MARKETBEAT
Q3 2023
MARKETBEAT LUXEMBOURG / Office Q3 2023
88K
YoY Chg
12-Mo. Forecast
Take-up (sq m)
4.23%
YoY Chg
12-Mo. Forecast
YoY Chg
12-Mo. Forecast
YoY Chg
12-Mo. Forecast
Vacancy rate
54€ Prime rent (EUR/sq m/month)
5.00% Prime yield (9y. lease)
A mild recession in 2023 Due to the current global economic conditions, the projections have undergone a significant shift, and the Luxembourg economy is now on track for a mild recession in 2023. Several elements, such as elevated commodity prices, more stringent borrowing terms, ongoing subdued consumer confidence, and reduced business competitiveness, are exerting and will persist in exerting pressure on economic expansion. In the second quarter of 2023, Luxembourg’s gross domestic product (GDP) experienced a contraction of 0.13% compared to the precedent quarter, leading to a projected annualized growth now estimated to be negative, at 0.35%. Nevertheless, the Luxembourg economy is expected to recover starting from 2024, with anticipated GDP growth rates of approximatively 2.4% and 1.7% in 2025. Undoubtedly, inflation has been the primary catalyst for economic activity. After peaking at 12% last year, the ECB found it necessary to persist in tightening its policy. In September, the ECB implemented its tenth consecutive rate hike, bringing rates to 4.5%, the highest point since the introduction of the euro. Consequently, the inflation rate in Luxembourg has experienced several declines in recent months, although it remains above the ECB's 2% target. In September, the consumer price index saw an increase from 4.2%. Concurrently, alongside this decline in GDP, the unemployment rate has been on an upward trajectory this year. It is projected to reach 5.09% by the end of 2023, before embarking on a decline from 2024, reaching levels of 4.9% and 4.8% in 2025. The number of bankruptcies rises slightly in the third quarter of 2023 (162 compared with 157 judgements in the third quarter of 2022, i.e., +3%). During the first nine months of 2023, the number of bankruptcies rose by 9% (710 compared with 650 judgements between January and September 2022).
Economic Indicators Q3 2023 YoY Chg
12-Mo. Forecast
-0.35%
GDP Growth and unemployment rate
Inflation rate
2023 GDP Growth
5.09%
2023 Unemployment Rate
3.82%
2023 Consumer Price Index
7% 6% 5% 4% 3% 2% 1% 0% -1%
7% 6% 5% 4% 3% 2% 20 18
Sources: Moody’s Analytics, Statec Lux, Eurostat, October 2023 Please note the economic data can vary significantly from one source to the other. Therefore, the figures provided should merely be used as an indication or trend.
20 19
20 20 GDP
20 21
20 22
20 23
20 24
Un empl oymen t Ra te
20 25
1% 0% 20 18
20 19
20 20
20 21
20 22
20 23
20 24
20 25
MARKETBEAT LUXEMBOURG / Office Q3 2023
Take-up has decreased by almost 50% In the third quarter of 2023, the Luxembourg office market saw 38 transactions, resulting in a total take-up of 12,485 sq m. This brings the year's total take-up to 88,238 sq m. Demand has dropped by 48% compared to the same period in 2022. When projecting activity using the average Q4 demand over the last five years, the total take-up would be 150,000 sq m, still nearly 30% lower than 2022, which itself saw a 40% decrease from 2021. This decline is primarily attributed to reduced interest from the private sector, where the consideration for new office space is currently not a top priority. Due to challenging economic conditions, the present level of demand, one of the lowest in six years, is even worse than that of 2020, a year defined by the COVID-19 pandemic and subsequent restrictions.
Ever-smaller transactions Alongside the general decrease in take-up, there was also a decline in the number of deals this year. However, this only accounts for a portion of the overall drop in take-up. Presently, the average transaction size stands at 674 sq m, marking a reduction of nearly 350 sq m compared to the recent average. This unequivocally illustrates the trend of downsizing among occupiers in Luxembourg, particularly within corporate entities.
