Property Times Stockholm Offices Q Limited supply holding up rents

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1 Limited supply holding up rents 26 January 212 Contents Executive summary 1 Economic overview 2 Market overview 3 Supply 4 Demand 5 Forecasts 6 Definitions 7 Contacts 8 Author Karin Witalis Head of Research, DTZ Sweden +46 () karin.witalis@dtz.com Contacts Magali Marton Head of CEMEA Research +33 () magali.marton@dtz.com Tony McGough Global Head of Forecasting & Strategy +44 () tony.mcgough@dtz.com Hans Vrensen Global Head of Research +44 () hans.vrensen@dtz.com Over the past year, the Swedish economy performed stronger than most other developed countries. GDP growth in 211 is estimated at 4.3%. 212 is forecast to record a weak.8% growth before returning to a long term growth trend of 2.2% in 213. According to recent employment statistics, the rise in employment is now levelling out and the falling trend in the unemployment rate appears to be coming to an end. Over the next two years, employment growth is not expected to be more than.1% per year. The total supply pipeline for the next two years totals 112, sq m of office space. This is quite modest in a historic perspective and corresponds to less than 1% of the total existing office stock in Greater Stockholm. Due to the softening demand, the overall vacancy rate in Greater Stockholm is forecast to begin to increase this year. This will be the case in all submarkets except for the CBD, where availability most likely will continue to decrease in the year to come. However, in 213 the CBD vacancy rate is forecast to bottom out at just below 6% before starting to move out. At present, the prime office rent level is estimated at SEK 4,6 ( 52) per sq m per year, which is unchanged from the second quarter 211. We forecast prime rents to continue to rise somewhat over the next few years. However, in secondary locations and in outdated buildings, we expect rents to remain stable or possibly decline. In order to capture occupier demand it will be crucial for property owners to actively manage and upgrade the quality of their buildings. Figure 1 Stockholm prime office rent SEK/sqm,yr Exchange rate, 25 January 212: EUR = SEK 8.85 Stockholm CBD Forecast 1

2 23M4 23M1 24M4 24M1 25M4 25M1 26M4 26M1 27M4 27M1 28M4 28M1 29M4 29M1 21M4 21M1 211M4 211M Q1 25 Q3 26 Q1 26 Q3 27 Q1 27 Q3 28 Q1 28 Q3 29 Q1 29 Q3 21 Q1 21 Q3 211 Q1 211 Q3 Economic overview Sweden s economy forecast to bottom out in 212. Figure 2 GDP growth Sweden, % 8 Over the past year, the Swedish economy performed stronger than most other developed countries. In 21 Swedish GDP recorded a high growth of 5.6%, on the back of a sharp decline the previous year (-5.3%). On a quarterly basis, growth peaked in Q4 21 at 7.7% and recorded 4.6% in Q3 211 (Figure 2). The consensus view for the full year 211 is 4.3%. In 212 growth is forecast to record a weak.8% expansion before returning to a long term growth trend of 2.2% in According to employment statistics released in November, the rise in employment is now levelling out and the falling trend in the unemployment rate appears to be coming to an end (seasonally adjusted data). In 211, total employment is estimated to have increased by 2.1%. Over the next two years, employment growth is not expected at more than.1% per year (Figure 3). At present, sentiment is weak across all sectors of the Swedish industry. The confidence indicator for the private service sectors, i.e. the office occupiers, has fallen by 39 points since the peak in February 211 and currently stands at 1. However, the fact that the overall business sentiment indicator, as well as the indicator for future employment plans, has not flipped over to negative territory can be positively interpreted as a possibility for growing demand for office space, although one would not expect it to be particularly strong (Figure 4). Source: Statistics Sweden Figure 3 Employment growth Sweden, % Source: Statistics Sweden, Consensus forecast Figure 4 Business Tendency Survey, OIS Confidence indicator, sa Exp. no. of emloyees, sa Source: NIER 2

3 Market overview With approximately 11.4 million sq m of office space, the office market in Greater Stockholm is the largest in the Nordics. Approximately 1.9 million sq m, or 17% of the stock, is located in the Central Business District. Central Business District (CBD) The CBD is the most attractive office location in Stockholm, characterised by high quality offices, an extensive retail offer, and excellent public transport connections. Over the last decade the CBD has gradually expanded to the west, towards the central station. The office stock in this area has recently been upgraded and enlarged with a number of new buildings. Rest of Inner City (excl CBD) The office stock in the inner city (excluding the CBD) totals 3.8 million sq m and is quite mixed in terms of standard. Key office hubs include Fridhemsplan, Västra Kungsholmen, Slussen/Medborgarplatsen, Skanstull, Hornstull and Norrtull. Outside the Inner City there are a number of relatively large suburban office markets (see inset map). Adjacent suburbs (D,E,F) Just outside the Inner City border there are three office hubs; Alvik in the west, Marievik in south west and Globen in the south. These areas are growing in popularity as Stockholm continues to expand. Solna and Sundbyberg (C,B) The office market in Solna/Sundbyberg can be divided into six submarkets: Frösunda, Solna Strand, Solna Centrum, Solna Business Park, Solna Station and Sundbyberg Centrum. The office stock in Solna/Sundbyberg comprises 1.6 million sq m. Kista (A) The submarket Kista is located about 1 km north of Stockholm CBD. It is known as the ICT cluster of Stockholm. The office stock in Kista is gradually being upgraded into modern standard and totals approximately 9, sq m. 3

