2022, a year that was anything but normal
After two years of ups and downs, marked by the COVID-19 pandemic in 2020 and booming economic activity following the post-crisis rebound in 2021, one might have expected somewhat 2022 to be a regular year. 2022 was an unusual year from every point of view yet.
Economic conditions have suffered throughout the year in the aftermath of the conflict in Ukraine. Europe is significantly impacted due to its reliance on energy imports. To fight soaring inflation, the European Central Bank (ECB) have passed successive rate hikes While GDP held up well this year, price pressures have reached a high and a recession is looming. As a result, GDP growth is expected to drop to 1.1% in 2023. However, we anticipate just a little slowdown because Europe has already managed to reduce Russian gas imports without disrupting activity and is expected to gain from the same post-pandemic improvements. Given the lowered prospects of a major recession and sustained inflation, we now anticipate rate hikes until May, with the ECB peaking at 3%.
Despite remaining above the ECB targets, inflation slowed in the last quarter of 2022 as the economy faltered. However, annual inflation has been revised upwards to a new threshold of 9.74%. According to the most recent forecasts, running inflation will continue in 2023, and the market should suffer a mild recession. Inflation level will decelerate to 7.40% in 2023 before broadly closing in on the ECB’s 2% target from 2024.
Despite a mild recession impacting the Belgian economy, the unemployment rate is expected to decline further next year to 5% before increasing again in the following years, according to Moody’s Analytics’ baseline scenario Significant job growth is projected in the administration, personal services, and industry-R&D sectors during the next couple of years, while the banking, finance, and insurance sectors are expected to employ fewer people.
GDP Growth and unemployment rate
Inflation rate
A new standard for the occupational market
In Q4, 84,000 sq m of take-up has been recorded, which brings the total in 2022 to 315,000 sq m. Office demand in Brussels has been significantly lower to its annual average levels with a decrease of 20% compared to five-years average of take-up recorded.
In a nutshell, occupier demand is experiencing hesitation in the aftermath of the conflict in Ukraine. Demand in Brussels can be essentially defined as existing players on the market in search of quality office (as much or less) spaces. Demand for these types of assets is reinforced by companies’ ESG requirements.
Public sector will play an essential role next year
In Q4, public and non-profit sectors contributed just over 20% share of take-up, mainly led by the 5,200 sq m purchase for own occupation by the VGC in the property located on Rue aux Choux 35. Although demand from the public sector has been consistent this year, it may increase take-up next year with large transactions as it did in 2019.
Indeed, some large deals involving a couple of public sector occupiers including EU institutions should ensure strong take-up over the next couple of quarters. The Office for Infrastructure and Logistics in Brussels is in need of 100,000 sq m of new office spaces over the next three years, and negotiations to take part of Engie Towers are ongoing.
Prime rents should move up again next year
Following a rise in Q3, prime rents in the Leopold district remained stable in the fourth quarter of 2022, at EUR 340/sq m/year. Rents in other districts are also unchanged, ahead of a likely increase next year. Indeed, some projects, such as The Louise in the samenamed district, are even demand as much as EUR 300- or more/sq m/year, but it remains to be seen whether these can materialise as a trend, rather than an exception. The average weighted rent is trending upwards at EUR 185/sq m/year, against EUR 183/sq m/year in 2021, due to the sheer weight of Grade A take-up.
Take-up by quarter (000s sq m)
Public and Private take-up (000s sq m)
Prime rents (€/sq m/year)
150,000 sq m of developments to meet demand up to 2023
In the fourth quarter of 2022, some additional 27,000 sq m of new projects have been delivered, which brings the total to more than 200,000 sq m. Furthermore, no less than 150,000 sq m will be delivered by the end of next year, meaning these two years will be a milestone in terms of new deliveries. The largest developments are The Wings, a 25,000 sq m asset located in the Airport district planned for Q4 2023, and Royale Belge, a mixeduse project including 21,000 sq m project located in the South district planned for Q2 2023, both being pre-let.
The significant 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.
Stable vacancy rate despite a lot of deliveries
The vacancy rate remains stable in Q4, to a level of 7.78%. 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 22%.
Sticking with sustainability
Occupational market fundamentals are generally still healthy, but slowing economic growth weighs on leasing demand. The office sector has been most impacted by the pandemic due to the permanent shift towards hybrid working. Whilst occupiers may have reduced their overall need for office space, there has been a notable shift towards leasing better quality space that supports corporate sustainability targets.
On 19 December, the European Commission joined 195 countries in the historic KunmingMontreal Global Biodiversity Framework. This framework contains global goals and targets aiming to protect and restore nature and remove pollutions, including reduce global footprint of consumption by 2030, with the real estate sector being no exception.
Office pipeline (000s sq m)
Vacancy rate
Distribution of take-up by grade since 2018
A bad year for the economy...
The European Central Bank (ECB) raised its interest rates by another 50 bps to 2% at the December meeting, moving further away from a decade of ultra-easy policy That decision, which was expected, marked a slowdown in the pace of tightening compared to the ECB’s two previous 75 bps hikes, as price pressures show some signs of peaking and a recession looms. The “Upside” and “Downside” scenarios correspond to the evolution of OLO 10y in various circumstances. The former predicts a quick settlement to the conflict in Ukraine, while the latter anticipates a protracted struggle.
As a result, prime office yields have been revised upwards again this quarter to a year-end level of 4.10%. 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.
… A better year for investment market
In the last quarter of 2022, more than 500 MEUR was invested on the Brussels office market which brings the total invested volume for the year to approximatively EUR 3 bn, a record year for the investment market despite turbulent market conditions.
However, after two hectic quarters, trading volumes have slowed down in Q4. The rise in yields and tightening financing conditions witnessed in Q3 has significantly impacted the investment market this quarter, and trading volumes currently being lower. Two large transactions still took place, representing more than 50% of the total invested this quarter Corum AM has recently acquired AXA IM’s Hendrick Conscience, while the US government has taken over Cours Saint-Michel to redevelop a build-to-suit project for its own purpose, for 175 and 102 MEUR respectively.
Challenges ahead but with potential opportunities
Rising rates have pushed up property yields, causing values to decline. Despite the rise in prime office yields, the spread with bond yields remains historically low, indicating further potential declines in property values Regarding our outlook, Cushman & Wakefield forecasting has elaborated a baseline short-term mild recession scenario in the Euro zone (50% probability). In this scenario, office property values could fall by 20% in Europe in 2023.
Just as investor demand has been curtailed, some property funds are dealing with a wave of redemption requests. To raise cash, they may need to sell assets, adding supply at a time of falling demand.
Prime yields Investment volumes by quarter (MEUR)
Prime LT Prime Upside Downside 10y. Bond 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2018 2019 2020 2021 2022
Office property index value
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
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION
©2022 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.
cushmanwakefield.com