DTZ Research. Property Times Stockholm Offices Q Demand is beginning to return. 14 November Contents. Author. Contacts

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1 Property Times Demand is beginning to return 14 November 2013 Contents Economic Overview 2 Demand 3 Supply 4 Outlook 5 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 Hans Vrensen Global Head of Research + 44 (0) hans.vrensen@dtz.com Recent data indicate that the Swedish economy has entered a more stable phase this autumn. Growth is driven primarily by domestic demand, spurred by low interest rates and a strong housing market. The consensus of economic forecasters expects GDP to growth by 1.4% in 2013 after 0.8% last year, before a pick-up to 2.7% in Employment in office intensive sectors in Stockholm was weak in Q and 2013, but a positive trend returned in Q2 and Q3 with 1.7% and 2.6% growth respectively. At present office demand is rather muted with lengthy decision making processes. Several companies move offices because they need to reduce their space. The office supply pipeline for the next three years corresponds to 3.7% of the total existing office stock in Greater Stockholm. When withdrawing office space that is being turned into other use, the net new supply in is cut back to 2.7% of the existing stock. Normally there is a lag before general economic trends reach the occupier market and affect the demand side. Recent encouraging OIS jobs statistics suggest that demand should continue to recover in the short term and gather more strength next year. In the short term though we believe rental uplifts will be limited. However, thanks to a narrow supply pipeline and a vacancy rate that is also fairly low, at least in attractive locations, we expect prime rents to be able to hold up better than would otherwise be the case. The medium term outlook for rental growth for Stockholm is good. Figure 1 Prime office rent Stockholm CBD, SEK/sq m/year DTZ Research

2 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q (f) 2016(f) Economic Overview Recent data indicate that the Swedish economy has entered a more stable phase this autumn. The Purchasing Managers Index (Silf/Swedbank) contracted from 56 in September to 52 in October signalling that the economy has begun to stabilise. Yet the index remains above 50 indicating that the economy is still expanding. The Economic Tendency Indicator from NIER climbed from 98.2 in September to in October. The indicator is now above the historical average. Figure 2 GDP growth Sweden, annual growth 8% 6% 4% 2% -2% Sweden's GDP rose by a weak 0.1% in the second quarter compared to the same quarter Growth is driven primarily by domestic demand, spurred by low interest rates and a strong housing market. -4% -6% The consensus of economic forecasters expects GDP to growth by 1.4% in 2013 after 0.8% last year, before a pickup to 2.7% in A relatively weak growth rate in both 2012 and 2013 means that the unemployment rate is likely to remain stuck on a relatively high level in the years to come. Source: Statistics Sweden, Consensus Forecast Figure 3 Population growth, Stockholm 3, 2,5% As seen in figure 3 Stockholm s population is growing rapidly, caused by a positive net birth rate and a strong inflow of people from other parts of Sweden and other countries. The number of inhabitants in Stockholm County grew by people in 2012, which is nearly half of the population growth in entire Sweden. Over the past few years Stockholm Municipality has grown by roughly 10,000 people per year and the forecast is for the population to reach one million by 2030 (Stockholm Stad). The population growth is of vital importance for Stockholm s economic development and the creation of new jobs. 2, 1,5% 1, 0,5% 0, -0,5% Rest of Stockholm County Source: Statistics Sweden, USK Stockholm Municipality In Q employment in office intensive sectors rose by 2.6% in Stockholm County, compared to 1.7% in Sweden (SCB, DTZ Research). In September the unemployment rate was 7. in Stockholm County, compared to 8.5% in Sweden (Arbetsförmedlingen). The confidence indicator for the private service sector in Sweden declined by three points in October but is still three points above the historic average. The regional OIS index for Stockholm is now just above the national index (figure 4). Service firms are relatively optimistic about the coming months and expect demand for their services to continue to pick up. The employment expectations improved in Q3 as the indicator advanced from -12 to 3 meaning that firms are now planning to take on more staff. Figure 4 Business Tendency Survey, OIS, Sweden vs Stockholm Stockholm Sweden Source: NIER Property Times 2

