EUROPEAN OFFICE FORECAST

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1 EUROPEAN OFFICE FORECAST A Cushman & Wakefield Research Publication JULY 15

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3 CONTENTS Executive Summary 2 Western Europe Amsterdam 6 Barcelona 7 Brussels 8 Dublin 9 Frankfurt Lisbon 11 London 12 Luxembourg 13 Madrid 14 Milan 15 Munich 16 At the time of writing, the uncertainty surrounding Greece is greater than ever, with an upcoming Greek referendum, the suspension of bail-out talks and loan default. Therefore, the likelihood of a Greek exit from the Eurozone has now increased to a probability of 50% or more, according to economic sources. Throughout this report we point to those economies where a potential Grexit may have a greater impact than others, but the economic scenario underlying our occupancy market forecasts was created at a time when the probability of Grexit was less than 50%. As such, the assumption in this report is that Greece will remain inside the Eurozone, with the alternative scenario outside the scope of this publication. Paris 17 Stockholm 18 Central & Eastern Europe Bratislava Bucharest 21 Budapest 22 Istanbul 23 Moscow 24 Prague 25 Warsaw 26 Office Data Table 27 Contacts 28 CUSHMAN & WAKEFIELD 1

4 EUROPEAN OFFICE FORECAST WHAT S IN STORE FOR EUROPEAN OFFICES In a period of high pricing in the European real estate markets, investors into office real estate will be questioning if there is enough momentum in the occupier market over the next few years to support the current pricing levels found in the core real estate markets around Europe. Indeed, in recent years, parts of Europe have experienced relatively sluggish tenant activity by historical standards occurring in stark contrast to the buoyant QE-fuelled investment market. The amount of office space completed across the main markets in Europe has risen over the last months, but with increasing amounts of pent-up demand also being satisfied, tighter supply levels will follow with a continued decline in the overall European vacancy rate expected. This is supported by the fact that only a quarter of the markets surveyed reported an increase in vacancy between now and the end of 17, and all are marginal apart from Moscow, Warsaw and Istanbul the reasons for this are explained later in the report. In addition, cities such as Brussels and Amsterdam, for example, are seeing older stock removed from the market and are being converted into alternative uses such as residential premises and hotels. Prime office space in particular will see a shortage as new, high-quality space is removed from the market with speed, bolstered by the number of occupiers continuing to upgrade their premises before supply falls further. This trend is exerting additional upward pressure on headline rental figures, spurred on by generally better economic conditions. Some markets will see the withdrawal of incentives by landlords before rental growth materialises. In addition, a larger proportion of the development pipeline has already been secured under pre-lease agreements, and with pre-let activity climbing higher, new developments will not be able to help loosen the tight vacancy of high-quality supply in many markets. In Western Europe, the outlook is generally positive: 12 out of 13 surveyed markets are anticipating some rental growth over the next 3 years, with of these likely to see rises that are higher than the -year-average. This robust regional performance highlights the building momentum of the occupier market in these Western locations. In Western Europe, 12 out of 13 surveyed markets are anticipating some rental growth over the next 3 years, with of these likely to see rises higher than the -year average. 12.0% London s City is forecast to see double digit rental growth in 15, at 12.0%. Sustaining its strong trajectory, Dublin is forecast to see the highest rental growth in Europe, at 15.4% per annum in The city experienced exceptional rental acceleration in and H1 15, supporting particularly strong growth rates in 15, although deceleration is expected to occur in While Ireland has benefited from a pick-up in economic growth and a buoyant technology sector, what s really fuelling Dublin s skyrocketing growth is the lack of development that occurred during the country s downturn. As demand returns to the market, supply cannot keep up, helping to consistently lift rental rates. The Spanish markets of Madrid and Barcelona are the 2nd and 3rd best performers, respectively, in the forecast period. Similarly to Dublin, Spain s office sector has benefited from economic recovery driving improvements in occupier demand during a period when office development activity is low, helping to fuel office rental growth. 2 CUSHMAN & WAKEFIELD

5 London is going from strength to strength as supply constraints in the City intensify. Combined with a robust occupier market, rents are climbing and are forecast to reach 12% growth in 15. Frankfurt is also performing well, with falling quality space availability and a pick-up in demand supporting positive rental growth. Paris, on the other hand, is facing some challenges as a faltering economy over the past two years has dampened business sentiment and, consequently, slowed the occupational market. Occupiers are now shelving expansion plans to focus on cost cutting and the rationalisation of their space. The only market in Western Europe not expected to have positive office rental growth over the next three years is Brussels, with a forecast rate of -0.6% per annum. This negative growth is underpinned by a below-average economic performance as well as the fact that many decentralised / peripheral areas in the city are better placed to satisfy large-scale requirements due to the wider availability of space. As such, it is likely that CBD office take-up volumes will be limited. In Central and Eastern Europe, the outlook is generally less positive than Western Europe with three out of the seven markets surveyed expecting rental falls over the next three years (Warsaw, Istanbul and Moscow). Five of those markets are forecast to have lower rental growth over the next three years compared to the ten-year average, a consequence of new net supply outstripping new net demand. Momentum in the European office occupier market continues to be positive, with the southern European economies as well as London and Stockholm the stand-out performers. However, there are also some supply-driven concerns that are beginning to emerge in certain markets, particularly Central & Eastern Europe and also London. James Young Head of EMEA Off ces, Cushman & Wakef eld EUROPEAN OFFICE RENTAL GROWTH FORECAST (15-17) 3 year forecast average year historical average 15 Prime rental growth (% pa) Dublin Barcelona Madrid Stockholm London: City Munich Paris: CBD Lisbon Frankfurt Luxembourg Amsterdam Milan Prague Budapest Bratislava Bucharest Brussels Istanbul Warsaw Moscow CUSHMAN & WAKEFIELD 3

