JLL Nordic Outlook Autumn 2024 by EDC Poul Erik Bech

JLL Nordic Outlook Focus: Carbon commitments

Dear reader

The present economic landscape is marked by a decline in inflation, aligning gradually with central bank targets. Despite the favourable inflation outlook, persistent uncertainties keep the market highly responsive to new economic data. In response, several central banks have embarked on a cycle of interest rate cuts, with predictions of further reductions and additional banks joining in due course. This monetary policy is expected to catalyse economic growth in 2024 and beyond, supported by robust labour markets and the resolution of electoral uncertainties.

In the Nordic region, real income growth, accommodative monetary policies and enhanced external growth are anticipated to be major drivers of economic performance. While short-term growth prospects may vary, all four main Nordic economies are projected to experience GDP growth exceeding the combined Eurozone for next year.

The positive sentiment in the investment market is evident in transaction activity, particularly in the second quarter of 2024, with Nordic transaction volumes increasing by over 15 percent during the first half of the year. This growth surpassed that of the broader EMEA region, with Sweden ranking as the 10th country globally in terms of total transaction volume in the second quarter.

Furthermore, the year has seen encouraging developments in funding, liquidity and debt pricing. The bond market has experienced a minor rally over the past few months, exemplified by an 90 basis points decline in the 5-year Swedish swap rate since April. Established companies are accessing the bond market on favourable terms, offering a sought-after alternative to traditional bank financing. Simultaneously, the equity market, particularly in Sweden, continues to be a crucial source of funding and a gateway to a substantial investment community.

It is noteworthy that valuations within the Nordic real estate stock market vary considerably. Companies in the industrial and logistics (I&L) segment command premium prices relative to their net assets, while smaller companies, among others, in other segments experience significant discounts. This market disparity presents opportunities for opportunistic rights issues and growth, particularly within the l&L sector.

In addition to a sectoral and geographical review of the Nordic real estate markets, this edition of our Nordic Outlook report explores how corporate commitments to reducing carbon emissions are increasingly shaping the real estate landscape. Companies committed to the ScienceBased Targets initiative (SBTi) have limited lease renegotiation cycles to demonstrate progress toward their carbon goals. We are nearing a green tipping point that also unlocks investment opportunities in sustainability. This report includes a focused examination of transparency in sustainability reporting, in alignment with JLL's Global Real Estate Transparency Index.

Thank you for your interest and engagement with our report. We hope you will find the insights within to be valuable and informative.

“

There is reason for optimism as we continue to bridge the gap between buyer and seller.

Erik Nyman Head of Research, JLL Sweden

Copenhagen, Bucharest, Luxembourg, Prague

Gothenburg, Lyon, Milan, Rome Cologne, Lisbon, Warsaw Berlin, Hamburg, Stuttgart

Oslo, Amsterdam, Athens, Barcelona, Geneva, London City, Zurich

Dusseldorf, Frankfurt, London West End, Madrid, Manchester

Brussels, Edinburgh, Munich, Paris CBD

JLL Property Clock Q2 2024 Rents Bottoming Out Rental Growth Accelerating

Stockholm, Helsinki, Malmö, Budapest

Dublin

Source: Akershus Eiendom, EDC and JLL

Macroeconomic conditions and the listed property market

Macroeconomic conditions

2024 has been characterised by falling inflation and the start of the interest rate cutting cycle. Among others, the Swedish Riksbank, Bank of Canada, the European Central Bank (ECB) and Bank of England have reduced interest rates, while the US Federal Reserve (FED) has chosen to keep rates unchanged. Easing will continue during the remainder of the year and through 2025. However, the inflation trajectory is far from straight, creating volatility and complicating monetary policy normalisation.

Recent mixed but mostly disappointing economic data has further elevated market expectations of rate cuts, and there has been a bit of a bond rally during the summer amid fears of a weaking US economy and inflation easing. Market expectations are currently for additional rate cuts in the range of 60 to 100 basis points until year end by the FED, the ECB and the Riksbank. However, the monetary policy situation in Norway is different, with no short-term rate cuts expected due to sticky inflation, stronger-than-expected wage growth and a weak NOK.