3 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Q Q 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 intensive sectors in Stockholm has held up pretty well during the economic downturn starting in Negative growth was recorded only during two quarters in More recently though, growth proved to be weak in Q and came down further in Q However, a positive trend returned in Q2 and Q3 with 1.7% and 2.6% growth respectively in the office intensive sectors. At present office demand is rather muted with lengthy decision making processes. Several companies move offices because they need to reduce their space. However, the recovering OIS jobs statistics suggests that office demand should soon begin to strengthen. This view is being mirrored in DTZ s Property Investor Confidence Index for Q where the share of respondents with a positive view of office demand going forward has gone from 8% last quarter to 25% today (figure 6). Those with a negative view represent 3%; down from 7% last quarter. Still, the vast majority (72%) expect demand to remain unchanged in Q The index has advanced from 1 to 22. Among occupiers there is a strong polarisation in favour of modern office space in attractive locations over more secondary space. Proximity to public transport is another important criterion for most occupiers. Demand is somewhat stronger for smaller and larger offices compared to medium size premises. Figure 5 OIS Employment Greater Stockholm, annual growth 1 8% 6% 4% 2% -2% Source: Statistics Sweden, DTZ Research Figure 6 Investor Survey, Demand for office space A growing number of companies are implementing the concept of activity-based working (ABW). This model is centred on the idea that there should be no permanently assigned work-points for staff members or senior leadership. Instead, an ABW office has a variety of different activity areas that allow employees to conduct specific tasks including learning, focusing, collaborating and socialising. Abolishing the idea of individual desks, it is possible to reduce the amount of office space required by up to 3. However, cost savings shouldn t be the primary motivation for ABW. Driving forces may instead be; flexibility in where and how the employees choose to work, improved work environment, increased staff collaboration, productivity and efficiency. However, ABW may not be suitable for all types of companies. For very small organisations or jobs that do not require different types of work-points, ABW may just be a waste time and effort. -12 Source: DTZ Property Investor Confidence Index Q Figure 7 Improve Worsen Prime office rent Stockholm CBD, SEK/sq m/year Thanks to stable demand for prime offices and low availability of such high quality space, prime office rents in Stockholm have risen to SEK 4,850 per sq m per year (figure 7). 0 Property Times 3

4 2005 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q (f) 2015(f) Supply Last year 93,000 sq m of offices were completed in Stockholm. This was more than double the volume that was completed in 2011 and just below the long term average of 97,000 sq m per year over the period Figure 8 Office development Greater Stockholm, sq m In 2013 a further 151,630 sq m of office space will be completed, and in construction activity will continue with an estimated 266,000 sq m of office space coming out on the market these years (figure 8). Approximately 35,000 sq m of office space will be completed in the CBD in The total supply pipeline for the next three years corresponds to 3.7% of the total existing office stock in Greater Stockholm. 0 Approximately 24,000 sq m were added to the Greater Stockholm market in Q At the same time 4,000 sq m of office space were turned into other use. In Q4 five schemes are scheduled for completion and they will add 79,000 sq m of offices to the market. More than 9 of this new space is pre let. Overall, speculative construction is limited and thus a shortage of grade-a space in attractive locations is already emerging. Figure 9 Greater Stockholm vacancy rate 16% 12% 8% The great inflow of people to Stockholm is causing a massive demand for housing. As a result 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. Last year 104,000 sq m of office space was taken off the market and in another 108,000 sq m of offices will disappear. When taking this volume into account, the net new supply in is cut back to 2.7% of the existing stock. 4% Figure 10 Stockholm CBD vacancy rate 16% The vacancy rate in Greater Stockholm peaked in Q at nearly 13%, before levelling down to 10.8% in Q Since then the overall vacancy rate has increased somewhat and just recently come down again to a level below 12%. 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 4%. 12% 8% 4% Over the next few years a number of large scale office occupiers will relocate out from the CBD. Although some of the left space will be converted into other use, and the rest over time will be mopped up by pent-up demand, the CBD vacancy rate should, over a period, increase quite markedly. Property Times 4

