Q1 - 2024 | Office Marketbeat | Luxembourg

Q1 2024

Early 2024 shows signs of recovery

After a turbulent 2023, the Luxembourg economy appears to be finding its footing in early 2024. While the road to full recovery remains ahead, recent data and forecasts paint a picture of cautious optimism

Following a contraction in 2023, recent forecasts from Moody’s Analytics anticipated a modest expansion of around 0.7% in 2024. This upswing is attributed to a combination of factors, including continued spending by households, increased government investment, and a revival in exports

Inflationary pressures, a major concern in 2023, started to show signs of easing in early 2024. Forecasts projected a decline in inflation to approximately 2 2% compared to a peak of 3 7% in the previous year This decrease is largely attributed to falling energy prices. However, the persistence of core inflation (excluding volatile food and energy prices) suggests some underlying inflationary risks. Consequently, the European Central Bank's (ECB) anticipated interest rate reductions in 2024 might be more gradual than initially expected.

The unemployment rate, which had been rising due to the economic slowdown in 2023, has shown signs of stabilisation in early 2024. Forecasts predict a gradual decrease in unemployment throughout 2024 and 2025, to a level of around 5%, suggesting a positive trend for the labour market.

As a highly integrated economy, Luxembourg remains heavily influenced by the health of the eurozone. Fortunately, a slight upturn in the eurozone's growth trajectory is expected, which should benefit Luxembourg's exports, a crucial engine of the economy.

The Luxembourg economy in early 2024 presents a picture of cautious optimism While growth remains sluggish, positive factors like declining inflation and a potentially improving labour market offer hope for a brighter future.

GDP Growth and unemployment rate Inflation rate

LUXEMBOURG / Office Q1 2024

Continued subdued activity

In the last couple of years, the Luxembourg occupier market has seen a period of limited activity, and this trend persists in 2024. Take-up, in fact, is below the average of the first quarter over the past five years, dropping by nearly 30,000 sq m to just under 25,000 sq m in 2024 Only in 2019 did things start off more challenging

As the Luxembourg occupational market navigates through a period of decreased activity, one notable trend emerges: a decline in the average transaction size. Just two years ago, transactions typically encompassed over 1,200 sq m of space. However, in the first quarter of 2024, this figure has dwindled to 690 sq m It is worth noting that in 2023, there was a temporary rebound in the average transaction size. However, this uptick was somewhat artificially boosted by two massive transactions exceeding 30,000 sq m each, involving KPMG and the European Parliament.

This downward shift in transaction size suggests evolving dynamics within the market, potentially reflecting adjustments in demand, supply, or economic conditions

Luxembourg state leads in quarter’s largest transaction

The public sector remains actively involved in supporting market activity by finalizing the largest transaction of the quarter. Once more, the Luxembourg State has reaffirmed its prominent position in the occupational market by sealing yet another significant deal. This time, the focus is on the latest phase of development within Terres Rouges complex, where the Luxembourg State has secured a lease of 10,000 sq m in Building F

Rising average rents amidst stagnant prime rents

In Luxembourg's office occupier market, a lack of activity has resulted in stagnant prime rents. However, driven by increasingly prevalent ESG requirements, average rents have risen in the first quarter of 2024 to 35€/sq m/year. This uptick suggests a growing emphasis on sustainability and corporate responsibility within the market.

Moving forward, it is anticipated that this pattern will escalate even more. As activity is projected to surge, particularly in 2025, there could be a discernible rise in prime rents as well.

Take-up by quarter (000s sq m)

Average surface by deal

Prime rents (€/sq m/month)

LUXEMBOURG / Office Q1 2024

Finally, prime yields stabilise

For the first time since June 2022, prime yields experienced a slight decline over the quarter, largely due to the European Central Bank maintaining rates unchanged since September 2023.

Currently, prime yields are at 5% for CBD, while remaining unchanged in other districts at 5.25% for Kirchberg and Cloche d’Or and 5.20% for Station. In the Other Inner districts, prime yields hold steady at 6.10%, while in Decentralised and Periphery, they maintain at 6.60%.