Global GDP growth is expected to be slightly lower this year and then accelerate in 2025 and 2026. Although world trade is expected to pick up as demand strengthens, growth is being counteracted by increasing protectionist tendencies. Geopolitical tension and risks remain elevated, caused in part by electoral changes in Europe and the upcoming US election.

“The Nordic economies are anticipated to demonstrate more robust growth trajectories than the Eurozone in the near term.

Adam Denlert Senior Associate, Research, Sweden

In the Eurozone, GDP showed moderate growth in the first half of 2024 (less than 1 percent year-on-year), following a period of stagnation since the end of 2022. There were indications of increased confidence among businesses and households during the spring and the growth rate is expected to increase towards the end of the year. Inflation in the Eurozone unexpectedly rose recently and uncertainty on the coming trajectory is significant. There continues to be large differences between economies, with pockets of high service and wage inflation.

Growth prospects in the Nordics are mixed in the short term but are expected to gradually accelerate in the second half of the year. Real income growth, monetary easing and stronger external demand are important

drivers in the region. Denmark is expected to experience the strongest growth, thanks to a booming pharmaceutical sector, with Finland as the laggard, due to a weak ending to 2023 and plans for significant fiscal consolidation to bring down public debt. As of next year, growth in the Nordic region is expected to outpace the Eurozone (Oxford Economics).

Listed property sector in the Nordics

The listed property sector in the Nordics consists of more than 40 companies on Nasdaq OMX and Nasdaq First North, with a total property value of €140 billion and a market capitalisation of €60 billion.

The sector experienced a significant recovery in late 2023, with an increase of over 46 percent between the October low and the year end. This year has started on a calmer note, and the sector is up approximately 10 percent so far in 2024. This means that the sector has performed in line with the overall stock market year to date. However, interest rate volatility has been high and so has performance for the sector. A Swedish 5-year swap started the year at 2.4 percent, reaching 3.0 percent in late April, but has since reduced by almost 90 basis points to 2.1 percent.

At the same time, the bond market has opened up, offering liquidity and competitive terms for larger, stable companies. The stock market has also provided companies with additional equity capital through offensive and defensive issuances, exemplified by Prisma Properties' initial public offering (IPO) in June.

The listed companies are currently reporting a capitalisation rate of 5.5 percent for their properties (median). Current stock market valuations indicate a significant discount and an implied yield of approximately 6.0 percent (median). Based on the most recent reported net asset values (in the second quarter of 2024) compared to closing, the listed sector is trading at a median discount of approximately 23 percent, whereas market cap weighted discount is 6 percent as the largest discounts are evident in smaller companies.

There is significant variation between different property segments and companies, with industrial/logistics companies trading above their reported net asset values, while companies in other segments are tending to trade at significant discounts. The valuation of listed real estate companies is influenced by various factors, and one contributing factor to these discounts is the uncertainty around reported property values. So far, the writedowns have been cautious, with a median of 6 percent for publicly traded companies and 10 percent for institutional or government-owned companies.

Interest and Credit markets

Interest market

After a period of high interest rates, it has now become clear that we have passed the peak, following the Riksbank's communication that we have moved into a rate cutting cycle. This coincides with a continuing slowdown in inflation compared to the peak at the end of 2022 and beginning of 2023.

The Riksbank led the way among central banks by reducing the policy rate by 25 basis points in May and by an additional 25 basis points in August. The market expects three additional cuts by the Riksbank before year end and, if fulfilled, it will result in a policy rate of 2.75 percent. The European Central Bank lowered the policy rate with 25 basis points in June where the market expects at least two additional cuts during 2024. Meanwhile the Federal Reserve has kept the policy rate unchanged since July 2023 but has indicated a potential cut in September.

