Covid-19 to limit future supplies of offices, say AEW

Because of the Covid-19 pandemic, the occupants reassess their needs for office space with the implementation of work from home. In the wake of the GDP decline in 2020, AEW expects rents to decline by nearly 10 percent this year.

In the year 2020, Q2 consumption has decreased by over 20 percent and vacancies have increased by a record low of 5.4 percent in the first quarter of 2020, according to the latest flash report from the European Research & Strategy team.

AEW says that while others focus mainly on the impact of demand, few also take the supply side of the market into account. Overload of new space has exacerbated previous market declines in previous reports. AEW takes a closer look at the impact of the pandemic on the latest supply pipeline data in this latest Covid-19 update.

The good news is that anticipated new supplies remain below half the level seen before the GFC. For the period 2020-24, we plan a new supply of 1.3% of current stockpiles, compared to the pre-GFC period of 2.7% pa.

In addition, JLL has estimated a 9 percent decline in supply in the years 2020-22 across 15 markets since early 2020, largely as a result of delays in construction related to Covet due to health, sanitary measures and material shortages.

Moreover, development focused land and restructuring acquisitions have continued their long-term downward trend, as a share of total office acquisitions.

Despite a recent upswing in 2018 in Germany, post-GFC lending regulations restricted banks from engaging in speculative development projects. Based on more recent information, we expect that the terms and conditions for office development will be further increased after Covid-19.

As investors, developers and lenders meet lower job demand, many office developments are expected to be adjourned, scaled down or cancelled over time. This will further reduce the new market supply.

Nonetheless, there are large supply pipelines in Central and Eastern Europe (CEE), Dublin and Barcelona markets. In Amsterdam, Lyon, Berlin and Munich, construction is also growing, but these markets are safeguarded by the record low vacancy rates below 4 per cent.

In Paris, the largest European office market, AEW stresses that its in-house database indicates that the pipeline is significantly larger than CBRE. The new Paris office pipeline is mainly concentrated in La Défense and submarkets on internal rims.