Take-up by quarter (000s sq m) 40 0 35 0 30 0 25 0 20 0 15 0 10 0 50 0
30 0 25 0 20 0 15 0 10 0 50 0 20 18
20 19
Q1
20 20 Q2
20 21 Q3
20 22
20 23
Q4
# de als
Average surface by transaction 1,60 0 1,40 0 1,20 0 1,00 0 80 0 60 0 40 0 20 0 0
Rents are expected to continue to rise Even with a decline in activity, prime rents have shown resilience across all submarkets, and they continue to follow an upward trend overall. The increasing significance of ESG considerations continues to play a pivotal role in shaping the future landscape of corporate office spaces. As a result, it is anticipated that prime rents will continue to climb in the upcoming months, possibly reaching 56 EUR/sq m/month as the new benchmark for the Luxembourg office market by the conclusion of 2024. Each district is expected to exhibit a comparable pattern, potentially experiencing an uptick of €1 per square meter per month. Consequently, prime rents in Kirchberg might reach 43 EUR/sq m/month in Q4, while Cloche d'Or could also witness its prime rents reaching 38 EUR/sq m/month, also in the fourth quarter.
20 18
20 19
20 20
20 21
20 22
20 23
Prime rents (€/sq m/month) 55 50 45 40 35 30 25 20 20 18
20 19
20 20
CBD Station Oth er inn er districts Peri phe ry
20 21
20 22 Kirch berg Cl oche d 'Or De central ised
Q3 23
MARKETBEAT LUXEMBOURG / Office Q3 2023
The coming months: a milestone in office deliveries In the upcoming months, a significant milestone in office deliveries is anticipated in the Luxembourg market. This signals a shift towards more environmentally, socially, and governance (ESG) efficient workspaces. The total office space is projected to grow by approximately 550,000 sq m by the end of 2025, reaching a cumulative 5 million sq m. Despite an annual addition of over 220,000 sq m, which nearly equals the average annual take-up in previous years, there is no indication of the market veering off course, as nearly 70% of the forthcoming supply has already been pre-leased. Recent years have witnessed a noteworthy surge in pre-lease transactions. It is anticipated that with the easing of the economic situation, the introduction of new projects will infuse a greater level of dynamism, aligning demand with supply.
A polarised vacancy The vacancy situation presents a clear divide. Even with a decrease in demand, the vacancy rate held firm at 4.2% in the third quarter. Despite the anticipation of a substantial influx of projects into the available market, it is predicted that the vacancy rate will maintain its stability. However, this stability will not be uniform across the market. The premium segment (Grade A) is expected to remain unaffected, while there may be an uptick in vacancy rates in Grade B and particularly in Grade C, as tenants transition from older offices to more contemporary workspaces.
Office pipeline (000s sq m) 35 0 30 0 25 0 20 0 15 0 10 0 50 0 20 22
20 24
20 25
Pre-l et
Avai lab le
Co mple te d
20 19
20 20
20 21
Vacancy rate 10 .0 0%
5.00 %
0.00 % 20 18
CBD Station Oth er inn er districts Peri phe ry
Glide path to clearer skies After the ECB's latest interest rate hike in September, marking one in a series of increases, the correction in CRE, which started in mid-2022, persists. According to Cushman & Wakefield’s forecasting, the European Central Bank (ECB) will pause after the recent hike, bringing it to 4.5% in the September 2023 meeting. The increases in interest rates and ongoing credit tightening is expected to be sufficient to slow the economy and bring inflation back to target, allowing both the ECB and the National Bank of Belgium (NBB) to pivot in Q3 2024. Simultaneously, commercial property values are predicted to decline further, ultimately experiencing a total peak-to-trough decrease of 25-35% by mid-2024.
20 23
20 22
Q3 23
Kirch berg Cl oche d 'Or De central ised d istricts Lu xembo urg
Office property index value 12 0 10 0 80 60 40 20 0 20 21
20 22 Base lin e
20 23 Up side
20 24
20 25 Do wnsi de
MARKETBEAT LUXEMBOURG / Office Q3 2023
Investment volume plummeted by nearly 90% In line with a challenging start to the year, with investment volume reaching only 25 million euros in the first half, marking it as the slowest start on record, the third quarter saw a similar level of quietude. Only two transactions were recorded, amounting to a total of 45 million euros. Cores recently entered into the capital of Atenor's Square 42, a 10,000 sq m development project in Esch-Belval, for 30 MEUR, while LaLux Assurances acquired the 3,300 sq m of Gravity in Differdange for 15 MEUR. The ongoing increase in yields and the tightening of financing conditions have had a noteworthy impact on the investment market in the initial nine months of the year. The collective total now stands at 70 million euros, reflecting a substantial 88% decrease from the 628 MEUR invested in Q1-Q3 of the previous year.