Market rates have dropped significantly since the beginning of the third quarter as expectations of future interest rate cuts from the ECB, the FED and the Riksbank have increased. For example, the Swedish 5-year swap decreased approximately 85 basis points between April and August and the 5-year Euro swap has decreased with 50 basis points. These movements strengthen the evidence that the market believes the peak is behind us.

The short-term rates in the Euro area and Sweden are set to converge to just around 2.0 percent in 2025, which is expected in a world where inflation is back at central bank target levels.

Credit market

Real estate companies issued around SEK 48 billion in the SEK bond market during the first half of 2024, which can be compared with around SEK 40 billion in issued volume during entire 2023. A-rated companies (or higher) account for around 35 percent of the issued bonds in the SEK denominated market, compared to 65 percent during 2023. In the EUR bond market, the liquidity is still on relatively low levels with Sagax, Cibus, Citycon, Castellum and Kojamo as the only issuers from the Nordics during the last 12 months. In the long term, it is important that the EUR bond market gets going as it still accounts for around 45 percent (SEK 270 billion) of the outstanding bond volume. The EUR bond market has SEK 70 billion in maturities coming in two years, which is almost 30 percent of total outstanding volume in the SEK bond market. Accordingly, if the EUR bond market will not recover for Swedish real estate issuers, other sources of capital outside the bond market will most likely be needed to catch the maturing volume.

Throughout the first half of 2024, the capital markets showed a significant improvement for real estate companies with a BBB+ rating or lower as issued volume in this segment started to increase substantially. Bond

spreads for companies with BBB rating or higher have become more attractive in relation to what the banks are currently offering as it is possible for these companies to obtain spreads below 100 basis points on shorter terms. There have also been issues of high yield bonds but not to the same extent as when the market reached its peak a couple of years ago. The only real estate-related companies that still struggle to issue bonds are those where a large part of the business is focused on groundup development.

During the last four quarters, the six major banks increased their outstanding volume towards Swedish real estate with SEK 20 billion, compared with SEK 105 billion during 2022. Nevertheless, the Nordic banks have, during recent months, showed an increased appetite for real estate lending. The banks are still primarily focusing on existing relationships but have opened the door slightly ajar to welcome new relationships. Even though their appetite has increased, they are still cautious about offering higher levels of leverage, particularly for low yielding segments.

The market patterns in Finland follow closely those in Sweden. Banks are still mainly focusing on existing clients, with strong support for rolling over existing loans, but banks are quite cautious in new financings. There are, however, notable discrepancies between lenders, and those banks with relatively less existing real estate exposure are more open for indicating loans for new financing cases. Cash flow of the assets remain as the focus but the required starting interest coverage ratio levels have drifted slightly lower and also loan margins have started to come down slightly. Together with the lower rates this is opening door for marginally higher loan to values (LTV) as well. The international lenders have also made a new push to the market by playing an active role in larger refinancing opportunities.

Outlook

The real estate sector continues to focus on liquidity, and refinancing remains the major theme. Even though the rates have started to drift downwards, for many investors the slightly higher rates are only now starting to have an impact through refinancings and hedging arrangements maturing.

Decreasing rates continue to improve credit metrics and ease the financing conditions. However, the transaction market has remained subdued and the activity is still waiting to pick up significantly. This, together with lower valuations, also has an impact on financing arrangements. We are likely to continue to see bridge-to-sell arrangements as well as continued polarisation between the more liquid and less liquid assets. Fortunately, new loan liquidity continues to be provided by the international lenders, who are filling the gap left by the more conservative local lending market.

“

The issued volume in the SEK real estate bond market during the first half of 2024 was SEK 48 billion.