6 EUROPEAN OFFICE FORECAST REPORT This excess development activity across the CEE region that we are forecasting may be partly a response to the increased liquidity caused by quantitative easing. As pricing is pushed higher by the weight of investment capital searching for yield, higher returning opportunities further up the risk spectrum begin to look more appealing. Given the relatively healthy economic performance of many of the CEE economies over recent years and the positive outlook, developers and investors have started construction or obtained planning on projects that total more than expected occupier demand. The amount of new supply now looks like it may slow rental growth or even lead to a decline in some locations over the next three years. The best performing CEE markets are expected to be Prague and Budapest, albeit with just 0.8% per annum rental growth each. In Prague, this modest rental growth is likely to be back loaded with stability over the next few years, while Budapest is set for some moderate increases in on the back of little rental movement seen recently. The weakest rental growth outlook is for Moscow at -7% over 15-17, where the much publicized sanctions and the low oil price have taken their toll on business prospects and occupier demand. 0.8% Budapest and Prague are forecast to see the strongest rental growth in the CEE region in 15-17, at 0.8% per annum. EUROPEAN OFFICE SUPPLY DEMAND BALANCE (15-17) 12 demand is greater than supply Western Europe Central & Eastern Europe Net absorption as % stock - 3 year forecast average Milan 2 Lisbon 3 Amsterdam 4 Paris: CBD 5 Madrid 6 Barcelona 7 Stockholm 8 Dublin 9 Munich Frankfurt Budapest 12 Brussels 13 Moscow 14 London: City 15 Bratislava 16 Luxembourg 17 Prague 18 Warsaw 19 Bucharest Istanbul supply is greater than demand Net additions as % stock - 3 year forecast average 4 CUSHMAN & WAKEFIELD

7 WESTERN EUROPE CUSHMAN & WAKEFIELD 5

8 EUROPEAN OFFICE FORECAST AMSTERDAM NETHERLANDS The Dutch economy expanded by 0.4% in Q1 15, the fourth consecutive quarter of growth but a slowdown on the final quarter of 14 (0.8%). As real wage growth has improved, consumer confidence has picked-up, which alongside a positive net export trend is providing a boost to economic performance prospects. Growth is expected to be 1.8% in 15, up from 0.9% in 14, before dropping back slightly to 1.5% per annum over The Amsterdam economy emerged from two years of contraction in 14 registering growth of 1.2%. Improvements in financial and business services employment are forecast, with growth expected to average 1.6% over the next three years having been just 0.2% per annum over the last five years. Job creation is expected to be largely concentrated in business services. Dutch inflation was 0.6% year-on-year in April 15, continuing its movement upwards following the low reading of 0% in January 15. As unemployment continues to fall, average earnings increase and the low oil price impact begins to fall out of the numbers, it is likely that inflation will continue to increase, reaching 1.1% by end-15 and 1.5% by end 17. As an open economy where exports account for almost 90% of GDP the Netherlands is more vulnerable than most to adverse external conditions, which makes both the growth trajectory for the Eurozone as well as a resolution to issues surrounding Greece particularly important. Demand for high-quality office space in Amsterdam is improving. Indeed, there is the beginnings of a shift away from occupier activity driven by lease extensions and space rationalisation towards activity that is increasingly underpinned by new requirements as occupiers register their interest in the market. Office schemes along the South Axis command the highest rents across Amsterdam, reflecting not only the high quality of space here but also the easy accessibility and good transport links. Rents are currently at 370/sq.m/year, and while incentive packages are largely being withdrawn, they are still supporting headline rents to an extent. Vacancy for quality space across the city is around the 6% mark, despite being in the double digits for Amsterdam as a whole. However, a large proportion of this is outdated space and is slowly being renovated or removed from the market and converted into residential units. This, alongside a recovery in the Dutch economy, will help to boost take-up levels along the South Axis. Activity is expected to be driven by the technology sector as occupiers here increase their footprints, resulting in positive net absorption and acting as a lever to positive rental growth. Developers are anticipated to increase their willingness to commit to speculative construction, but this will be on a select basis only for the foreseeable future and only after detailed due diligence. AMSTERDAM OFFICE VACANCY RATE & PRIME RENT Dec Gradual recovery of Amsterdam s office market underway Incentive packages continue to be withdrawn as market conditions improve Expanding internet companies are driving demand CUSHMAN & WAKEFIELD

