Office demand polarization takes hold
Share of Grade A leasing up by 10% versus pre-pandemic levels
- Alex Colpaert
A clear flight to quality is emerging as more of Europe’s companies choose Grade A offices for their workforces.
Grade A leasing accounts for almost 10% more of total leasing volumes when compared with pre-pandemic levels, according to new JLL data.
It’s a trend that aligns with anecdotal evidence from corporate clients, who often indicate they may not need the same amount of space but focus their requirements instead on a certain type of space. Among others, Cisco, for example, recently exited its lease outside of central Paris, reducing its footprint, but opting for best-in-class space and location at a new central business district headquarters in Rue Washington.
Office space that aligns with company sustainability targets, that supports the physical and mental health and wellbeing of their staff, or supports the digital infrastructure, are now clearly held in higher esteem. Successfully adapting to hybrid working and importantly, providing amenities and unique experiences that draw people back to the office are key factors.
Bifurcation in European office demand
More companies now seem to be ‘fishing in the same pond’ when it comes to new office requirements. It’s not necessarily a new phenomenon; upgrading space at the end of a lease is common practice. However, what we increasingly see is that companies don’t renew or expand their ‘capacity space’. Office space with rows and rows of desks with the sole purpose of ‘providing a space to work for every worker’ isn’t always required in a new world of hybrid working.
With some companies looking to ditch some of their ‘capacity’ space, older offices will face even faster obsolescence.
A growing lack of premium office space, intensified by a hamstringed development cycle, will push rental growth up quickly for best-in-class space while rents for Grade B and C offices could drop even further.
The proof is in this year’s H1 numbers, with significant market headwinds not holding back rental growth for Europe’s offices. Prime rental growth for the region came to 3.9% y-o-y in Q2, the highest level since the peak of the previous cycle back in 2019. The European average hides more exceptional growth numbers such as Dublin (9.3%), Berlin (7.9%), Milan (8.3%) and Amsterdam (5.6%). When taking into account rent free periods and other incentives, rental growth was much higher, Amsterdam seeing net effective rents increase by 9.7% over the year.
The signs are that those leasing choices being made by companies are now filtering through to create an increasingly polarized leasing market.
To hear more on rental growth and Grade A leasing please click below to watch the first episode of Office Spotlight, is a video series, led by Alex Colpaert, Head of EMEA Office Research which engages with key players across the sector who provide key insights into market trends and insights.
In this edition Alex speaks with Marie-Laure De Sousa, Head of EMEA Office Leasing, on current and future rental growth across Europe. Marie-Laure has been with JLL for over seven years and leads the Leasing Advisory department in France covering Offices, Retail, Industrial and Logistics. As an active member of the Executive Committee, EMEA and Global Leasing Boards, there is not much Marie-Laure does not know about the rental market.