Q1 2023 | Office Marketbeat | Luxembourg

/ Office Q1 2023

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 1 3% in 2023 according to the government statistics service of Luxembourg Overall, Luxembourg’s economy is expected to continue performing quite well, driven by domestic demand, favorable fiscal policies and a resilient financial sector, outpacing the Eurozone average

The unemployment rate declined these last two years but is expected to increase as from 2023 and to reach 4.8% according to the lastest forecasts released Moody’s. It should remain stable after 2023, around 4.8% to 5% up to 2025

After having peaked in 2022-Q2, headline inflation gradually decelerated in the last two quarters, driven by the slowdown in energy and services price growth, while prices of food and non-energy industrial goods continued to accelerate. The projected further decrease in wholesale energy prices in combination with a package of government measures to support households and businesses in mitigating the impact of elevated energy costs are expected to ease inflationary pressures in 2023. Overall, inflation is set to decrease significantly to 3.2% in 2023 and further to 2.1% in 2024 according to the latest forecasts released by Moody’s.

GDP Growth and unemployment rate Inflation rate

LUXEMBOURG / Office Q1 2023

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

Occupational market activity slowed further in Q1 2023, with a total take-up of 50,000 sq m. This represents a 30% decline compared to Q1 2022. Following two years of adjusting to new ways of working as a result of the COVID-19 epidemic, we anticipate a normalisation trend in the office leasing market in 2023, with an annual take-up of 210,000 sq m comparable to last year.

Pre-letting plays an essential role in the activity

Digging deeper into the take-up reveals more than a handful of transactions over 4,000 sq m, the majority of which related to Grade A spaces. Chief among these was a 8,700 sq m pre-letting by the Luxembourg State in Centre Administratif Nordstad, the redevelopment of Ettelbruck One. This is followed by a 8,200 sq m pre-letting by Intertrust in White House and Emerald and a 4,400 sq m pre-letting by DLA Piper in Nova, both under construction.

These three transactions illustrate the significance of pre-letting in today’s market, especially when the transactions occur in projects in the pipeline. Pre-letting accounts for 45% of total-take up in Q1 2023.

Prime rents should move up again

Following a rise last year, prime rents in the CBD district remained stable in the first quarter of 2023, remaining at EUR 54/sq m/month. Rents in other districts are also unchanged, ahead of a likely increase this year Indeed, inflation is naturally followed by an indexation phenomena that inexorably pushes rents upwards, thus we anticipate a new threshold of EUR 55/sq m/month in the CBD by the end of 2023.

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, thanks to the weight of Grade A deals in Q1, average weighted rents increase to 34€/sq m/month

Take-up by quarter (000s sq m)

Prime rents (€/sq m/month)

LUXEMBOURG / Office Q1 2023

Strong pipeline can ensure healthy dynamic

The pipeline for the coming years is substantial, with 415,000 sq m of new or renovated office space added to the stock by 2025. These also include a good share of speculative developments, such as Skypark Business Center, a 50,000 sq m project developed in two phases, located in the Airport or The Waves, a 14,000 sq m development in the Kirchberg. 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 increase in the first quarter of 2023, to a level of 4.2%. 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.

For 2023, we expect occupier space reductions to contribute to an increase in the vacancy rate to 4.5% globally for Luxembourg. 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

The private sector accounts for two-thirds of total take-up

In the first quarter of the year, the corporate sector represents 66% of the take-up recorded, mainly driven by activity stemming from the financial and insurance sector (30% share), service & consultancy firms (19% share), and law firms (10%).

Public and non-profit sectors contributed some 17,000 sq m across four deals, all carried out by the Luxembourg State.

Looking ahead, we anticipate demand will be driven usually by the financial and legal industries, as indicated by today's statistics. The public sector, particularly the State, will continue to be a key player role in future activity.

Office pipeline (000s sq m)

Vacancy rate

LUXEMBOURG / Office Q1 2023

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 U.S. and Credit Suisse in Europe, has added uncertainty to the path ahead. If the ECB’s economic forecasts prove accurate once the 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 the year 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 4.40% in 2023.

The investment market is taking a hit

After two quarters marked by a slowdown in the investment market due to turbulent market conditions, the market is stalling in the start of 2023. This quarter only one transaction has been recorded, totalling 17 MEUR, making it the lowest Q1 ever.

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.

Investors are attracted by both ends of the risk spectrum

Despite uncertain economic conditions, both national and international investors continue to take a strong interest in Luxembourg. Even when rates and yields rise, the fundamentals of Luxembourg 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 LTCore 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 represents 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.

Prime yields

Investment volumes by quarter (MEUR)

Distribution of invested volumes by risk type

MARKETBEAT

LUXEMBOURG / Office Q1 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

Sébastien 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

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©2023 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.

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