Q1 2023 | Brussels Office Marketbeat | Belgium

/

Economic normalisation expected in 2023

2022 was an unusual year from every point of view. The economy has been severely hit with inflation at highest levels since decades, sky-high energy prices and rising interest rates to try to fight running consumer price index.

Economic conditions have suffered throughout the year 2022 in the aftermath of the conflict in Ukraine. While GDP held up well last year, price pressures have reached a high and a recession is looming. As a result, GDP growth is expected to stand around 0 5% in 2023 according to the National Bank of Belgium The Belgian economic outlook is thus mitigated for this year while public debt could continue to deepen if any adjustments is taken by the authorities Successive interest rates hikes also weigh on the public debt

The unemployment rate declined these last three years but is expected to increase as from 2023 and to reach 6.2% according to the latest forecasts released by Moody’s. Unemployment is expected to rise faster in Wallonia than in Flanders It should remain relatively stable after 2023, around 6 5% to 6 7% up to 2026

Inflation remains high, namely due to an increase in food and services inflation since the beginning of the year. This is fueling fears of inflation becoming entrenched while energy inflation is now strongly negative While the headline Belgian consumer price index should decline throughout 2023, high and rising underlying price pressures remain a big worry.

GDP Growth and unemployment rate Inflation rate

BRUSSELS / Office Q1 2023

2023 starts as 2022 ended, with a low take-up

Occupational market activity slowed further in Q1 2023, with total take-up of 70,000 sq m. This represents a 10% decline compared to Q1 2022. Following two years of adjusting to new ways of working as a result of the COVID epidemic, we anticipate a normalisation trend in the office leasing market in 2023, with an annual take-up of 320,000 sq m comparable to last year

In contrast, the number of transactions remains consistent, indicating a solid demand in the market, which is currently dependent on smaller-area deals. The average surface per transaction is presently 920 sq m, compared to 1,065 square meters in Q1 22.

Pre-letting plays an essential role in the activity

Digging deeper into the take-up reveals more than a handful of transactions over 3,000 sq m, the majority of which related to Grade A spaces. Chief among these was a 7,000 sq m pre-letting by Securitas in The Wings development. This is followed by a 3,500 sq m pre-letting by Sodexo and a 3,150 sq m pre-letting by Clifford Chance, respectively in Aria and The Louise, both under construction.

These three transactions illustrate the significance of pre-letting in today's market, especially when the transactions are for projects in the pipeline. Pre-letting accounts for more than 20% of total take-up in Q1 2023.

Prime rents is no longer only dictated by location

Following a rise in Brussels office prime rents last year, prime rents in the Louise districts increased this quarter. The first transaction in the iconic The Louise raised prime rents by an astonishing 65 euros, an unprecedented in the Brussels office market. The prime rents in the Louise area is currently 340€/sq m/year, equal to the prime in the Leopold district.

The gap in prime rents between the CBD submarkets is narrowing From now on, the quality of the services and the flexibility of building, beyond ESG criteria, will be a determining factor for the rental levels, next to the location of the building. Occupiers will focus on the highest quality building and will be willing to pay for them.

Meanwhile, as a result of strong demand for high-quality new developments, prime rents in the Airport district has risen to 185€/sq m/year.

Take-up by quarter (000s sq m)

Distribution of take-up by transaction type

Prime rents (€/sq m/year)

Strong pipeline can ensure healthy dynamic

The pipeline for the coming years is substantial, with 340,000 sq m of new or renovated office space added to the stock by 2024. These also include a good share of speculative developments, such as The Louise, a 27,000 sq m iconic project, or Chancelier, a 15,000 sq m development in the city centre. This critical amount of new Grade A spaces can entice occupiers to leave older offices in favour of more efficient offices

The high proportion of pre-let developments confirms occupiers' interest in ESG buildings. One thing is certain: the stock must be renewed to meet the new ESG requirements of public authorities and corporate tenants.

