The risk of office stock becoming obsolete due to a range of factors including climate legislation is increasing, with assets in several major Western European cities facing significant challenges in the next five years, according to new analysis by Cushman & Wakefield.
The RETHINKING European Offices 2030 report examines office stock across 16 key European cities and the opportunities for landlords to reposition or repurpose their space. By 2030, Cushman & Wakefield estimates that more than 170 million sqm of office stock is at risk in 16 European cities. This is equivalent to more than six times the total office stock in Central London.
| Market |
% Office Stock At Risk Of Obsolescence By 20230 |
| Milan | 86% |
| Barcelona | 81% |
| Stockholm | 81% |
| Paris | 80% |
| Madrid | 77% |
| Amsterdam | 77% |
| London | 76% |
| Brussels | 70% |
| Frankfurt | 70% |
| Berlin | 65% |
| Lisbon | 64% |
| Dublin | 64% |
| Munich | 60% |
| Prague | 47% |
| Budapest | 43% |
| Warsaw | 40% |
Western European markets face a greater challenge with nearly 80% of total stock at risk in seven leading cities reflecting relatively older assets in those areas. Repositioning assets to improve their quality is likely to be the optimal solution in CBD locations with strong demand for best-in-class space, relatively lower vacancy and premium rents being achieved. In non-central locations, higher vacancy is driving a widening discount in values. As such, repurposing of assets is likely to be the best option with more favourable values for alternative uses.
The seven key Western markets where close to 80% of stock is at risk of obsolescence reflects a relatively older stock profile. Eastern European markets (Budapest, Prague, and Warsaw) all have a lower volume and share of stock at risk, averaging just 43%. Much of the built environment in this region has been delivered over the past couple of decades, in contrast to Western markets where less than a fifth of stock was developed in this period.
Nonetheless, these challenges will rise up the agenda for Eastern European landlords as stock ages over the coming years. Nor is the risk uniform across Western markets. Munich (60%), Dublin (64%), Lisbon (64%) and Berlin (65%) have relatively lower risks, reflecting a relatively higher proportion of stock developed over the past two decades compared to other Western European markets.
Whilst the percentage of stock at risk in Berlin and Munich is not the highest, the total volume is more than other cities. With relatively newer stock in these markets, the solution may be focused on minor modifications to grade, subject to location and local amenity.
In London, the analysis suggests the level of stock that is obsolete will reach 76% by the turn of the decade. With regulation already in place providing for more stringent ratings, this should accelerate the pace of change, especially with an improving economic landscape. Many landlords are actively upgrading or redeveloping buildings across the capital to meet these needs together with the growing demands from occupiers as lease events emerge.
Dr Nigel Almond, Head of EMEA Office Research, at Cushman & Wakefield, said: Across Europe there is continued strong demand for offices, but tightening sustainability regulations, shifting workplace strategies, and economic pressures mean property owners and investors must act now to prevent their assets from losing value. We will see continued changes over the remainder of this decade and beyond with three main factors – carbon, community, and cost – driving the direction of obsolescence.
The real estate sector is responsible for around 40% of all greenhouse gas emissions, with investors and developers working hard to significantly reduce the impact development has on the environment. Occupiers are increasingly focused on well-located, amenity-rich buildings that help them achieve their corporate ESG goals and attract top talent. We see a greater opportunity to reposition office assets to meet these expectations in central locations where vacancy is typically lower and assets are holding their value better than those further afield. Ultimately, a range of financial factors will impact decision making and influence the future of this stock.
The report highlights that Europe is positioned relatively well in effectively managing risks through changing occupational demand with vacancy in the cities tracked increasing to a lesser extent than in other cities and regions across the globe at just 450 bps. Of 18 key North American markets, vacancy post Q4 2019 has risen on average 1,100 bps to over 20%. This compared to 600 bps across APAC to an average of around 15%.
Emma Swinnerton, Head of RETHINKING EMEA at Cushman & Wakefield, said: Investors need to carefully consider the factors at play as they seek value from real estate transactions in the next decade. Equally, occupiers need to understand how these trends impact their choice of location. We anticipate a growing divide between best-in-class centrally located assets and those in peripheral locations where vacancy risk is often greater.
Landlords need to understand their assets, and the context in which they exist, to determine whether repositioning or repurposing is the best strategic approach. Clear, flexible, and efficient planning policies at a local or national level will be critical for developers in being able to move schemes forward. Tax breaks, reduced targets or other incentives may be required to help ensure schemes are brought forward, enabling governments to meet targets and avoid assets falling into disrepair.