Despite optimistic forecasts, central bankers remain cautious amid the volatile geopolitical landscape and the looming possibility of inflation resurgence, especially with core inflation persisting. Consequently, although central bank interest rates are projected to decrease in 2024, they are likely to do so at a more gradual pace than what financial markets are predicting Similarly, prime yields are also expected to decline by the year’s end

Investment market starts strong with landmark acquisition

The Luxembourg office investment market kicked off 2024 with a bang, despite recording only one transaction in Q1. This single deal, however, was a record-breaker, showcasing continued investor confidence in the city's prime office segment.

Pontegadea, the family office behind fashion retail giant Inditex, acquired Royal Park, a redevelopment project in the CBD, for a staggering 175 MEUR, a record considering the current economic climate. The acquisition price reflects a yield of 4.75%, which could be a benchmark for the market. However, it's important to consider that the property comes with a longer-term lease agreement Overall, this deal highlights that prime office yields in Luxembourg slightly decrease in early 2024.

Interest rates: Switzerland cuts, Japan hikes

In March 2024, central banks implemented contrasting monetary policies, with Switzerland cutting rates while Japan raised them for the first time in 17 years. The Swiss National Bank reduced rates to address currency appreciation after successfully managing inflation. Conversely, the Bank of Japan aimed to tackle rising inflation after years of stagnation

As for Luxembourg and the European Central Bank (ECB), they are expected to adopt a cautious stance, monitoring inflation closely without an immediate need for rate adjustments. Luxembourg, as a Eurozone member, would likely align with the ECB's approach. While rising inflation could prompt rate hikes later in 2024, economic uncertainties make rate cuts unlikely in the near term.

Prime yields

Building momentum and environmental shifts

Following a bustling year for new office space deliveries in 2023, 2024 has commenced with equal vigour, as evidenced by the introduction of 23,000 sq m to the Luxembourg market Notably, the largest project, Royal Park, spanning 10,000 sq m and situated in the heart of the CBD, achieved remarkable success by securing full pre-lease commitments prior to its completion.

Looking ahead, the remainder of the year holds similar promise, with an additional 150,000 sq m currently under construction.

With numerous projects underway, the market braces itself for new environmental standards, prompting occupiers to gravitate towards energy-efficient properties. This shift is apparent in the considerable portion of pre-lets slated for the end of 2024, accounting for nearly 50% of the pipeline. It's evident that the gap will swiftly close in the months following the completion of these projects.

Rising vacancy rate in the Luxembourg market

The trend of increasing vacancies in the Luxembourg market, observed previously, persists into the first quarter of 2024. The ongoing weak demand, witnessed over several quarters, continues to exert pressure on the vacancy rate, which climbs from 4.28% at the close of 2023 to 4.32% in Q1 24.

While vacancy rates remain unchanged in almost all markets, the CBD experiences a rise in vacancies at the year's onset due to speculative deliveries. The overall vacancy rate in central districts is slightly below 3%, whereas in the Other Inner districts, Decentralised and Periphery, it stands at 5 25%, 8 2% and 10 4%, respectively

Additionally, across all grades, vacancy rates are on the rise. Despite Grade A buildings typically being in high demand due to ESG requirements, vacancy rates are also rising in newly built buildings, some of which have come onto the market partially unoccupied, with sluggish activity hindering their occupancy.

Outlook 2024

The outlook for the future suggests a steady but cautious trajectory. Without significant transactional drivers, the year is expected to see a take-up level ranging between 150 to 180,000 sq m. However, true momentum may be delayed until 2025 when a more robust recovery is anticipated.

Vacancy rate

LUXEMBOURG / Office Q1 2024

Market Statistics

Key Lease Transactions Q1 2024

Key Investment Transactions Q1 2024

Benjamin DEVIE

Senior Research Analyst | Belgium & Luxembourg

+32 492 11 35 10

benjamin.devie@cushwake.com

Sebastien BEQUET

International Partner | Head of Luxembourg

+352 661 36 47 12

sebastien.bequet@cushwake.com

Michael DESPIEGELAERE

Head of Capital Markets | Belgium & Luxembourg

+32 476 82 08 59

michael.despiegelaere@cushwake.com

cushmanwakefield.lu