DTZ Research. Property Times Stockholm Offices Q Weak fundamentals cast a shadow on outlook. 8 November Contents. Author.

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1 Property Times Weak fundamentals cast a shadow on outlook 8 November 2012 Contents Economic Overview 2 Demand 3 Supply 4 Outlook 5 Definitions 6 Author Karin Witalis Head of Research + 46 (0) karin.witalis@dtz.com Contacts Magali Marton Head of CEMEA Research + 33 (0) magali.marton@dtz.com Recent signs point to a slowdown in output in the period ahead, and the Swedish economy is expected to record 1.3% growth this year followed by 1. in There are signs that the unexpectedly resistant labour market is about to weaken. Stockholm has not experienced any major decline in office demand, although the general sentiment in the market has changed and risk awareness has increased. The total supply pipeline for the next three years corresponds to 2.7% of the total existing office stock in Greater Stockholm. However, when subtracting offices that are taken off the market, the net new supply in is only 1.1% of the existing stock. The vacancy rate in Greater Stockholm has begun to increase and is currently estimated at 11%. The vacancy rate in the CBD is still limited to just over. Thanks to stable demand for prime offices and low availability of such space, prime office rents have remained unchanged in Stockholm CBD at SEK 4,700 per sq m per year this quarter. Our short term forecast is for prime rents to hold up due to lack of new supply, while rents for secondary space will suffer from downward pressure. Hans Vrensen Global Head of Research + 44 (0) hans.vrensen@dtz.com Figure 1 Prime office rent, SEK per sqm per year DTZ Research

2 (f) 2014(f) Economic Overview Last year, Sweden s economy managed to avoid the worst of the problems that struck Continental Europe, and the economy grew by 3.9% over the year. This year however, the economy has been weaker, recording 1.5% and 1.3% respectively in Q1 and Q2 (y-o-y, working-day adjusted). Yet, compared to other European countries these are enviable strong numbers. According to the flash estimate, Eurozone GDP declined by 0. y-o-y in Q (s.a.). Growth in EU27 fell by 0.2% in Q2 (y-o-y, s.a.). Figure 2 GDP growth, annual growth 6% 2% Despite Sweden s relatively healthy start to the year, recent signs point to a considerable slowdown in output in the period ahead. The Economic Tendency Indicator from NIER, fell just over three points in October from 95.6 to 92.3, indicating that growth in the Swedish economy is currently weaker than normally. At the same time, slow external demand, particularly from the Eurozone, combined with a strong SEK is dampening export prospects. The Purchasing Managers Index (Silf/Swedbank) fell by 1.6 point to 43.1 in October. An index value below 50 indicates that the economy is shrinking. However, the situation is not as bad as in 2008 when the PMI reached a trough at To sum this up, the economy is expected to record 1.3% growth this year followed by 1. in 2013, before rising to 2.6% in 2014 (figure 2). -2% - -6% Source: Statistics Sweden, Consensus Forecast Figure 3 Unemployment rate, seasonally adjusted 1 6% There are signs that the unexpectedly resistant labour market is about to weaken. The unemployment rate has gradually increased from 7. in July to 7. in September (figure 3). The number of corporate bankruptcies in Sweden is increasing, according to statistics from UC. In September 501 companies were going bankrupt, which is an increase by 2 compared to the same month A larger number of people have been given notice this year compared to last year. During the first nine months this year approximately 5,000 people were given notice, which is an increase by 55% compared to the same period However, this is an increase from low levels and we are not even close to the situation in 2008 when approximately 20,000 people were given notice every month. The confidence indicator for the private service sector, i.e. the office occupiers, fell five points in October and is now 15 points below its historic average (figure 4). Demand has been weak over the past few months and OIS employment is reported to have fallen somewhat. The consensus forecast point at a fragile labour market this and next year. However, the total employment is not expected to fall but cling to the positive side. This year the total employment is expected to grow by a low 0. and in 2013 by 0.1%. The unemployment rate is forecast to reach a peak at 7.9% in 2013 before starting to slowly level down. 2% Source: Statistics Sweden Figure 4 Business Tendency Survey, Office Intensive Sectors Confidence indicator, sa Exp. no. of emloyees, sa Source: NIER, the National Institute for Economic Research Property Times 2