Uncertainty hampers the investment market Due to persistently high inflation and increasing interest rates, the ”cost-of-money” is on the upswing, causing a shift in the underlying dynamics of the commercial real estate market. These shifts are reflected in high yield expectations and lower investment volumes. In the first three quarters of 2023, the average transaction volume stands at approximately 17 MEUR, a notable contrast to the 55 MEUR recorded in 2022. Furthermore, there has been a significant decline in international investment. Americans have notably scaled back their involvement in European real estate, and likewise, Asian investors have redirected their investments from Europe towards North America.
4% 3% 2% 1% 0%
Prime
LT Prime
23 Q
3
23 2 Q
23 1 Q
20 22
20 21
-1% 20 20
Yet, as Christine Lagarde, President of the ECB, asserts, ECB interest rates have reached levels that will make ‘a substantial contribution to the rapid return of inflation to the target’, this may be the peak for rates in drive to bring down stubborn inflation. Consequently, prime yields might experience further ascension in the upcoming months, but it is anticipated that a plateau will be reached in 2024.
5%
20 19
As time passes, the European Central Bank persistently raises interest rates. With the tenth consecutive hike this quarter, ECB interest rates have now reached 4.5%, marking their highest point since the introduction of the euro. Consequently, prime yields have once more been adjusted upward, and by the end of Q3, they theoretically stand at 5.00% for standard leases.
Prime yields
20 18
The end of interest rate hikes?
10 y. Bon d
Investment volumes by quarter (MEUR) 2,50 0 2,00 0 1,50 0 1,00 0 50 0 0 20 18
20 19
20 20 Q1
Q2
20 21 Q3
Q4
20 22
20 23
MARKETBEAT LUXEMBOURG / Office Q3 2023 Market Statistics SUBMARKET
STOCK (SQM)
AVAILABILITY (SQM)
VACANCY RATE
Q3 2023 TAKE-UP
2023 TAKE-UP
UNDER CONSTRUCTION (SQM)
PRIME RENT (€/sq m/mth)
PRIME YIELD
CBD
876,648
20,480
2.34%
1,173
10,887
28,519
€54
5.00%
Kirchberg
1,369,637
23,034
1.68%
408
10,121
346,469
€42
5.15%
Cloche d’Or
487,938
18,233
3.74%
2,329
18,657
34,443
€37
5.15%
Station
495,449
13,722
2.77%
2,142
10,004
15,488
€39
5.10%
Other inner districts
262,372
13,777
5.25%
532
2,267
17,136
€35
6.00%
Decentralised
476,091
39,634
8.32%
2,372
13,451
53,563
€30
6.75%
Periphery
649,154
66,945
10.31%
3,247
22,941
114,957
€26
6.75%
Luxembourg (Overall)
4,625,587
195,847
4.23%
12,320
88,328
610,575
€54
5.00%
Key Lease Transactions Q3 2023 PROPERTY
SUBMARKET
TENANT
SQ M
TYPE
Hitec
Cloche d’Or
Green Square SA
2,329
Letting
Station
Rothschild & CO IM
1,241
Letting
Moonar D
Decentralised
Wundermann Thompson SA
1,042
Letting
Longwy 488
Other inner districts
CGFP
900
Purchase
Airport Center
Decentralised
Baumann & Partners SA
579
Letting
Central Plaza
Key Investment Transactions Q3 2023 PROPERTY
SUBMARKET
BUYER / SELLER
Volume (in MEUR)
Yield
Square 42
Periphery
Cores / Atenor
30
-
Gravity
Periphery
LaLux / BPI & Unibra
15
5%
MARKETBEAT
Benjamin DEVIE Research Analyst | Belgium & Luxembourg +32 492 11 35 10 benjamin.devie@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
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION ©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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