9 BARCELONA SPAIN The Spanish economy continued its impressive recovery in Q1 15, recording quarterly growth of 0.9% and marking the seventh straight quarter of expansion. Business services and manufacturing are performing well, with the latter in particular boosted by Euro depreciation. The labour market is also improving, with unemployment at 23% down from a peak of 26%. GDP is forecast to grow by 2.8% in 15 which would be the strongest annual number since 07. The Barcelona economy is estimated to have grown by 1.5% in 14, following three years of contraction. Growth in financial and business services employment was 1.7% in 14 which is forecast to accelerate to 3.7% in 15 before dropping back to around 2% per annum in Spain has suffered from deflation since mid-14, with the April 15 reading at -0.7%. Although deflation is likely to remain for the majority of 15, by the end of the year some inflationary pressure is expected to re-emerge. The forecast is for inflation of around 1%. A key downside risk to the Spanish outlook is the election this year. Two of the four main parties support a reversal of the landmark labour reforms of 12 that are widely accredited with helping to turn around the labour market and promote job creation. The Barcelona office market appears to be on the road to recovery after a period of stagnation. Prime rents in the CBD ticked up at the beginning of 15 and are expected to increase by 3.1% over the course of the year. This is bolstered by improvements in the economy supporting healthier occupier demand levels as well as dwindling amounts of quality supply particularly as construction was reined in following the Global Financial Crisis. This situation is reflected by the fact that, in 14, only two buildings were under construction totalling 6,500 sq.m in the decentralised area of the city, both of which were pre-let and reached completion in Q1 15. However, the beginning of 15 saw four schemes break ground albeit only one building is being developed in the city centre with completion expected in 17. The low level of new supply combined with a growing trend in the city center for space transformation from office to residential and hotel use is expected to cause a lack of supply in the future. The subsequent decline in the vacancy rate, as excess supply is absorbed, will see competition increase amongst occupiers looking to secure space in the city centre. As a result, headline rents are expected to see upward growth across the forecast period. An increase in new tenants entering the market will also support healthier rates of positive net absorption and push vacancy rates down to around 6.8% in 19: a level not seen since the middle of 08. BARCELONA OFFICE VACANCY RATE & PRIME RENT Dec Healthier market balance expected over 2-3 years as fundamentals improve Low development likely to persist over the forecast period Space transformations in the city centre placing downwards pressure on quality space CUSHMAN & WAKEFIELD 7

10 EUROPEAN OFFICE FORECAST BRUSSELS BELGIUM Belgium s GDP growth was estimated at 0.3% in the first quarter of 15: a continuation of the modest performance experienced throughout 13 and 14 and just below the Eurozone average of 0.4%. Household confidence improved during the first part of 15, and this is likely to drive consumption over the remainder of the year, taking economic growth to around 1.5%. This would be the strongest annual growth rate since 11. Economic expansion in Brussels was estimated at 0.6% in 14, which was double the pace achieved in 13 but modest in a European context. Financial and business services employment has increased by 0.8% per annum on average over the last five years. Over the next three years, employment in these areas is forecast to grow by 1.5% per annum, with job creation focused on the professional and administrative sectors. Inflation in Belgium was 0.4% in April 15 having re-emerged from four consecutive months of deflationary readings. The energy component of inflation fell by % over the year to March 15. The forecast for end 15 is for 1% rising to around 2% in 16 and 1.5% in 17. A loss of competitiveness has been a major issue for Belgium s export sector due to wage indexation and high non-wage labour costs the danger is that this becomes a long-term problem. BRUSSELS OFFICE VACANCY RATE & PRIME RENT Dec The low level of available quality supply in Brussels is acting as a support to headline rents, which have been stable at 275/sq.m/year for the last 18 months. This is, however, masking the attractive incentive packages that landlords are offering to tenants in a bid to limit void periods. On the flip side, it is also stimulating some churn of space in the Brussels market as, although the decision making process remains lengthy, a growing number of companies are using the current conditions to upgrade their office space in what remains a tenant-led environment. In addition, further space is due to complete in 15 and, while 76% in the CBD Leopold area has already been secured under pre-let agreements, there is still some speculative space coming through. This, coupled with the fragile state of the economy and slow recovery of the overall market, has subdued demand levels particularly from new occupiers and will dampen any prospects of rental growth. Indeed, rents are anticipated to decline over the next months before seeing positive growth again in 17, underpinned by a strengthening in the occupier base and a fall in vacancy. These factors combined are expected to further squeeze the already limited amount of Grade A space in the central submarkets of the capital. Incentives supporting headline rents Public sector remains a key driver of demand Lack of available Grade A space diminishing rental growth prospects 8 CUSHMAN & WAKEFIELD