3 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Demand As can be seen in figure 5, employment in office incentive sectors in Stockholm has held up pretty well during the economic downturn starting in Negative growth was recorded only during two quarter in More recently, Q proved to be a weak quarter, but it was then followed by two relatively strong quarters. There is normally a lag before general economic trends reaches the occupier market and affects the demand side. In Stockholm we have not yet experienced any major decline in office demand, although the general sentiment in the market has changed and risk awareness has increased. Figure 5 OIS Employment Stockholm, annual growth 1 6% 2% -2% According to DTZ s survey Property Investor Confidence Index for Q4, conducted in September, the proportion of investors with a negative view of near term office demand has grown somewhat from 17% to 2. The share of investors with a positive view has remained fairly stable at 3% (down from ). Worth noting, however, is that still the vast majority of respondents (77%) expect demand to remain unchanged in Q The index value came down somewhat from -13 in the Q3 survey to -17 in Q4 (figure 6). Among occupiers there is a strong polarisation in favour of modern office space in attractive locations over more secondary space. Demand seems to be more and more driven by the motive of cost cutting by increasing space efficiency. The occupiers favour either inner city locations or, if they require larger offices or head quarter type buildings, certain suburban areas that have prime office stock and excellent public transportation. Companies that have relocated, or consider a move, from the inner city to out of town locations include; Swedbank, the Swedish Social Insurance Agency, the Tax Authority and SEB. Should all these plans become reality, the amount of available office space will rise quite markedly in the inner city, and in the CBD in particular. However, this left-over space will come out on the market gradually over a period of 3-4 years. Therefore the general view in the market is that demand should be able mop up this new supply, which is all attractive space, fairly quickly. Thanks to stable demand for prime offices and low availability of such space, prime office rents have remained unchanged in Stockholm at SEK 4,700 per sqm per year this quarter. Still there are rental agreements signed at higher levels, in particular in newly produced offices or in smaller premises. This is illustrated by figure 7 where the size of the bubbles reflects the size of the premises. The rent level is on the y-axis and the lease length in years on the x-axis. Source: Statistics Sweden, DTZ Research Figure 6 Development of Office Demand Property Investor Confidence Index Q Figure 7 Office lease contracts in Stockholm CBD Rent level, lease length and size of premise SEK/sqm,year Improve Worsen Property Times 3

4 1999 Q Q Q Q Q Q Q Q Q Q Q Q Q (f) 2013(f) 2014(f) Supply Since many office development projects were put on hold during the financial crisis, only 42,000 sqm of offices was completed in Greater Stockholm in This is significantly lower than the average of 125,000 sq m per year over the period This year another 50,000 sqm of office space will be completed and in construction activity will pick up speed with an estimated 255,000 sqm of office space coming out on the market these years (figure 8). The total supply pipeline for the next three years corresponds to 2.7% of the total existing office stock in Greater Stockholm. Figure 8 Office development, sqm Examples of new construction projects due for completion this year include Klövern s Isafjord 1 (27,300 sq m) in Kista, Fabege s Uarda 5 (43,000 sq m) and Uarda 1 (24,000 sq m) in Arenastaden, and Atrium Ljungberg s development of Sicklaön 83:22 (5,600 sq m) in Sickla. Speculative construction is minimal and thus a shortage of grade-a space in attractive locations is already emerging. Since demand for housing is huge in Stockholm, a fairly large amount of secondary office stock is being redeveloped into residential use. The largest projects that are currently under way include Vattenfall s former head office in Vällingby as well as Tieto Enator s previous head quarter and Ericsson s old office in Älvsjö. In total, an estimated 179,000 sqm of offices will be turned into residential use or simply demolished over the period When taking this volume into account, the net new supply in is only 1.1% of the existing stock. Figure 9 Greater Stockholm vacancy rate 16% 12% The vacancy rate in Greater Stockholm peaked in Q at nearly 13%, before levelling down to 10. in Q This quarter the overall vacancy rate has begun to increase and is currently estimated at 11%. Most of the vacant space is found in older buildings in less attractive locations, whereas the vacancy rate in the CBD is still limited to just over. Figure 10 Stockholm CBD vacancy rate 16% 12% Property Times 4

5 Q Q Q Q Q Q Q Q Q Q Outlook Based on the macroeconomic forecasts that are available today and the general view of the market, occupier demand should be fairly weak in the short term but might recover in the second half of Therefore upward pressure on vacancy rates should continue and any general rental growth cannot be expected in the short to medium term. However, while prime rents should be able to hold up due to lack of new supply, rents for secondary space will suffer from downward pressure. Figure 11 One year prime rent view, share of respondents 10 8 Rents expected to rise A similar view is seen in the latest consensus forecast from SEPREF, the Swedish Property Research Forum. According to this survey, prime office rents in Stockholm could rise somewhat in the very short term, but looking one year ahead 5 of the respondents expect prime rents to decline. The other half expect rents to remain stable (figure 11) Source: SEPREF, the Swedish Property Research Forum Rents expected to decline Property Times 5

