Q4-2022 | Office Marketbeat | Luxembourg

/ Office Q4 2022

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 6.4%. 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 3.7% in 2023 before broadly closing in on the ECB’s 2% target from 2024.

According to Moody's Analytics' baseline scenario, after two consecutive years of decline, the unemployment rate in Luxembourg is likely to climb again next year to 4.7% due to a mild recession impacting the Luxembourg economy

GDP Growth and unemployment rate Inflation rate

LUXEMBOURG / Office Q4 2022

A new standard for the occupational market

In Q4, 36,000 sq m of take-up has been recorded, which brings the total in 2022 to 207,000 sq m. Office demand in Luxembourg has been significantly lower to its annual average levels with a decrease of 28% compared to five-years average of take-up recorded. However, the number of transactions remained at the same level as previous year, indicating that the market is mostly dependent on smaller transactions This year's average transaction size is 630 sq m, down from 1,400 sq m last year.

In a nutshell, occupier demand is experiencing hesitation in the aftermath of the conflict in Ukraine. Demand in Luxembourg 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, a muted player

After accounting for more than 40% of overall take-up in the previous two years, the public sector contributed just 20% this year, mainly led by the 9,400 sq m letting transaction by the Luxembourg state in the property located on Rue Thomas Edison 2. Although public sector demand has returned to 2018 - 2019 levels, significant public transactions might increase the take-up next year, as they did in 2021.

Prime rents should move up again next year

Following a rise at the start of the year, prime rents in the CBD district remained stable in the fourth quarter of 2022, remaining at EUR 54/sq m/month. Rents in other districts are also unchanged, ahead of a likely increase next year. Indeed, inflation is naturally followed by an indexation phenomena that inexorably pushes rents upwards, thus we anticipate a new threshold of EUR 56/sq m/month in the CBD by the end of next year.

Despite declining demand, the average rent has stayed at EUR 32/sq m/month this year

For the past two years, the transition to buildings that meet the highest environmental requirements has resulted in higher rents, but the reduction in surface area allows for this rent gap to be filled while the cost to businesses remains the same.

Take-up by quarter (000s sq m)

Public and Private take-up (000s sq m)

Prime rents (€/sq m/year)

LUXEMBOURG / Office Q4 2022

250,000 sq m of developments to meet demand up to 2023

In the fourth quarter of 2022, some additional 17,000 sq m of new projects have been delivered, which brings the total to more than 100,000 sq m. Furthermore, no less than 250,000 sq m will be delivered by the end of the next year, meaning these two years will be a milestone in terms of new deliveries. The largest developments are Jean Monnet, a 75,000 sq m asset located in the Kirchberg planned for Q3 2023, and Skypark Business Center, a 30,000 sq m project located in the Airport district planned for Q2 2023.

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.

Slight increase in vacancy rate

The vacancy rate has increased in Q4, to a level of 4.16%. Despite a lot of office space delivered this year, 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.

Due to the large number of deliveries and a decline in activity this year, the various districts have witnessed a considerable increase in vacancy, particularly those in the Periphery, Decentralised, and the Other inner districts.

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.

Office pipeline (000s sq m)

Vacancy rate

LUXEMBOURG / Office Q4 2022

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

As a result, prime office yields have been revised upwards again this quarter to a year-end level of 3.80%. 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 4.35% in 2023. More information are available here.

… but also for investment market

More than EUR 110 million was invested in the Luxembourg office market in the fourth quarter of 2022, bringing the total volume spent for the year to roughly EUR 750 million, a first since 2013, when less than EUR 1 billion was invested yearly. However, after two usual quarters, trading volumes have slowed down in H2. The rise in yields witnessed in Q3 and Q4 has significantly impacted the investment market this quarter, and trading volumes currently being lower. Although a theoretical yield adjustment is detected, the practical results are not. The disparities between districts are narrowing, and transactions are still being completed with uncorrected yields. RE Invest just acquired Bronze Gate in the Cloche d’Or for a yield of 3.60%.

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)

Office property index value

MARKETBEAT

LUXEMBOURG / Office Q4 2022

Market Statistics

Key Lease Transactions Q4 2022

Key Investment Transactions Q4 2022

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

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.lu