Polarised vacancy in 2023

The vacancy rate decreases in the first quarter of 2023, to a level of 7.4%. The large proportion of pre-let buildings entering the market limits the vacancy growth. In addition, an increasing number of conversion projects are now adapting to new ways of working, reducing office space in favour of a broader mix.

The vacancy rate is falling in the Periphery. Thanks to the high level of activity, the various districts have witnessed a significant drop in vacancy However, the Ring suffers from limited demand and records a vacancy rate of over 23%.

For 2023, we expect occupier space reductions to contribute to an increase in the vacancy rate to 8.2% globally for Brussels. The reconcentration of occupiers in the highest quality buildings will contribute to a significant increase of the vacancy rate in Grade B- and C buildings. Meanwhile, the relatively limited delivery of new unleased office space will help to compress the vacancy in the Grade A segment by the end of 2023.

Public sector might be a key player in the take-up

Although take-up is projected to be approximately 320,000 sq m this year, the total could be much higher due to big transactions from the public sector, particularly European institutions. Indeed, in order to accomplish its goal of reducing its carbon footprint by 2030, the European Commission is actively looking for new efficient office spaces.

European services now occupy around 1.9 million sq m of office spaces, with more than 60% of that space are qualified as Grade C. As a result, a shift to more energy-efficient assets is required.

Vacancy rate

Distribution of EU office spaces by grade

Office pipeline (000s sq m)

Prime yields still rising

The European Central Bank (ECB) increased again its interest rates to combat inflation, as previously announced. However, the recent financial market turmoil, triggered by the collapse of three midsize banks in the US and Credit Suisse in Europe, has added uncertainty to the path ahead If the ECB’s economic forecasts prove accurate once the current market uncertainty subsides, the bank will still need to tighten monetary policy further.

As a result, prime office yields have been revised upwards again in the start of 2023 to a level of 4.30%. The very likely upcoming ECB interest rate hikes should lead to a further correction in prime yields, which could then rise to a new threshold of 4.55% in 2023. More information are available here.

The investment market is taking a hit

After a record year, boosted by “big tickets”, for the investment market despite turbulent market conditions, the market is stalling in the start of 2023. This quarter, nine transactions, totalling 128 MEUR, have been recorded, making it the Q1 with the lowest invested volume since 2014.

The rise in yields and tightening financing conditions witnessed in H2 2022 has significantly impacted the investment market this quarter, and trading volumes currently being lower. This quarter's average transaction volume is at 15 MEUR, compared to 53 MEUR last year. The largest transactions recorded this quarter are the purchase of Media Corner by Corum AM and the sale of Wood Hub to Ethias for 29 and 25 MEUR respectively.

Investors are attracted by both ends of the risk spectrum

Despite uncertain economic conditions, both Belgian and international investors continue to take a strong interest in Brussels. Even when rates and yields rise, the fundamentals of Brussels office market remain solid, and its resilience has always been a key driver for investors.

Two distinct trends are profiling in terms of risk:

• On the one hand, with sustainability now crucial, investors refocus on Core and LT-Core products, i.e. buildings of the highest quality, well connected to transportation hubs and offering secured cashflows.

• On the other hand, redevelopment & value-add assets represent another important part of the invested volumes. Investors and developers look to create value by renovating older schemes to new ESG standards with the latest environmental certifications.

Distribution of invested volumes by risk type

Prime yields

Investment volumes by quarter (MEUR)

MARKETBEAT

BRUSSELS / Office Q1 2023

Market Statistics

Key Investment Transactions Q1 2023

Benjamin DEVIE

Research Analyst | Belgium & Luxembourg

+32 492 11 35 10 benjamin.devie@cushwake.com

Cédric VAN MEERBEECK

Head of Research & Marketing | Belgium & Luxembourg

+32 2 629 02 86 cedric.vanmeerbeeck@cushwake.com

Maximilien MANDART Head of Occupier Services | Belgium

+32 478 24 08 02 maximilien.mandart@cushwake.com

Michael DESPIEGELAERE

Head of Capital Markets | Belgium & Luxembourg

+32 476 82 08 59 michael.despiegelaere@cushwake.com

©2022