6 Definitions Stock The office property stock is the sum of office properties which are in use and office properties standing empty at the time of analysis. The office property stock is not a static amount. Due to new-build or totally refurbished operations it increases (new supply). It decreases due to demolition, change of use or even larger refurbishments that make the space not usable for a significant amount of time. By our definition, the Greater Stockholm region is geographically equal to the office clusters within the following municipalities in Stockholm County: Stockholm, Solna, Sundbyberg, Sollentuna, Täby, Danderyd, Järfälla, Nacka, Huddinge and Haninge. Our stock figures include both prime space and secondary space. However, we don t include office space in properties that are primarily for residential use. New supply Prime rent New supply represents the total amount of floor space that has reached practical completion (including major refurbishments) as known on the last day of the quarter. This is regardless of whether or not the space is occupied or still available on the market. Common areas and service areas are not included. Prime office rent represents the top market rent that could be expected for a notional office unit of the highest quality and specification in the best location in a market. The rent quoted normally reflects prime units of over 500 sq m of lettable floor space, which excludes rents that represent a premium level paid for a small quantity of space. The Prime Rent reflects an occupational lease that is standard for the local market and would exclude service charges and property tax. Note that the rent figures in this report include heating. It should be an effective rent that factors in any rent free-periods spread over the life of the lease. It should not be a face rent that does not reflect the financial impact of any other tenant incentives like fit-out contributions, rental payments under existing leases or any other benefit provided to tenants. It represents the average mean value of all rents achieved on leasing transactions completed during the survey period, but excludes any unrepresentative deals. If there are no prime transactions during the survey period a hypothetical rent should be quoted, based on expert opinion of market conditions. The rent should not include any additional rent for non VAT registered tenants. The rent should be quoted per sq m and annum. Vacancy Vacancy represents the total floor space in existing properties, which are physically vacant, ready for occupation and being actively marketed as known on the last day of the quarter. The vacancy rate represents the total vacant floor space divided by the total stock at the survey date. Property Times 6

7 Other DTZ Research Reports Other research reports can be downloaded from These include: Occupier Perspective Updates on occupational markets from an occupier perspective, with commentary, analysis, charts and data. Global Occupancy Costs Offices 2012 Obligations of Occupation Americas 2012 Obligations of Occupation Asia Pacific 2012 Obligations of Occupation EMEA 2012 Property Times Regular updates on occupational markets from a landlord perspective, with commentary, charts, data and forecasts. Coverage includes Asia Pacific, Bangkok, Beijing, Berlin, Brisbane, Bristol, Brussels, Budapest, Central London, Chengdu, Chongqing, Dalian, Edinburgh, Europe, Frankfurt, Glasgow, Guangzhou, Hangzhou, Ho Chi Minh City, Hong Kong, India, Jakarta, Japan, Kuala Lumpur, Luxembourg, Madrid, Manchester, Melbourne, Milan, Nanjing, Newcastle, Paris, Poland, Prague, Qingdao, Rome, Seoul, Shanghai, Shenyang, Shenzhen, Singapore, Stockholm, Sydney, Taipei, Tianjin, Ukraine, Warsaw, Wuhan, Xian. Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. Great Wall of Money October 2012 Property Market Correlations October 2012 J-Reit October 2012 Rise of City Clusters September 2012 Singapore luxury condominiums September 2012 China Hongqiao Transportation Exchange June 2012 Global Debt Funding Gap May 2012 DTZ Research Data Services For more detailed data and information, the following are available for subscription. Please contact graham.bruty@dtz.com for more information. Investment Market Update Regular updates on investment market activity, with commentary, significant deals, charts, data and forecasts. Coverage includes Asia Pacific, Australia, Belgium, Czech Republic, Europe, France, Germany, Italy, Japan, Mainland China, South East Asia, Spain, Sweden, UK. Money into Property For more than 35 years, this has been DTZ's flagship research report, analysing invested stock and capital flows into real estate markets across the world. It measures the development and structure of the global investment market. Available for Global, Asia Pacific, Europe and UK. Foresight Quarterly commentary, analysis and insight into our inhouse data forecasts, including the DTZ Fair Value Index. Available for Global, Asia Pacific, Europe and UK. In addition we publish an annual outlook report. Property Market Indicators Time series of commercial and industrial market data in Asia Pacific and Europe. Real Estate Forecasts, including the DTZ Fair Value Index TM Five-year rolling forecasts of commercial and industrial markets in Asia Pacific, Europe and the USA. Investment Transaction Database Aggregated overview of investment activity in Asia Pacific and Europe. Money into Property DTZ s flagship research product for over 35 years providing capital markets data covering capital flows, size, structure, ownership, developments and trends, and findings of annual investor and lender intention surveys. Property Times 7

8 DTZ Research Contacts DTZ Sweden AB Kungsbron Stockholm Sweden Phone: +46 (0) Fax: +46 (0) Agneta Jacobsson Managing Director +46 (0) agneta.jacobsson@dtz.com Patrik Kallenvret Deputy Managing Director +46 (0) patrik.kallenvret@dtz.com Karin Witalis Head of Research +46 (0) karin.witalis@dtz.com Sven Erik Hugosson Head of Valuation +46 (0) svenerik.hugosson@dtz.com Anna Nordin Head of Occupier Services +46 (0) anna.nordin@dtz.com Malou Ekman Head of Office Agency +46 (0) malou.ekman@dtz.com Fredrik Lidjan Head of Capital Markets +46 (0) fredrik.lidjan@dtz.com DISCLAIMER This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ November Property Times 8