11 DUBLIN IRELAND Ireland s recovery is continuing, with GDP growth of 4.8% in 14 s the strongest performance since the onset of the financial crisis, underpinned by a strong export sector. Labour market conditions are strengthening, and this combined with falling consumer prices is providing a welcome tonic to the still highly indebted households. GDP growth in 15 is forecast to be 3.7%, holding at this rate in 16 before dropping back slightly to 2.9% in 17. Dublin s GDP is estimated to have grown by 4.5% in 14, driven by solid performances from information & communications as well as the financial, professional and administrative services. Indeed, financial and business services employment increased by 2.2% in 14 the strongest rate since 07 but this is expected to moderate to 1.6% per annum over the next three years. Ireland has been in deflationary territory since January 15, with the latest reading at -0.7%. Inflation is expected to gradually pick-up during 15, ending the year at 1.4% before increasing to 1.6% in 16 and 2.2% in 17. Ireland s economy is forecast to be one the fastest-growing in the EU again this year, with the ECB s programme of quantitative easing expected to help boost the export sector. Further, the impact of a weaker Euro should help to cost competitiveness relative to key export markets in the UK and US. DUBLIN OFFICE VACANCY RATE & PRIME RENT Dec Dublin s real estate market continues to move from strength to strength, underpinned by the robust economic recovery that is positively impacting business confidence and rising levels of employment. The occupational market is firmly in the hands of the landlord as there remains a dearth of speculative development. Across the capital, there are only three new schemes which are under construction: two have already been earmarked, and the remaining one has just restarted following a standstill. Even allowing for buildings under renovation, the space available is inadequate for the demand registering interest in taking space. The lack of supply is a mounting issue as the option for expanding companies to move into larger premises is no longer realistic in some areas indeed, finding suitable space is potentially of more concern for tenants than rents. Signs of deferred expansion and satellite offices around Dublin already exist. Strong rental growth has been seen over the past few years and the situation is not expected to change. Rents are forecast to grow until at least the end of 17, when additional schemes are expected to come onto market and help ease the pressure on rents somewhat. Landlord favourable city centre at least for the short term Strong rental growth supported by low construction volumes IT sector dominates the market, particularly from US firms CUSHMAN & WAKEFIELD 9

12 EUROPEAN OFFICE FORECAST FRANKFURT GERMANY The German economy expanded by 0.3% in the first quarter of 15, which was marginally lower than the Eurozone average of 0.4% and was a slowdown on the 0.7% growth recorded in the final quarter of 14. However, the expectation is that economic growth will pick-up during the remainder of 15, driven by consumption as real wages continue to grow at a robust pace and the minimum wage boosts lower income households. Export growth is also expected to improve thanks to rising demand from the rest of the Eurozone and a weaker Euro particularly beneficial given Germany s high share of non-european exports. GDP growth is forecast to be 2% in 15, dropping to just below 2% by 17. Frankfurt s financial and business services employment growth is forecast to be 0.7% in 15, down from 0.9%n 14, and is expected to decelerate further in This slowdown reflects the already low unemployment rate in Germany and the tight labour market, meaning employment is unlikely to continue growing at the pace seen in the post-global financial crisis (GFC) recovery period. Inflation in early 15 was slightly stronger than expected. After the deflationary reading of -0.3% year-on-year in January, inflation has steadily increased to 0.5% as at April 15. This has resulted in forecasts being upgraded to 0.5% for the year-end, rising further to around 1.5% in Fears of bad deflation becoming entrenched in the Eurozone have now receded. Political instability in Ukraine and Greece, a further slowdown in China and disappointing growth in the Eurozone are the main risks to growth. Frankfurt s office market registered a solid start to the year in terms of occupier activity with 88,000 sq.m let in Q1 15, although this was largely due to a 32,000 sq.m owner occupier deal by Deutsche Vermögensberatung AG. As speculative construction is reined in and some older buildings are removed from the market with some being converted into alternative uses such as hotels and residential spaces the amount of available space declined in early 15. The.9% vacancy rate for the total city is now at the lowest it has been for 12 years and will continue to fall further, largely for quality office floorplates. Indeed, this lack of quality space is supporting rental levels of 37/sq.m/ month: the highest across the country that have remained unchanged since the latter half of 13. Despite an increase in the availability of development financing and a rising numbers of developers dusting down previously shelved plans, construction is still on a selective basis. Coupled with improvements in the occupational market, headline rents are anticipated to come under an upwards pressure, with levels rising slowly over the next five years to potentially reach 40/sq.m/month. FRANKFURT OFFICE VACANCY RATE & PRIME RENT Dec Several larger deals in the pipeline bolstering a solid office market in 15 Office vacancy forecast to decrease going forward Frankfurt CBD Limited quality supply keeping prime rents highest in Germany CUSHMAN & WAKEFIELD

