Covid-19 to restrict future office supply, say AEW

As a result of the Covid-19 pandemic, occupiers are reassessing their needs for office space as working from home has been implemented. On the back of the 2020 GDP decline, AEW is forecasting rents to come down by nearly 10 per cent this year. 

So far, in 2020 Q2 take-up is down over 20 per cent and vacancy has ticked up by 20bps from a record low of 5.4 per cent in Q1 2020, according to the latest flash report from AEW's European Research & Strategy team.

AEW says that while others are mostly focused on the demand side impact, few are considering the supply side of the market too. In previous reports the company has noted that oversupply of new space has exacerbated previous market downturns. In this latest Covid-19 update, AEW takes a closer look at the impact of the pandemic on the latest supply pipeline data.

The good news, according to the report, is that expected new supply remains at less than half the level seen pre-GFC. For the 2020-24 period we project new supply at 1.3 per cent of existing stock pa relative to the pre-GFC period at 2.7 per cent pa.

In addition, JLL has estimated a decline of 9 per cent in 2020-22 supply across 15 markets since the start of 2020, mostly as a result of Covid-related delays in construction due to the health and sanitary measures and material shortages.

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

Post-GFC lending regulations have limited banks from committing to speculative development projects, despite a recent uptick in 2018 in Germany. Based on more recent data, we expect that post Covid-19 conditions will further tighten finance availability and terms for office development.
As investors, developers and lenders come to grips with lower occupational demand, we also expect that many office developments will be postponed, down scaled or cancelled over time. This will further reduce the new supply across markets.

Nevertheless, some Central and Eastern Europe (CEE) markets, Dublin, and Barcelona face large supply pipelines. Construction is also picking up in Amsterdam, Lyon, Berlin and Munich, but these markets are protected by record low vacancy rates below 4 per cent.
In the largest European office market, Paris, AEW highlights that, based on its in-house database, the pipeline is significantly larger than indicated by CBRE. The new office pipeline for Paris is mostly concentrated in La Défense and inner rim sub-markets.