Cost control has risen to the top of the corporate agenda and companies are acting conservatively in their approach to any capex spend. Occupiers are faced with three questions: why do we need an office, what will our business need post-Covid, and when will rents drop?

Some occupiers are analysing the merits of a ‘hub and spoke model’, which would seem more likely in Europe’s largest metropolises of Paris and London, where cross-city transportation takes more time. According to this model companies would downsize in CBDs, but also add a network of smaller offices to access talent and facilitate employee and client needs, although the additional cost burden may prove to be a stumbling point. Flexible office space could facilitate this model, offering a flexible and more cost-effective alternative. Workthere’s latest sentiment survey indicates that European flexible office enquiries have increased to 46% of pre-Covid levels, compared to 16% in April and 28% in May.

Corporates are strategically reviewing both headcounts and return to workplace strategies over a five year period and these future plans will be impacted by the current uncertainty. We expect the long-term technology-based subsectors including fintech and cybersecurity trends to create new office demand.

Some of the multinational tech occupiers have perceived Covid-19 as an opportunity to recruit workers digitally in locations they previously would have had to open an office. However, whilst they are tending to report that productivity has held surprisingly resilient during the lockdown period, creativity levels have waned and initial corporates’ remarks surrounding “the end of the office” have since eased down. Virtual meeting platforms including Teams and Zoom has siloed working practices for the younger employees who otherwise would have benefitted from the workplace interaction and Savills Office FiT survey indicates that 89% of respondents expect the office will remain a necessity post-Covid.

We expect the life sciences sector to be a source of growth in the aftermath of Covid-19, although these large lot sizes are generally slower moving. As at end July 2020, €3.2bn of private equity has targeted European headquartered life sciences companies, already in line with the previous five year annual average, as Belgium, France, Germany and Switzerland attract increased inward investment. We anticipate the investment into this sector to accelerate driving further lab requirements throughout 2020–21.

Companies with 2021/22 lease events are being forced into regears due to limited alternative options. For companies with leases expiring in 2023/24, companies are actively reviewing when is the right time to strike a deal and are likely to resume activity in September once a price point can be agreed. The direction of rents and level of incentives will be important factors to their strategy.

When is the time to strike?

Although rent incentives have traditionally moved out before any movement in headline rents, there appears to be a ‘stickiness’ in rent incentives as at end H1 2020, despite the negative implications of the lockdown on the ability of some tenants to fully meet their leasing obligations. Average European rent free periods currently stand at 9% of lease value, increasing marginally from 8.2% at the end of H1 2019. Following the lockdown period, landlords and tenants have been unable to agree on price points – only Amsterdam, London WE, London City and Warsaw have observed any marginal outward movement in incentives over the past 12 months. We anticipate that the weakening economic conditions will lead to further outward movement in incentives.

It is worth noting that lease incentives peaked at 12.8% of lease value during 2009, indicating that incentives have some further room to move out before we can expect any impact on prime headline rents. Savills data indicates that European net effective rents have in fact risen by an average of 2% over the past 12 months (see below), led by Berlin (12.6%), Hamburg (11.1%) and Paris CBD (+9.2%). London WE and La Défense, however, have observed an increase in rent-free periods and decline in headline prime rents.

An undersupply of office space across Europe has continued to apply upward pressure to prime headline rents which have grown by an average of 3% over the 12 months to Q2 2020, despite rent-free periods increasing by 1%. However, it should be noted that the majority of this headline rental growth was driven in H2 2019, with rents tending to flatten off during H1 2020.

_{Read the articles within European Offices Outlook below.}