13 LISBON PORTUGAL The Portuguese economy expanded by 0.4% in Q1 15, the fourth consecutive quarter of recovery. Exports have been the biggest contributor to growth, with government consumption continuing to act as a drag on the overall performance. The fact that Spain is performing well and is Portugal s largest export market accounting for a fifth of merchandise exports is positive news for the economy. In 14 annual growth was 0.9% which is expected to almost double to 1.7% in 15 before leveling off at a modest, but healthy, 1.4% per annum over Lisbon s economy is estimated to have grown by 0.7% in 14 following three years of contraction. Financial and business services employment growth was strong in 14 at 4.5%, although this is expected to reduce to 2.3% in 15 but is nonetheless positive news for office demand. Portuguese inflation was at 0.4% year-on-year in April 15, the fastest since mid-13, helped by the improving Eurozone outlook and the modest rebound in energy prices. This provides further support to the view that Portugal is unlikely to fall into a period of sustained deflation this year. The forecast for end-15 is 0.4%, gradually increasing to above 1% in 17. A significant risk to the outlook remains deflation. Although fears have subsided recently, an external shock could trigger a return to deflation via lower growth and confidence, which given Portugal s high public and private debt, would represent a serious problem LISBON OFFICE VACANCY RATE & PRIME RENT Dec 9 8 The initial signs of a recovery in the Lisbon office market seen in 14 where reaffirmed in Q1 15, with occupier activity reaching 29,300 sq.m. Overall performance is now on much firmer ground than twelve months ago, with not only the number of deals gaining pace but the average size of deals increasing as well. A proportion of this activity can be attributed to the popular trend of consolidation by companies into a single location, as well as existing occupiers taking advantage of the current tenant-favourable market before the balance begins to turn in favour of the landlord and rents come under upwards pressure. Headline rents have held firm at 18.50/sq.m/month since 11 and are expected to stay at this level until at least the middle of 16 at the earliest. However, with the amount of sought-after quality space becoming increasingly scarce on the back of improving demand from a broad range of occupiers and requirements from new market entrants are reactivated a positive upswing in rents is anticipated, potentially by 3.0% by the end of 16. Thereafter, further rises are forecast but at a slower rate as market fundamentals rebalance themselves. Previously postponed developments may be revived in a bid to address the quality supply challenges, but substantial pre-lets will need to be in place before construction commences. This is likely to instigate further vacancy rate falls as the supply of new completions is moderated. Recovery is likely as supply declines, demand improves and rents rise Falling vacancy as construction moderates Lack of space for larger tenants could push supply pipeline forwards CUSHMAN & WAKEFIELD 11

14 EUROPEAN OFFICE FORECAST LONDON UNITED KINGDOM The UK economy expanded by 0.3% in Q1 15 lower than had been expected and the weakest quarterly figure in more than two years. This is likely to be a temporary dip, with healthy real wage growth, private consumption and higher frequency survey based measures all pointing to stronger expansion. GDP is forecast to accelerate by 2.6% in 15, remaining around that rate during London has been a stand out performer in Europe over recent years and 14 was no different, recording output growth of 3% underpinned by the performance of professional and business services, administrative services and retail trade. Financial and business services employment is expected to grow by 3.5% in 15, which is slightly down on the 5.9% growth in 14 but nonetheless a strong year in prospect. UK inflation dipped below zero in April 15 (-0.1%), the first time inflation has fallen on an annual basis since The impact of low oil prices played its part, with air and sea fares all reducing as companies passed on the savings to consumers. Later in 15, as the oil effects recede, inflation is likely to pick-up, ending the year at around 1% and reaching nearly 2% by 17. The main risk to this outlook is the timing and impact of further austerity. The newly elected Conservative government has committed to returning the UK public finances into positive territory by the end of this parliament, but as yet, the scale or impact of the government cutbacks that will be required in order to achieve this is unknown. The second main risk is Britain s renegotiation on EU membership and the referendum that has been promised following that in 17; indeed, the uncertainty surrounding this decision is bad news for business. LONDON OFFICE VACANCY RATE & PRIME RENT Dec 6 5 Supply levels across the City market declined over the first quarter of 15 due to a combination of a buoyant occupier market and low levels of development completions. In particular, Media & Tech companies together with Banking & Financial occupiers are driving demand in the City market. However, many occupiers face the reality of a temporary shortage of supply in 15. While there is anticipated to be 3.2 million sq.ft of speculative space under construction in the period along with 3.0 million that is already pre-let no more than 282,000 sq.ft of speculative additions to stock is expected this year (% of the 15 pipeline). Consequently, vacancy rates will follow suit, with a notable improvement expected before the end of 15 helping to frontload rental growth that could possibly enter double-digit growth in 15. Prime headline rents are expected to remain on a growing path until 18, although the pace of growth will be moderate from 16 onwards once the development market regains some of its former strength. However, given the growing occupier appetite for prelettings, new supply is likely to get absorbed relatively quickly. Rises in pre-lets supported by low supply levels Strongest start to the year in terms of leasing activity since 1998 Rising rents across the City, with stronger growth in emerging areas 12 CUSHMAN & WAKEFIELD