Mattias Baggfelt Head of Debt & Financial Advisory Stockholm, Sweden

Source: Bloomberg and JLL

Mattias Baggfelt Head of Debt & Financial Advisory Stockholm, Sweden

Eemeli Lehto Head of Debt & Financial Advisory Helsinki, Finland

Investment Market Sweden

Improved market sentiment was evident in the second quarter of 2024. Globally, direct investment volumes were stable year-over-year, with Europe, the Middle East, and Africa (EMEA) posting 10 percent gains. Following challenging years, the Swedish transaction market also showed signs of recovery. Investment volumes in Sweden were up by 10 percent in the first half of 2024 compared to 2023, ending at approximately SEK 49 billion. Transaction volumes improved throughout the year, reaching over SEK 32 billion in the second quarter, a significant increase from the first quarter. The gap between buyers’ and sellers’ expectations appears to be closing, indicating stronger liquidity. Despite historically low volumes, Sweden ranked 10th globally for direct real estate investment in the second quarter, showing relative strength.

The industrial/logistics segment continues to attract many buyers, accounting for an increasing share of total volumes. Over the first half of 2024 and the past year, the segment represented 27–29 percent of total investment volumes, surpassing offices as the largest sector. Catena executed the largest deal with a SEK 2.4 billion sale-and-leaseback transaction from DSV in Landskrona. The office segment also saw renewed investor focus, particularly in Stockholm. Major deals were noted in the central business district (CBD), but significant transactions also occurred outside the CBD, such as Alecta Fastigheter's SEK 2.1 billion acquisition of offices from Atrium Ljungberg in Sundbyberg. Despite this activity, the office segment has not yet regained its prepandemic dominance.

While office transactions are concentrated in Stockholm, residential volumes are once again more local. Residential accounted for almost 20 percent of total transaction volumes during the first half of the year,

which emphasises its importance to the investment scene. Retail, on the other hand, has been staying in the shadows for an extended period of time, accounting for no more than 6 percent of transaction volumes in 2023. But we saw a bit of revival during the first half of 2024 when the corresponding share rose to 10 percent. Virtually all segments have, thus, been represented to some extent, although volumes in public use assets have been tiny.

Although inflationary pressure has eased, the trajectory has been far from linear, and interest rates have shown a volatile pattern over the past year. With a bit of a bond rally during the summer, as expectations of rate cuts increased, longer swap rates have been edging lower and the scene is now set for further policy rate cuts. Importantly, the SEK bond market has also recovered throughout the year and well consolidated companies can access the bond market again at attractive terms, providing a competitive source of funding in relation to banks. In addition, the equity market continues to play an important role in Sweden as a source of funding and giving access to a large investment community. In all, there are reasons for optimism as most fundamentals are in place to bridge the expectations gap between seller and buyer.

Investment sentiment could improve further, although, so far, sentiment has been somewhat cautious, and the macro scenario is not without risks. There is a relatively high supply of properties for sale and the need for consolidation efforts is not yet fully over.

“

There

is improved investment sentiment, but international buyers are yet to find their way back into the market at scale.

Daniel Anderbring Head of Capital Markets, Sweden

Investment market Finland

Real estate investment activity in Finland started with another recordlow in 2024, with very few transactions in the first quarter. The total investment volume in the first half of 2024 amounted to €780 million, which is down from €1.3 billion in the first half of 2023 and remarkably down from €3.8 billion in the first half of 2022. In the first half of 2024, residential accounted for the largest share of transaction volume at €245 million, which was 31 percent of the total volume. Retail and logistics followed with shares of 23 percent and 21 percent, respectively. Office transactions were at a record-low, with a €65 million transaction volume.

The ongoing economic and geopolitical climate has implications across all sectors. Higher interest rates, LTV available and more difficulty in obtaining financing put pressure on transaction activity in the first half of 2024. Now that interest rate hikes are expected to be over and declining rates are forecasted, the investment volumes are expected to slowly pick up. Price expectations have narrowed between sellers and buyers, but pricing will remain tight as long as capital in the industry remains limited. This is evident in the polarisation of assets and the stringent criteria set by buyers, with particular emphasis on location and Environmental, Social and Governance (ESG) perspectives.

Regardless of sector, sustainability and ESG considerations are part of virtually all due diligence processes. While there has been a clear increase in investors’ ESG maturity, the adopted practices and weighting

of different aspects among investors vary greatly. Overall, this translates to more detailed and strict sustainability standards for target assets, especially in prime segments. This has decreased liquidity among assets not meeting these standards.