4 Supply The supply pipeline is limited but volumes can rapidly change. Last year, 42, sq m of new office space was completed in the Stockholm region. This is significantly lower than the average of 125, sq m per year over the period Looking forward, new construction activity is set to be stagnant. Due to the financial crisis most office projects previously planned for 212 have been postponed and currently only 52, sq m is expected to enter the market this year. In 213, an estimated 6, sq m of new office space will be completed, while there is a larger pipeline of projects preliminary planned or set for completion during 214. The total supply pipeline for the next two years totals 112, sq m of office space. This is quite modest in a historic perspective and corresponds to less than 1% of the total existing office stock in Greater Stockholm (Figure 5). The vacancy rate in Greater Stockholm peaked in Q2 21 at nearly 13%, and has come down ever since. Currently, 11.5% of the office space in Greater Stockholm is vacant. Given the lack of developments, the CBD vacancy rate has come down from 7% to 6% over the last 12 months. Most of the vacant space is found in older buildings in less attractive locations (Figure 6). Examples of new construction projects due for completion in 212 and 213 include Klövern s Isafjord 1 (27,3 sqm) in Kista, Fabege s Uarda 5 (43, sq m) in Frösunda, Vasakronan s Svea Artilleri 14 (6,6 sq m) in the outskirts of the Inner City and Atrium Ljungberg s development of Intrum Justitia s new head quarter (7,1 sq m) in Sickla (Sicklaön 83:22). Figure 5 Office development pipeline, Stockholm Sq m Figure 6 Vacancy Rate, Stockholm sub markets, Q4 211 % CBD Rest Inner City Kista Solna/Sundb. Adj. suburbs 4

5 Q3-8 Q4-8 Q1-9 Q2-9 Q3-9 Q4-9 Q1-1 Q2-1 Q3-1 Q4-1 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Demand Occupier demand exists for high quality premises. According to DTZ s latest Property Investor Confidence Index for Q1 212, investors have become less positive about future demand for office space. Since the peak in mid-211 when 1% of the respondents expected demand to improve, sentiment has weakened quite significantly. According to our latest survey conducted in late 211, the group of respondents expecting demand to improve represents only 8%. A majority of 72% of respondents believe demand will remain stable in the short term while 2% think demand will shrink. The index value has now moved down into negative territory for the first time in two years (Figure 7). Occupier demand is currently strongest for modern, efficient space in attractive locations near public transport hubs, whereas it is much weaker for older premises in poorer locations. Figure 8 shows a selection of office leases in the CBD starting in 211 and Q The size of the bubble reflects the size of the lease (sq m). Worth noticing is that relatively large premises have been let on high rent levels. Figure 7 Short term future office demand, index series 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% -1% Improve Worsen Figure 8 Examples of leasing transactions, Stockholm CBD SEK per sq m pa Key leasing transactions in the CBD in Q4 211 include Ongame Service s lease of 4, sq m in Klarabergshuset (Blekholmen 5), owned by Fortin Properties. Also in the CBD, Restate has taken nearly 6 sq m in Olov Lindgren s property Polacken 25 in Kungsgatan and R/GA has let 312 sq m in Mengus property Core Stockholm (Järnplåten 29) Contract length In the Rest of Inner City, River Cresco and Norman & Co have let 625 and 266 sq m respectively in AMF Fastigheter s property Trumman in Rosenlundsgatan. Also in Södermalm Infopaq AB has taken 1,76 sq m in Diligentia s Ringvägen 1 (Åkern). Outside the inner city, UC has let 4, sq m from Aberdeen Asset Management in Marievik. UC has an option for an additional 8 sq m in the building. Office Depot has taken 1,9 sq m on a 5 year contract in Mengus Solna One (Solna Hilton 1). 5

6 Forecasts Prime rents forecast to rise only moderately in 212. At present, the prime office rent level is estimated at SEK 4,6 ( 52) per sq m per year, which is unchanged from the second quarter 211 (Figure 1). Figure 9 Vacancy Rate, Greater Stockholm % This rent level is achieved for premises larger than 5 sq m in prime buildings located in the CBD. In secondary locations, the rent level is lower and more stable over time compared to prime. Secondary rents have remained unchanged in most locations this quarter. In the inner city of Stockholm secondary rents ranges between SEK 2,-2,9 ( ) per sq m per year Our base case forecasts assume that 212 will be the bottom year in terms of economic expansion and that the economy will return to a long term growth trend in 213. However, downside risks are significant and therefore negative scenarios have to be considered alongside the base case picture. Due to the softening demand, the overall vacancy rate in Greater Stockholm should begin to creep up this year. We forecast the overall vacancy rate to rise from 11.5% to 12.% in one year s time, and to increase somewhat further in the medium term (Figure 9). Figure 1 Stockholm prime office rent SEK/sqm,yr In the CBD, on the contrary, availability will most likely continue to shrink over the next 12 months. However, in 213 we forecast the CBD vacancy rate to bottom out at just below 6% before starting to move out. 2 1 Rising availability is likely to have an overall dampening effect on rental growth, although all parts of the market will not be affected equally. We forecast prime CBD rents to continue to rise somewhat over the forecasting period (Figure 1). In secondary locations and in outdated buildings, however, we expect rents to remain stable or possibly decline. Stockholm CBD Forecast In order to capture occupier demand it will be crucial for property owners to actively manage and upgrade the quality of their buildings. 6

7 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 a residential use. New supply 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 rent 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 5 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 7

8 Contacts Agneta Jacobsson Managing Director +46 () Karin Witalis Head of Research +46 () Anna Nordin Head of Occupier Services +46 () Patrik Kallenvret Deputy Managing Director +46 () Sven Erik Hugosson Head of Valuation +46 () Gabrielle Hemmerlind Acting Head of Agency +46 () Fredrik Lidjan Head of Capital Markets +46 () 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. 8