15 LUXEMBOURG LUXEMBOURG After a solid recovery in 13 and 14, growth is expected to ease slightly in 15 to 2.6%. This marks an upgrade to previous forecasts, however, and the majority of indicators remain upbeat. Ongoing recovery in the Eurozone should offer a significant boost to the Luxembourg economy given its close ties with the rest of the continent. Economic growth is expected to further accelerate to 2.9% per annum over Short-term and medium-term prospects for Luxembourg are bright, with growth likely to remain significantly ahead of most Western European countries. Luxembourg s financial and business services employment growth is expected to average 2% per annum over the next three years which is slightly below the impressive growth of 2.8% seen over the last five years. Job creation is likely to be strongest in the real estate and the administrative and support sectors. Inflation has been hovering around zero over recent months after a brief period of deflation. Akin to many parts of Europe, inflation is expected to pick-up slightly during 15 as the low oil price effects start to fall out of the statistics. CPI is forecast to be 0.5% by end-15, increasing to around 2% in Downside risks are mainly external; any further tension between Russia and EU could impact exports, while a deeper crisis in Greece could damage financial markets across Europe, a sector which is integral to Luxembourg s economy. Take-up levels in Luxembourg s office market were robust in Q1 and are expected to remain positive throughout the year. This is bolstered by some sizeable deals by the European Commission which, at the time of writing, are in negotiation stages and expected to complete before the end of June. In addition, ongoing demand from financial institutions and business services companies will continue to support activity levels, with the focus very much on central areas of the capital. Prime rents have, so far, remained stable at 45/sq.m/month in the CBD and 33/sq.m/ month in Kirchberg, and these levels are expected to stabilise despite more robust occupier activity as demand and supply fundamentals remain in balance over the next 18 months. However, there are signs that quality space is becoming increasingly scarce, and as such more schemes are expected to break ground, bringing the potential to nudge the overall vacancy rate up albeit still at low levels to peak in 16 at just over 6%. Thereafter vacancy is anticipated to decline as demand strengths despite a rise in the amount of construction delivering new space to the market. The fall in availability will go hand in hand with positive rental growth, although this is expected to be gradual and confined to the central areas of the city. In the decentralised and peripheral areas of the capital where activity is more muted and the markets suffer from an overhang of supply any rental uplifts will be limited. LUXEMBOURG OFFICE VACANCY RATE & PRIME RENT Dec Limited quality space supporting rental growth after 16 Nearly 40% of development in is pre-let or for owner-occupation Highest vacancy in the decentralised submarket CUSHMAN & WAKEFIELD 13

16 EUROPEAN OFFICE FORECAST MADRID SPAIN The Spanish economy continued its impressive recovery in Q1 15, recording quarterly growth of 0.9% and marking the seventh straight quarter of expansion. Business services and manufacturing are performing well, with the latter in particular boosted by Euro depreciation. The labour market is also improving, with unemployment at 23% down from a peak of 26%. GDP is forecast to grow by 2.8% in 15 which would be the strongest annual number since 07. The Madrid economy is estimated to have grown by 1.7% in 14, a relatively strong expansion after two years of contraction. Financial and business services employment grew by 1.4% in 14 with job creation likely to accelerate to 3.5% in 15 before dropping back to around 2% per annum in Professional and administrative services especially are expected to perform strongly. Spain has suffered from deflation since mid-14, with the April 15 reading at -0.7%. Although deflation is likely to remain for the majority of 15, by the end of the year some inflationary pressure is expected to re-emerge. The forecast is for inflation of around 1%. A key downside risk to the Spanish outlook is the election this year. Two of the four main parties support a reversal of the landmark labour reforms of 12 that are widely accredited with helping to turn around the labour market and promote job creation. MADRID OFFICE VACANCY RATE & PRIME RENT Dec The positive momentum that was building over the course of 14 in the Madrid office market buoyed by an expanding economy is now translating into more robust levels of occupier activity, with approximately 1,000 sq.m let in Q1 15. Demand is currently focused on the CBD, and with quality, efficient space here limited, rents have been nudging up over the past four quarters, albeit supported somewhat by incentive packages that have yet to see any substantial withdrawals. However, with a rebalancing of the market underway along with declining vacancy, improving demand and the fact that tenants are willing to pay to secure space in the CBD, a 4.0% uplift in prime rents is anticipated by the end of 15. Further, some occupiers seeking to consolidate their operations are struggling to find the larger floorplates that meet their needs, and thus they are investigating options in the peripheral areas of the CBD where the likelihood of satisfying these requirements is higher for now. The situation is likely to be exacerbated in 16 and 17, linked to the restrained development activity and the conversion of some projects from offices to residential. Indeed, this is forcing some tenants whom are priced-out of central locations to consider quality space further afield. While some new developments are being started, this is unlikely to dampen rental growth, which is expected to remain positive until after 17, although the rate of growth will slow. New requirements reactivated helping to erode excess space Rental growth supported by low levels of development activity Rising demand underpinned by economic recovery 14 CUSHMAN & WAKEFIELD