The transaction volume was historically low in the first half of 2024, but the investment volumes are expected to slowly pick up.

Tero Uusitalo Head of Capital Markets, Finland

Source: JLL

In H1 2024, the transaction volume was at a record low 780€m

H1 2024 transaction activity decreased by 40% compared to H1 2023 -40%

Tero Uusitalo Head of Capital Markets, Finland

How carbon commitments are changing the market

It cannot be denied that sustainability and ESG are becoming increasingly important in the commercial real estate sector. The ‘greening’ of real estate is already underway and will have a major impact on real estate markets in the future. The relationship between sustainability and long-term property investments appears to be clearly interconnected. Companies are progressively intensifying their efforts on various sustainability initiatives, not least because of the significant financial, environmental and social consequences of inaction.

As an example of the international trend, the Science Based Targets Initiative (SBTi) has seen a five-fold increase in engaged organisations and companies setting their net zero emissions goals over the past 24 months. Over 8,000 companies worldwide have committed to SBTi targets (some 800 in the Nordics), and the trend indicates that the pace of engagement will continue to accelerate. As these companies deal with buildings that impact carbon dioxide emissions under Scope 1 and 2 (sometimes Scope 3), commitments under SBTi, in addition to legal requirements such as the Corporate Sustainability Reporting Directive (CSRD), have direct implications for how companies lease and use their premises.

At JLL Sweden, we are witnessing an increase in tenants prioritising sustainability to a greater extent when it comes to choosing and using spaces. One of the goals for these tenants is clear–to reduce their carbon footprint, not only in terms of operational emissions but also embedded carbon.

This has led to a shift where environmental certifications, once important indicators of sustainability, have lost some of their significance due to the limited correlation with the building's actual carbon impact. Instead, the focus is increasingly on building energy efficiency and energy sources. We estimate that environmental certifications will adapt and incorporate a stronger emphasis on the building's actual carbon impact in their criteria in the future.

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We are approaching a green tipping point.

Max Keysberg Head of Project & Development Services

Figure 1 on page 15 illustrates the headquarters of major companies in the Nordics, detailing their headquarters locations, EPC ratings and any environmental certifications such as BREEAM, LEED or Miljöbyggnad. The companies represented in the graph were selected randomly, based on a few criteria: they have SBTi targets, their headquarters are located in the respective countries and they are somewhat well-known.

While it is evident that many companies’ HQs are still based in buildings with low EPC ratings and no environmental certificates, a positive trend towards occupying more sustainable buildings has been emerging over the past few years. This transition indicates a growing commitment to environmental responsibility within the corporate sector. The graph only shows the headquarters and does not reflect the company as a whole or any other buildings they occupy.

Property owners are expected to transition from mere planning and promises to making measurable commitments directly linked to sustainability and carbon emissions. These commitments are expected to be included in lease agreements to ensure they are also realised during the lease term.

This change in perspective has raised the status of green lease clauses, which have become an important tool for tenants to move closer to their net zero emission goals. Tenants attach greater importance to ongoing dialogue with property owners to implement improvements and increase transparency throughout the lease term. This collaboration involves sharing consumption data such as energy, water and waste, and a transition from focusing solely on concrete numbers to also considering social and climate-related risk factors.

Slowly but surely, we are approaching 2030, the first significant milestone for interim targets under the Paris Agreement. The world has less than seven years to halve emissions (compared to 1990 levels) to comply with the agreement's provisions. Companies committed to following SBTi have only one or two remaining lease renegotiations to demonstrate concrete progress towards their goals–we are approaching a green tipping point.

With the exponential growth of organisations engaging in SBTi and the implementation of strict reporting frameworks, tenants' ESG requirements will be raised and will become increasingly detailed. This change is not limited to large international companies but also includes smaller, local companies following this trend.

