leasing volumes across many European markets including London, Paris and Brussels. The lack of supply of good quality space in core markets is also a contributing factor to the healthy leasing market, as occupiers (both traditional and serviced office operators) vie to snap up the limited prime space available in top locations.

OFFICE COMPLETIONS BY MARKET &
AGGREGATE LEVEL (000s SQM)

Source: CBRE

VACANCY ALMOST NONEXISTENT IN SOME MARKETS

Office vacancies are trending downwards thanks to the combination of positive demand and limited new completions. Vacancy rates reached new lows in several markets such as Paris CBD (1.1%), Berlin (1.5%), Amsterdam (1.5%) and Munich (2.9%). Although new office development has gradually picked up in supply-starved markets, the risk of oversupply experienced in previous market cycles appears low in the current environment. That said, a handful of markets such as Dublin and Warsaw have responded quite aggressively to the shortage of new space, with large pipelines – these markets may be vulnerable to the risk of oversupply.

VACANCY RATES & 5-YR PRIME RENT GROWTH OF
EUROPEAN OFFICE MARKETS (%, 14Q3 VS. 19Q3)

Source: CBRE

HEALTHY RENTAL GROWTH IN MANY CITIES

Against the backdrop of falling vacancies and a limited development pipeline, prime rents are reaping the rewards. The European aggregate prime office rent increased by 3.5% y/y on average, driven by strong rental increases in core markets where the shortage of Grade A space is the greatest. Furthermore, rental growth in European offices is becoming more widespread as more markets are moving from stable rents to growth. More interestingly, there are a number of markets that are experiencing double-digit rental growth, including Hamburg (12.7%), Berlin (12.3%), and Lisbon (11.9%). Going forward, we expect to see continued rental growth in the office sector across Europe, and that is expected to boost returns in the sector as yield compression fades out.

EMEA OFFICE MARKET RENT GROWTH (Y/Y),
SPLIT BY GROWTH REGIONS

Source: CBRE Research, compiled by CBRE Global Investors based on 88 office markets across Europe

LOW YIELDS NOT DETERRING INVESTORS

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.

EUex.UK-15 PRIME VALUATION YIELDS,
BASIS POINT Q/Q CHANGE, LATEST=Q3 2019

Source: CBRE

Related Content

Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

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