Q2 2023 | Brussels Office Marketbeat | Belgium

Mitigated economic outlook in 2023 but a more robust 2024 awaited

After a challenging year in 2022, economic recovery will be modest in 2023, with GDP growth predicted to be about 0.6% for the whole year. The Belgian economic outlook is therefore tempered, whereas stronger GDP growth is predicted beginning in 2024 and notably in 2025. GDP growth is expected to be approximately 2.6% in 2025 and 2026. However, the Belgian public deficit will remain substantial in 2023, while public debt may continue to rise as a result of successive interest rate hikes.

The Belgian political scene is becoming increasingly tense as everyone has already the different 2024 elections in mind. In this environment, the Federal Government has many difficulties to finalize certain major changes that might have a negative impact on the global economy and/or the country's attractiveness

This year, the unemployment rate is expected to grow to 6.17%. According to the most recent projections, it will rise even more to 7.3% in 2026. Significant regional discrepancies remain, with Flanders scoring best and Brussels performing worst

After reaching an all-time high last year, inflation in Europe and Belgium is gradually declining. It is now 5.2% in Belgium (as of May), compared to 6 1% throughout the Eurozone Despite the drop in energy costs, inflation remains much above the European Central Bank's 2% target, owing mostly to high food price inflation. To combat inflation, the ECB tightened its European monetary policy through repeated interest rate hikes. In this context, the 400-basis point gain over the previous eleven months is extraordinary. As a result, the pace of economic growth is slowing. However, in order to meet its 2024 target, the ECB needs hike interest rates by 25 basis points in July.

GDP Growth and unemployment rate Inflation rate

Historically low take-up

The Brussels office market registered 87,641 sq m of take-up in the second quarter of 2023, which is comparable to the first quarter. This brings the overall take-up in H1 to 157,439 sq m, lower than the five- and ten- year averages for take-up through the first half of the year, but higher than the same period in 2022.

The latest European Commission transaction, the largest deal by a European Institution since 2013, accounts for one-quarter of the overall take-up in 2023. Without this transaction, take-up on the Brussels office market would be even lower than in 2022, indicating that occupiers are taking a wait-and-see strategy and choosing to renew their leases in this uncertain environment.

Public sector plays an essential role in the activity

The long-awaited transaction of the European Institutions has officially been secured. The European Commission has just confirmed the 36,500 sq m letting in North Light, one of Engie Towers. Heavily influenced by this deal, the public sector share accounts for more than half of overall take-up this quarter.

Negotiations for Allianz’s Commerce 46 and Kolmont’s Montgomery Square are still ongoing, and the take-up of these buildings could further boost take-up in the coming months.

Rents are expected to continue to rise

Following an increase in prime rents in the Louise and Airport districts at the start of the year, prime rents have stayed unchanged this quarter at €340/sq m/year for the CBD, €200/sq m/year for Decentralised, and €185/sq m/year for the Periphery.

However, with demand for the most energy-efficient buildings outstripping supply and rents set to be indexed next year, some developers are already aiming for new prime rents for projects now under development. This is why, between now and next year, prime rents in the CBD, especially in the Leopold district, are expected to reach a new high of more than 360€/sq m/year. Meanwhile, prime rents in the Decentralised and the Periphery are likely to rise by 10€, reaching 210 and 195€/sq m/year, respectively.

Take-up by quarter (000s sq m)

Take-up: Public and private split (000s sq m)

Prime rents (€/sq m/year)

BRUSSELS / Office Q2 2023

Abundance of projects with significant pre-let occupancy

By the mid-year mark, no less than 55,000 sq m of (re-)developed office space had been delivered on the Brussels market, including Royale Belge and Science 12, two projects that have already achieved pre-let transactions at record rents. Furthermore, more than 87,000 sq m are expected to be delivered by the end of the year.

In the medium term, more than 370,000 sq m are currently under construction and should be entering the market, with more than half being already pre-let. Tenants are in strong demand for new buildings as energy and environment requirements become more stringent.

On the other hand, in an uncertain context, tenants are also renegotiating their leases and adopting a wait-and-see attitude. As a result, we could observe a longer commercialisation process for ongoing projects with a potential negative impact on the vacancy rate.

An ever-lower vacancy rate

Despite the steady increase in developments, the vacancy rate continued to fall in the second quarter of the year, reaching a new threshold of 7.3%. The ongoing decreasing vacancy is mainly by a high number of residential conversion projects

The vacancy rate remained stable in all districts, except for the Periphery. Indeed, the various districts have witnessed a significant drop in vacancy as a result of the high level of activity.

Although a considerable number of projects are expected to enter the market empty in the near future, the vacancy rate will likely remain stable or slightly grow as demand for ESG buildings continues to surpass supply.

Growing trend of conversions

The decrease in vacancy is mostly due to the significant number of conversion projects. Indeed, more than twenty buildings totalling over 200,000 sq m of office space have been pulled out of stock and are now being converted into residential space due to more stringed energy regulations.

At the same time, there are redevelopment projects with mixed-use concepts, such as retail and residential accommodation. A noteworthy example is the rehabilitation of the European Commission's office portfolio, which, in addition to renovating office spaces, should result in the construction of 650 residences in the Leopold district.

Office pipeline (000s sq m)

Vacancy rate

BRUSSELS / Office Q2 2023

Towards a cap on prime yields?

The closing of the Treesquare acquisition in the early stages of the quarter made it possible to set a number on prime yields at somewhere around 4.30%. However, circumstances have changed since then, and ECB (European Central Bank) rate hikes, now in their eighth straight raise, have driven prime yields even higher. Therefore, prime office yields have been revised upwards again in the second quarter of 2023 to a new theoretical level of 4.60% for standard leases.

Christine Lagarde, President of the ECB, has stated that “stubbornly high inflation all but guaranteed another move next month and likely beyond that too”, which would have the effect of increasing prime yields even further, to 4.80% by the end of the year.

The investment market is still ice cold

The market was already investing more than a billion euros in the Brussels market at this time last year, but the volume invested currently totals only 305 MEUR. “Big tickets” that fuelled the investment market last year are already a thing of the past, with current volumes peaking at 44 MEUR

The continuing rise in yields and tightening financing conditions has significantly impacted the investment market in the first half of the year, and trading volumes currently being lower. This semester's average transaction volume is at 15 MEUR, compared to 53 MEUR last year. The largest transactions recorded this quarter are the purchase of Treesquare by KGAL and the sale of Liberty House to Alides for 43.7 and 36 MEUR, respectively.

Exclusively Belgian players

Due to uncertain economic conditions, some investors have adopted a more cautious approach and have paused their investments. The market is no longer attracting investments from beyond Europe, and now relies solely on local investors. Almost a third of the volume recorded since the beginning of the year has come from Belgian players, with the rest of the volume coming from neighbouring countries.

Furthermore, ten of the nineteen transactions recorded were in the Valueadd/Redevelopment field, demonstrating the opportunism of investors striving to create value in renovation projects

Prime yields

Investment volumes by quarter (MEUR)

Investment volumes by investor nationality

MARKETBEAT

BRUSSELS / Office Q2 2023

Market Statistics

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

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