At the same time, we are seeing the concept of the ‘green premium’ gaining recognition. Buildings with environmental certifications that showcase best practices in sustainability benefit from higher rents and increased demand from tenants. The demand for spaces that offer sufficiently limited carbon emissions is expected to exceed supply, partly because renovations will not keep up with the pace for demand. This is assumed to further drive the green premium and provide more fuel to what we currently see as a ‘flight to quality’. On the other hand, buildings that do not follow sustainable practices or cope with adaptation run the risk of losing value or receiving a ‘brown discount’.

Initially, the transition may require significant investments and expenses to achieve the desired effects, such as energy efficiency. However, long-term benefits are expected to cover and exceed these costs. Consequently, the green premium can contribute to competitive advantages for properties that adapt and meet tenants' requirements, creating an era of highly attractive office spaces. We will have a segment of ‘super prime’–a phenomenon that has begun to emerge worldwide, including in Sweden.

The size of the green premium, however, varies depending on several factors. Research has shown that the green premium can range from a few percentage points to as high as 20 percent or more. JLL has conducted its own studies on rental premiums in the USA, Asia and London, calculating green premiums between 7-12 percent for certified offices (isolating the impact of environmental certification). As sustainability becomes increasingly important to investors, tenants and regulators, the relative green premium is expected to continue growing.

A key consideration though is that green premiums are influenced by time and adoption rate. The premium tends to be low at the start, limited by awareness, but rises as time passes and demand for a

sustainability feature grows, but eventually declines as the sought for feature becomes standard and expected by market participants. This, in turn, might lead to a brown discount when an asset lacks the sustainability feature expected by investors and/or occupiers.

While the concept of a brown discount is not discussed or studied to the same extent, we have already seen investors withdrawing from potential deals that do not meet their sustainability criteria. These assets not only face the risk of not being able to meet the demands of engaged tenants but also experience lower liquidity and a higher risk premium in the investment market. Whether observed price, value and performance differentials are referred to as green premium or brown discounts might only be a matter of perspective and can vary with time as attributes transition from novel, to highly valued, to standard. Either way, there is no doubt that this differential will also create investment opportunities, whether it is for green or brown.

While sustainability and decarbonisation are linked to value creation for stakeholders, the importance of transparency, comparability and common standards for sustainability reporting cannot be underestimated. This can be seen in our recent report on transparency in sustainability reporting across markets.

Figure 1: Sustainability credentials of large companies' HQ's in the Nordics

Disclamer: This graph reflects the current status of each company's headquarters only. It does not represent the company as a whole, their portfolio, other buildings they may occupy, or their efforts towards environmental sustainability.

SwedenSKF, AFRY, Assa Abloy, Atlas Copco, Coop, Ericsson, H&M, ICA Gruppen, Scania, Securitas, Skanska, SSAB, Vattenfall, Kappahl FinlandKone, Tietoevry, Kojamo, Nokia, Sanoma, ABB, Finair, Nordea NorwayElopak, Telenor, Storebrand, Sprint Consulting, FSN Capital Partners

DenmarkCarlsberg, Novo Nordisk, Lego, DSV, Coloplast

An extract from JLL’s Global Real Estate Transparency Index 2024 report, focusing on the Sustainability components of our survey.

Sustainability has been the largest driver of transparency improvements in JLL’s Global Real Estate Transparency Index 2024, compared to our 2002 report. France, Japan and the US’s leading markets like New York head the sustainability rankings as they implement energy performance requirements for existing and new buildings, property-level energy use reporting and biodiversity protection and restoration. The UK, Australia, Canada, Netherlands, New Zealand, Denmark and Sweden complete the top 10.

Sustainability transparency is set to accelerate over the next two years as new or expanded requirements for companies to disclose their emissions and climate risks are implemented across many of the world’s largest economies, including in the US, EU, UK, China, Japan, Korea, Canada and Australia. These measures will lead to a substantial increase in the number of companies with mandatory ESG reporting requirements–for example, the EU’s Corporate Sustainability Reporting Directive (CSRD) will cover approximately 50,000 companies across the bloc and will also mandate reporting by organisations based outside the region, but which have significant operations there.

