Office

Leasing levels should pick up slowly in 2024, reflecting weak economic growth and the shift towards new workplace strategies. Vacancy levels look to be nearing a peak, with high quality new space much scarcer in many cities. Even with a slight increase in development completions, most office markets are still likely to see modest increases in prime rents. 

Key Takeaways

1. Leasing volumes will likely pick up by 10% in 2024 but remain below historic norms. We anticipate employment in office-using sectors to show modest growth in 2024, and occupiers to advance their return-to-office (RTO) and workplace strategies to a point where their space needs are clearer.
2. Quality differentials will become even more apparent. The two big trends in portfolio strategy are rightsizing and quality enhancement, as occupiers act to raise the user appeal of their space and control costs. Poorer quality space will suffer higher voids and faster obsolescence, but there will be upgrading/refurbishment opportunities.
3. Vacancy rates will likely peak out in more markets. Although there may be a rise in development completions in some of the bigger markets, the flow of speculative space to the market still looks controlled. We expect most office markets to see modest growth in prime rents through 2024.

A year of slow recovery in prospect

Evolution and polarisation

The main influences on the office market in 2024 will be modest leasing growth, further evolution of occupiers’ strategies towards hybrid working, and a deepening polarisation between prime assets and the rest.

Demand picking up - slowly

After a very weak start to 2023, leasing volumes look to have picked up a little in the second half. Despite this, the full-year figure for 2023 is likely to show a drop of 15 - 20%.

Looking ahead, employment in office-using sectors should see moderately positive growth in 2024. The outlook is complicated by continued restructuring in some key sectors, notably technology, where retrenchment from earlier rapid expansion will persist.

Overall, this points towards some rise in leasing demand, probably of around 10%, which would bring leasing levels back in line with 2021, but still below pre-pandemic levels.

Occupier strategies a growing driver of markets

Large occupiers will be progressing their workplace strategies across a number of fronts: aiming to raise utilisation levels, rightsize portfolios, and offer quality space as part of the employee value proposition - but also tighten cost controls.

These are steps towards occupiers being able to assess their future space needs more clearly. In the short term, we see these as net negatives on balance, as office attendance picks up only slowly and cost considerations dominate, hence our moderate growth expectation for leasing in 2024.

Figure 7: Office Leasing Volumes, Europe, 2015-24

Source: CBRE Research

Figure 8: Company Aspirations for Future Workplace Policy

Source: CBRE Research, European Office Occupier Sentiment Survey 2023

Quality differences expected to deepen

One clear consequence is that differences between the best buildings and commodity space will likely expand through a sustained flight-to-quality. Occupier decision-making is now more motivated by factors like transport accessibility, proximity to retail, leisure, hospitality and public realm and - increasingly – sustainability.

Locations and buildings that display these features or that can be repositioned, will outperform in terms of user appeal, void levels and ultimately value. Evidence of these impacts is already accumulating: the vacancy rate spread between CBD markets and overall city averages is widening in many places including Paris, Madrid, Stockholm and Amsterdam, and is likely to expand further.

Demand for flex space to increase

Corporates’ growing need for quality and agility also plays into the flex market, and we expect to see increased use of flex space within portfolios. The European flex market is still immature; we see scope for further evolution in 2024 as more occupiers become comfortable with an improving offer.

Vacancy peaking out – Development activity to remain muted

The overall vacancy rate has been rising since early 2020 and continued to do so through 2023, but there are signs of this nearing a peak in 2024. Some markets including Warsaw, Milan, and Madrid are already seeing vacancy stabilising or falling and more will follow, including major cities such as London, Paris, and Munich.

Development activity remains at generally low levels, though is likely to rise above recent levels in Western Europe, notably in Paris, Berlin, and Madrid, and up by around 10% overall. As the proportion of speculative space due for completion in the next two years is barely above 50%, occupier choice for new built space will remain tight.

Modest rental growth expected

Given all this, where do we expect rents to go in 2024? So far, rents at the prime end of the market have been mostly resilient in the face of subdued demand levels, with the CBRE prime office rent index for Europe up by 4.9% in the year to Q3 2023. We expect most office markets to see at least modest growth, typically 2-3%, in prime rents through 2024, with markets such as London, Barcelona, Milan, and Amsterdam seeing the greatest increases.

Figure 9: Office Development Completions Europe, 2015-25

Source: CBRE Research