5 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Outlook Employment in office incentive sectors in Stockholm has held up pretty well during the economic downturn starting in Growth was weak in Q and came down further in Q1 2013, but picked up in Q2 and Q The Swedish economy is expected to continue to recover this year and produce a 1.4% growth over the year and further 2.7% in There is normally a lag before general economic trends reach the occupier market and have an effect on the demand side. Recent encouraging OIS jobs statistics would suggest that demand should gather more strength in Figure 11 One year prime rent view, share of respondents In the short term though we believe rental uplifts will be limited. Landlords are aware of the fact that a number of large scale occupiers, including Swedbank and the Swedish Social Insurance Agency, will be relocating from the inner city, and that this will have an effect on vacancy rates. Although the general view is for this centrally located office space to be quickly absorbed by pent-up demand, rising vacancy rates should have a dampening effect on short term rental growth. The medium term outlook for rental growth for Stockholm is good. This is partly because, unlike previous cycles, the level of development was being cut down as a direct result of the financial crisis. Provided no new macro shocks, demand will return and when it does the vacancy rate should quicker come down to a level that spurs rental growth, compared to previous cycles. Construction activity will return over the coming years, but since a fairly large amount of office space is taken off the market, the net new supply in the next few years remains low. 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 are expected to remain stable in the very short term. Looking one year ahead however 57% of the respondents expect prime rents to increase and no one forecast them to decline. Half a year ago 29% expected rents to increase in the year to come and 7% thought they would fall (figure 11). Increasing Source: SEPREF, the Swedish Property Research Forum Decreasing 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. 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 Obligations of Occupation Americas Obligations of Occupation Asia Pacific Obligations of Occupation EMEA Office Occupier Review Asia Pacific Office Occupier Review Europe Motorways of the Sea - January 2013 The TMT Sector - October 2012 The European Insurance Sector - June 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. 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, North America 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, UK and China. In addition we publish an annual outlook report. Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. Insight Net Debt Funding Gap - June 2013 China Insight - The Healthcare Sector - April 2013 Insight City of London occupier demand - April 2013 European Sustainability Guide - April 2013 Great Wall of Money - March 2013 European Retail Guide - Shopping Centres - March 2013 China Property Market Sentiment Survey - January 2013 India Special Economic Zones - December 2012 Singapore Executive Condominiums - December 2012 UK Secondary market pricing - December 2012 Singapore office demand - December 2012 China Ecommerce & Logistics - November 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. 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 DTZ Research Contacts Global Head of Research Hans Vrensen Phone: +44 (0) Global Head of Forecasting Fergus Hicks Phone: +44 (0) Head of Strategy Research Nigel Almond Phone: +44 (0) Head of Americas Research John Wickes Phone: Head of CEMEA Research Magali Marton Phone: magali.marton@dtz.com Head of North Asia Research Andrew Ness Phone: andrew.ness@dtz.com Head of South East Asia and Australia New Zealand Research Dominic Brown Phone: +61 (0) dominic.brown@dtz.com Head of Research, Sweden Karin Witalis Phone: +46 (0) karin.witalis@dtz.com DTZ Business Contacts Chief Executive, EMEA John Forrester Phone: +44 (0) john.forrester@dtz.com Managing Director Agneta Jacobsson Phone: +46 (0) agneta.jacobsson@dtz.com Head of Capital Markets Fredrik Lidjan Phone: +46 (0) fredrik.lidjan@dtz.com Head of Valuation Sven Erik Hugosson Phone: +46 (0) svenerik.hugosson@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