Q2 2023 | Office Marketbeat | Luxembourg

LUXEMBOURG / Office Q2 2023

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 1 4% for the whole year, above the EU level The Luxembourg outlook is therefore tempered, whereas stronger GDP growth is predicted beginning in 2024 and will continue in 2025. GDP growth is expected to be approximatively 2.3% in 2024 and 1.7% in 2025.

According to the most recent projections, the unemployment rate should reach 4 9% this year The different industries are performing differently. Indeed, while employment growth is expected to be 2.5% in the public sector, the banking and financial sector should see growth of almost 3.5% in Luxembourg this year. Over the coming years, the unemployment rate is expected to steady at 4.85%

After reaching an all-time high last year, inflation in Europe and Luxembourg is gradually declining. It is now 3.6% in Luxembourg (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 point in July.

GDP Growth and unemployment rate Inflation rate

LUXEMBOURG / Office Q2 2023

Historically low take-up

The Luxembourg office market experienced one of the worst Q2 ever with 25,164 sq m of take-up. This brings the overall take-up in H1 to 75,843 sq m, lower than the five- and tenyear averages for take-up through the first half of the year, but higher than the same period in 2019.

In addition, the number of transactions is down in the first half of 2023, -30% compared to last year, demonstrating that occupier demand is wavering in this unstable atmosphere. Demand in Luxembourg can be simply defined as existing players on the market who are now taking a delayed decision on their move transactions.

The public sector keeps the market afloat

While take-up is falling in the first half of 2023, the positive impact of the public sector should not be underestimated. With 25% of overall take-up, the public sector still limits the downturn in demand, which would be only 50,000 sq m after 6 months without this player.

Two of the three largest transactions recorded this semester were letting deals by the State of Luxembourg, 8,700 sq m and 5,500 sq m, respectively, and, in addition, the largest transaction of the quarter was a 2,300 sq m letting by the State of Luxembourg in the Technopolis.

The State of Luxembourg has signed for 16,500 sq m, or more than 20% of the overall take-up, with only these three deals.

Rents are expected to continue to rise

Following a rise last year, prime rents have stayed unchanged this quarter, at 54€/sq m/month for Central districts, 33€/sq m/month for Other inner districts, 30€/sq m/month for Decentralised districts and 26€/sq m/month for the Periphery.

Take-up by quarter (000s sq m)

Take-up by sector (000s sq m)

Prime rents (€/sq m/month)

However, with demand for the most energy-efficient buildings

outstripping

supply and tightening financial conditions, 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, are expected to reach a new high of 55€/sq m/month. Meanwhile, prime rents in Other inner districts and Decentralised are likely to rise by 0.5€, reaching 33 5€/sq m/month and 30 5€/sq m/month, respectively

Abundance of projects with significant pre-let occupancy

By the mid-year mark, no less than 94,000 sq m of (re-)developed office space had been delivered on the Luxembourg market, including Mercier Building and Nova, two projects that had achieved pre-let transactions. Furthermore, more than 98,000 sq m are expected to be delivered by the end of the year.

In the medium term, more than 430,000 sq m are currently under construction and should be entering the market, with more than 65% 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.

Vacancy rate remains very low

LUXEMBOURG 5%

Despite a drop in take-up and a steady increase in developments, the vacancy rate remains stable in the first semester of the year, standing at a level of 4.17%. This constancy may be attributed to a couple of factors, a large number of (re-)conversion projects and a large number of renegotiations.

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

Office pipeline (000s sq m)

0 50 100 150 200 250 300 350 2022 2023 2024 2025 Pre-let Available Completed

Vacancy rate

/ Office Q2 2023 10% 2018 2019 2020 2021 2022 H1 23 CBD Kirchberg Station Cloche d'Or Other inner districts Decentralised districts Periphery Luxembourg

LUXEMBOURG / Office Q2 2023

Towards a cap on prime yields?

At its June meeting, the European Central Bank (ECB) hiked interest rates by 25 bps to 3.5% This eighth rise, lower than the previous ones, signals a slowing in rate hikes, since the ECB is approaching its “cruising altitude”, and the global environment is shifting, with the U.S. Federal Reserve widely expected to put its tightening cycle on hold. As a result, prime yields have been revised upwards again to a level of 4 60% for standard leases

However, even after the ECB’s unprecedented campaign, headline inflation continues to run at more than three times then central bank’s price stability target. Therefore, 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 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 Luxembourg office market at this time last year, but the volume invested currently totals only 25 MEUR. “Big tickets” that fuelled the investment market last year are already a thing of the past, with current volumes peaking at 17 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 12 MEUR, compared to 50 MEUR last year. The only transaction recorded this quarter is the sale of Monterey 18 by Nextensa for 7 5 MEUR

Exclusively local 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. Since H2 2022, almost a fifth of the volume recorded has come from Luxembourg players, with the rest of the volume coming from neighbouring countries, especially Belgium.

Furthermore, five of the eleven transactions recorded over the same period, were in the Value-add/Redevelopment field, demonstrating the opportunism of investors striving to create value in renovation projects.

MARKETBEAT

LUXEMBOURG / Office Q2 2023

Market Statistics

Key Lease Transactions Q2 2023

Key Investment Transactions Q2 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

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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