17 MILAN ITALY The Italian economy expanded by 0.3% in Q1 15, ending a three-year recession. This is a positive development that is expected to continue over subsequent quarters, albeit with very modest rates of growth. In 15, GDP is forecast to expand by 0.5% increasing to 1% by 17. It s worth noting that output is currently around % lower than in early 08, putting the size of the recovery task into context: Italy will still underperform compared with the main Eurozone countries over Milan has been consistently outperforming the national economy over recent years, a pattern which is likely to continue over the next three years. Financial and business services employment grew by 1.5% per annum over -14, which will be maintained over this period, albeit with moderately stronger growth in 15 before trailing off slightly in The best performing sector is likely to be professional and administrative services. Italian inflation fluctuated around zero in the first part of 15, but there is likely to be some modest inflationary pressures starting to re-emerge later in 15 as the low oil price effects start to recede. CPI is forecast to end 15 at 0.4% before rising gradually to 1% by 17. A potential upside risk surround the implementation of structural reforms. If the current government can accelerate these reforms then this would aid the recovery. Introduced in March 15, the new labour reforms are yet to take effect but may provide a boost going forward MILAN OFFICE VACANCY RATE & PRIME RENT Dec The Milan office market had a positive start to 15, with prime locations in the capital seeing significant demand from both local and international occupiers. Short-term prospects for the occupational market are stable, with landlords taking a flexible approach to lease negotiations. Stabilised rents in the short-term before gradual growth from 16 Incentives remain commonplace, and Milan will continue to witness occupiers upgrading their space or streamlining their operations into a single HQ building. Flexible, modern space is therefore expected to remain in good demand and, given the general lack of such space, a rise in pre-lease contracts in new developments or substantial refurbishments is anticipated. Demand improving from both local and international corporates In addition, only just over a quarter of all space under construction is being built speculatively a trend that is expected for the foreseeable future as developers remain cautious in the current market. All of these factors, plus the tight planning restrictions in the city centre, will support headline rental growth which will gather momentum as 16 approaches. Gradual return of new development and refurbishment activities CUSHMAN & WAKEFIELD 15

18 EUROPEAN OFFICE FORECAST MUNICH GERMANY The German economy expanded by 0.3% in the first quarter of 15 while only marginally lower than the Eurozone average of 0.4%, it represents a slowdown on the 0.7% figure recorded in Q4 14. The expectation is that economic growth will pick-up during the remainder of 15, driven by consumption as real wages continue to grow at a robust pace and the minimum wage boosts lower income households. Export growth is also expected to improve thanks to rising demand from the rest of the Eurozone and a weaker Euro: particularly beneficial given Germany s high share of non-european exports. GDP growth is forecast to be 2% in 15, dropping back to just below 2% by 17. Financial and business services employment growth in Munich is forecast to be 1.3% in 15, down from the 5 year average of 2.6%, and is expected to decelerate further in The slowdown reflects the already low unemployment rate in Germany and in Munich especially. The already tight labour market implies employment is unlikely to continue growing at the pace seen in the post-global financial crisis (GFC) recovery period. Inflation in early 15 was slightly stronger than expected. After the deflationary reading of -0.3% year-on-year in January, inflation has steadily increased to 0.5% as at April 15. This has resulted in forecasts being upgraded to 0.5% for the year-end, rising further to around 1.5% in Fears of bad deflation becoming entrenched in the Eurozone have now receded. Political instability in Ukraine and Greece, further slowdown in China and disappointing growth in the Eurozone are the main risks to growth. MUNICH OFFICE VACANCY RATE & PRIME RENT Dec Q1 15 was another strong quarter for the Munich office market, with occupier activity reaching 182,000 sq.m (including owner occupier deals). This is the strongest performing first quarter seen for seven years, 22% above the five-year average and 12% above the ten-year average. The city benefits from a broad range of occupiers spanning a plethora of industry sectors, and this goes some way in supporting the stability that the city is known for and its ability to weather real estate cycles reasonably well. Munich s prime rent is 33.50/sq.m/ month, and despite high pre-let rates and lively demand for high-quality office properties in the CBD, levels remained static over Q1 15 after a rise in Q4 14. However, a shortage of supply particularly in the city centre prime segment will exert more pressure on rents and is expected to translate into headline rental rises before the end of 15 equating to a 3.2% upswing. This will be bolstered by not only a decline in the overall amount of new completions but also by the steady decline of speculative construction, which has been a significant factor influencing vacancy rate falls over the past five years. Furthermore, the strength and attractiveness of Munich as a location is pushing those occupiers seeking larger floorplates to move sooner than anticipated in order to secure appropriate space for their needs as supply dwindles, further supporting robust occupier activity. Strong demand eroding vacancy and supports rising rents Broad range of occupiers bolstering activity IT sector pushing CBD demand Firms moving into CBD as can now pay higher rents 16 CUSHMAN & WAKEFIELD

