Analysts at UBS Asset Management see office rents falling in most European markets as economies move through the coronavirus crisis – but add that weak supply should mean the drops are not as steep as during the financial crisis of a decade ago.
With a “V”-shaped economic recovery unlikely, the team said in a new note, a more realistic (“but sill optimistic”) possibility is one that looks like the “Nike swoosh” logo – “the sharp contraction but a more gradual recovery coming through starting next year”.
“If we take this as a baseline, we would still be expecting prime rents to fall across the vast majority of European markets this year,” UBS’s note said.
“Generally the negative impact on sentiment and demand will force landlords to be more accommodative, even on the better quality space in tight markets,” UBS added. “But the extent of the declines should be lower than in the [Great Financial Crisis] and dotcom crash, where aggregate euro zone prime rents fell by 8% and 15% respectively.
“This is the result of the modest level of existing supply, weak future supply pipeline coming through and the assumption that we avoid mass scale insolvencies and the worst of the potential job losses in the coming years.”
European markets enter this downturn with “relative strength” on the supply side, UBS said, with vacancy rates in most at or near all-time lows. But there will now be several challenges.
“Once an economic downturn hits, vacancy rises from two sources,” UBS said. “Initially, new office schemes which started during the strong economic growth years complete. Against a weak demand backdrop these take longer to be leased, and add to vacancy levels. And then as the economic slowdown starts to bite, second-hand space starts to be released from occupiers through both full-scale insolvencies and, more commonly, job consolidations.”
The success of working from home initiatives during country lockdowns adds another driver for rising vacancy rates, the firm said.
“If productivity can be relatively well maintained with virtually 100% of staff working from home all the time, the resistance to allowing staff to work remotely for one or two days a week will be harder to justify,” UBS said. “And corporate real estate teams will be seeing this as an easy opportunity to reduce their floorspace, and costs, at a time when they are likely to be coming under pressure.”
Analysts at RBC Capital Markets recently predicted steep falls in prime office rents in London’s Square Mile and West End.
However, Cushman & Wakefield UK chairman Digby Flower has argued otherwise, writing in EG that “the London market’s strong fundamentals will mitigate against any severe contraction in prime headline rents this year”.
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