Spotlight: European Office Outlook – Spring 2020

Global Growth Shock

As health professionals point to falling coronavirus cases across much of Europe, questions are mounting as to the speed of return to normal working practices and the impact on the economy.

Government stimulus packages are keeping Europe’s economy on life support, with public debt levels forecast to rise by an average of c.20% in the eurozone (EZ) area during 2020, in order to maintain employment levels through furlough schemes. The optimism for a V-shaped recession with a strong bounce back are waning, with the EZ unemployment rate forecast to rise from 7.4% at end 2019 to over 10% by the end of 2020. Early evidence is present with Germany’s unemployment rate rising from 5.0% to 5.8% during April alone. Longer-term repercussions of the increased government debt burdens across Europe could likely point to higher corporate taxes/introduction of a solidarity tax once the pandemic has passed in order to service debt levels and avoid sovereign default.

GDP growth figures during the first quarter of the year showed -5.8% for France, -5.2% for Spain, whilst Germany is expected to be the most resilient major European economy. However, we expect the true depth of the negative spike to be revealed in the Q2 2020 figures as the full weight of the lockdown only came into play during the second half of March. Although we are still at relatively early stages of predicting the full extent of the downturn, April’s Eurozone Services Purchasing Managers Index (PMI) reading of 11.7 marks the lowest level on record (a reading of 50 separates expansion from contraction in the services sector), which was largely dragged down by the hospitality, restaurants and travel subsectors.

However, due to the depth of this decline, previous relationships between PMI readings and GDP growth levels are unlikely to hold. Capital Economics May 2020 forecasts indicate GDP growth of -12% for the eurozone during 2020, with a bounceback of 10% in 2021. On a brighter note, a number of European economies are beginning to lift some lockdown restrictions as office workers gradually return to the workplace. Office landlords will be gratified by the fact that c.80% of office rent was collected during the April period, marking the most resilient of the commercial property sectors.

Most government lockdowns across Europe were not fully implemented until March, which has limited some of the office leasing deals to be completed by the end of the first quarter. European office take-up reached 2.1 million sq m, 21% below the five-year average level (see below). This was largely dragged down by lower take-up levels in the larger cities of Paris IDF (-37% YoY), Berlin (-33% YoY) and Madrid (-47% YoY).

We should of course remember that the first quarter of leasing volumes is often influenced by the number of deals which are completed during the final quarter of the previous year, with companies taking stock during Q1. We expect to see more evidence as to the impact on the leasing sector during the second quarter of the year, with many viewings postponed and surveyors unable to undergo technical due diligence on properties. We doubt whether the number of virtual video tours being introduced will much compensate for potential occupiers’ inability to view offices during lockdown.

_{Read the articles within European Offices Outlook below.}