Policy directly requiring emissions reductions from buildings is also ramping up. For instance, the EU is developing minimum energy performance standards to reduce the emissions and energy use of buildings.

Source: JLL, LaSalle Investment Management

But despite this steady improvement, sustainability metrics continue to lag and remain the lowest scoring within the survey on average. Mandatory building performance standards, public disclosure of actual property-level energy use, climate risk reporting, biodiversity requirements and planning for greater resilience are all still limited beyond the most transparent markets. Against this backdrop, JLL estimates that the rate of building decarbonisation retrofits will need to triple from current rates to align with net zero carbon (NZC) pathways, while demand for green buildings is significantly outstripping supply. Sustainability transparency will need to increase faster to put the industry on track for its 2030 targets, and those markets with the clearest long-term pathway to more sustainable real estate will offer the most attractive environment for companies, investors and citizens. As sustainability factors become embedded in occupier and investor decision-making and drive location and investment decisions, lagging markets will need to speed up adoption to remain competitive.

Paris is the world's most transparent city when it comes to real estate sustainability

We expect transparency–and the need for actions by corporations, investors and governments–to accelerate across three key areas in particular:

1. Mandatory ESG reporting: As ESG reporting mandates are implemented across the majority of the world’s largest economies, companies will have to contend with an increasingly complex and detailed variety of reporting regimes and metrics. While many large organisations are already committed to some form of sustainability reporting, we have reached a critical juncture where companies will need to assess their obligations across all of the jurisdictions in which they operate, establish a long-term plan to formalise their measurement methodologies and track progress against more stringent non-financial metrics, including Scope 3 emissions. Companies will need to plan to identify the different reporting standards they are exposed to, carry out materiality assessments, specify sustainability targets and put in place the ability to measure, verify and improve their emissions performance.

2. Increasing focus on asset-level disclosure and in-use performance standards: The measurement of real-world emissions from individual properties is becoming a priority as governments transition towards whole life carbon calculations and in-use net zero building (NZB) requirements. The US announced its definition of a Zero Emissions Building in June 2024, while several other countries including the UK, France and Sweden are currently finalising their own NZB standards. These definitions will provide a more consistent and measurable basis for zero emissions buildings. With greater clarity around NZB performance and more data available, occupiers will be better equipped to understand where a building sits on its decarbonisation pathway and integrate these factors into site selection decisions. Building owners and developers will need to map out decarbonisation strategies aligned with these NZC pathways for their assets and portfolios, invest in technologies to measure and manage emissions, and be prepared to report and provide their space-level emissions to tenants and governments.

3. Enabling resilience and adaptation: With the frequency and severity of extreme weather events increasing, ensuring cities and buildings can withstand climate changes is rising in importance. This will necessitate greater effort from investors and occupiers to review their physical and transition risk exposure, include climate risk data and local infrastructure defences into their location decision-making, and develop asset-level resiliency planning that reflects the impacts of higher temperatures or storm risk on building operations.

Office rents in Europe 2024–2028

The European office rental index continued to increase in the second quarter of 2024 (up 0.9 percent quarter-on-quarter), albeit at a slower rate. At 5.4 percent, annual European office rental growth remained well above the 10-year average of 3.9 percent.

Rental increases were witnessed in 11 of 23 index markets including Rotterdam (up 7.1 percent quarter-on quarter), Brussels (up 4.0 percent quarter-on-quarter), Amsterdam (up 3.6 percent quarter-onquarter), Utrecht (up 3.2 percent quarter-on-quarter) and the Hague (up 2.2 percent quarter-on-quarter). The remaining 12 markets saw no rental growth in the second quarter of 2024.

Following a slow start to the year, positive sentiment has started to translate into increased leasing activity. Second quarter 2024 data points to an upward movement in leasing transactions on an annual basis (up 7 percent), at 2.2 million square metres.

Occupiers are increasingly compelled to avoid delays in their decisionmaking processes. In some cases, tenants who have initially decreased their office footprint are now looking to lease more space to meet their return-to office requirements. It is becoming increasingly apparent that space availability is limited beyond the CBDs and the previously overlooked good quality buildings are becoming more attractive.