19 PARIS FRANCE French GDP expanded by 0.6% in the first quarter of 15, stronger than anticipated due to a boost to consumption from oil related factors, which have now diminished. It is unlikely that this degree of strength will be maintained into subsequent quarters, albeit annual growth is estimated to be 1.4% for 15, which would be the best year since 11. However, this performance would still see France slightly underperforming compared with the Eurozone as a whole (1.6% forecast for 15). Next year, the expectation is for slightly faster growth of 1.7% as the investment climate improves and depreciation of the Euro feeds through into moderately healthier export growth. However, the growth gap with the Eurozone will not begin to close until 18. Financial and business services employment growth in Paris has averaged of 0.7% per annum over the last five years, and a very modest increase to 0.8% is expected over the next three years. This stability is unlikely to lead to significantly more office space demand overall, but the two sectors that are expected to see the best job creation over the next three years are information and communications and business services. French inflation improved slightly in March 15 with a zero reading: the first non-negative reading since December 14. As oil prices have gradually increased, the likelihood of sustained deflation during 15 has receded. The forecast for end 15 is 0.6% increasing to 1.5% by end 17. The main downside risks to the economic outlook are uncertainty stemming from fiscal tightening and a slowdown in the implementation of structural reforms that will enhance France s competitiveness. In addition, further risks remain in the strained relationship between the EU and Greece as well as any potential deceleration in the Eurozone s recovery. Prime rents in Paris CBD have been declining for the past two years as economic growth faltered and occupiers shelved expansion plans to focus on cost cutting and the rationalisation of their space. Lease renewals were commonplace, and absorption fell into negative territory as new requirements held back from registering an interest in entering the market. However, as business sentiment improves, rising activity should follow suit, although progress is expected to be slow. Despite the scarcity of Grade A space which is unlikely to be resolved in the short-term rental levels are not anticipated to gain the lost ground until the latter half of 16 or even early 17. This is likely to come to fruition when a more sustained pick-up in demand impacts market dynamics, with a number of significant lease expiries anticipated, and a healthier balance between market fundamentals is apparent. Therefore, 15 is expected to be the year of transition before a modest recovery is seen in the Paris office market in PARIS OFFICE VACANCY RATE & PRIME RENT Dec Space erosion of both Grade A and the best secondhand space in Paris CBD Net absorption to turn positive as demand improves Sustained demand from high-added value activity sectors CUSHMAN & WAKEFIELD 17

20 EUROPEAN OFFICE FORECAST STOCKHOLM SWEDEN The Swedish economy expanded by 2.1% in 14 following a very strong end to the year. GDP growth in Q4 stood at 1.1% quarter-on-quarter, driven by solid consumer spending and investment. Exports also improved over this period as demand from the rest of Europe strengthened. Following a stream of better than expected macro news, many economists raised both the GDP growth and inflation forecasts for 15, with the former now expected to grow by 2% in 15, 2.8% in 16 and 2.2% in 17. Stockholm s economy is estimated to have grown by 3% in 14, outperforming most other European cities. Financial and business services employment has increased by 2.4% per annum on average over the last five years and is forecast to grow by 1.9% per annum over the next three, with job creation focused on the information and communication sector as well as administrative services. Sweden has been dipping in and out of deflation since the end of 12, which has led the Riksbank to move interest rates into negative territory (-0.25%) while continuing QE. Further policy action, real wage growth and a reduction in the impact from low oil prices are likely to push inflation gradually upwards over the coming quarters to 1% by the end of 15. CPI is forecast to move above the 2% target rate in An important risk for Sweden is the level of household indebtedness, which was at 174% of GDP in Q4 14. Plans to introduce tighter repayment rules for new mortgages could help. The strength of the Swedish kroner has also been an issue over recent times given the openness of the Swedish economy and the importance of exports to growth; indeed, exports account for 45% of GDP. Robust economic growth and solid employment expansion are buoying healthy occupier demand levels, which are eroding the overhang of space in Stockholm s office market. As a result, vacancy rates are declining and rental levels rising as occupiers continue to compete for space. Indeed, the strength of demand across a broad range of occupiers has seen the market shift its balance from being in the hands of the tenant to one where landlords are withdrawing incentive packages and occupiers are willing to pay the asking rents. However, the focus is very much on quality space in Stockholm s central areas, although some more peripheral locations such as Solna are seeing rising levels of interest as they can offer the much sought-after space that expanding companies are after. The tight development pipeline will see availability dwindle further and is expected to hit 7.2% in 17 half the level seen in 06. This is despite the new supply deliveries that will not pick-up until late 16/early 17, most of which are expected to be pre-let before construction is complete. All of these factors will contribute to an imbalance between demand and supply and further support rental growth, which is expected to be strongest in 15 at around %-11%. After this, the rate of growth is expected to slow but remain in positive territory between 3.6%-2.5% per year. STOCKHOLM OFFICE VACANCY RATE & PRIME RENT Dec Very low vacancy for quality space will persist for the next 2-3 years Strong demand has triggered speculative construction in quality suburban areas Positive rental growth expected across most submarkets CUSHMAN & WAKEFIELD