Compared annually, 14 markets witnessed a rise in office demand. These include the Hague (up 499 percent year-on-year), Utrecht (up 439 percent year-on-year), Dublin (up 126 percent year-on-year), Prague (up 96 percent year-on-year), Amsterdam (up 82 percent yearon-year) and Brussels (up 41 percent year-on-year). The remaining nine cities recorded a fall in take-up, including Stockholm (down 57 percent year-on-year), Edinburgh (down 35 percent year-onyear), Warsaw (down 28 percent year-on-year) and Lyon (down 22 percent year-on-year).

European office vacancy reached 8.2 percent during the second quarter of 2024, up 10 basis points from the previous quarter, and reaching the highest rate since the third quarter of 2015. However, in most European markets, high vacancies remain concentrated in older stock in the outer areas, whilst CBD locations continue to outperform with significantly stronger occupancy rates.

Fourteen of the 23 index markets recorded an increase in vacancy in the second quarter of 2024 compared to the previous quarter,

including Brussels (up 80 basis points to 8.3 percent), Edinburgh (up 70 basis points to 7.4 percent), Stockholm (up 70 basis points to 13.5 percent) and Munich (up 50 basis points to 6.2 percent). Eight markets saw a decrease in available supply, including Amsterdam (down 100 basis points to 6.5 percent), Madrid (down 70 basis points to 9.5 percent), The Hague (down 60 basis points to 3.3 percent), Utrecht (down 60 basis points to 4.4 percent) and London (down 40 basis points to 8.5 percent). Frankfurt remained stable.

“ It is becoming

increasingly apparent that space availability is limited beyond the CBDs and the previously overlooked good quality buildings are becoming more attractive.

Alex Colpaert Head of Property Sectors Research EMEA

European office vacancy Q2 2024 8.2% European prime office rental growth Y/Y +5.4%

Yearly Percentage Rental Growth on the Office Market (%)

Source: EDC, Akershus Eiendom and JLL Research September 2024

Office Nordic

Investor risk appetite has increased despite ongoing challenges, as evidenced by rising bidding activity and interest in office properties. European office investment volumes rose 14 percent yearover-year and 13 percent quarter-over-quarter in the second quarter of 2024, following a weak first quarter. The Nordic region saw even more significant growth. However, transaction volumes remain historically low, comparable to levels from 2009, for both Europe and the Nordics.

The general outlook for the Nordic office investment market is cautiously optimistic, with investors focusing on premium locations offering high-quality office spaces. These spaces cater to companies' evolving needs, providing a competitive edge in attracting tenants. Yet, transaction volumes in markets like Gothenburg, Malmö/Lund and Helsinki remain low.

Improved financial market sentiment has led to narrowing credit spreads. Banks are favourable toward core office projects, especially given the slowdown in residential construction and reduced financing demand from that sector. Nevertheless, there is ongoing caution about potential vacancies, particularly concerning secondary assets, amid uncertain market conditions. The bond market's risk appetite has grown as pressure on company balance sheets eases. Enhanced balance sheets via asset sales and equity injections have allowed more companies to access competitive bond market financing, though banks still prioritise existing relationships over new investments. Non-core locations and value-add projects often need alternative financing sources.

Tenant preferences continue to shift toward sustainable and flexible office solutions, including modern properties with sustainability certifications and adaptable layouts. Property owners are strategically retaining and attracting tenants by offering incentives like lease discounts. The ‘flight to quality’ trend sees tenants favouring premium locations and modern office spaces. With the rise of flexible and hybrid work solutions, subleasing is increasing, affecting market transparency.

Sustainability certifications are crucial for tenants, driven by ESG initiatives and social responsibility commitments. Companies are investing in sustainability improvements to meet climate goals and gain a competitive edge. Environmentally friendly offices will become essential in the coming years due to regulatory and voluntary commitments. Core investors seek buildings meeting carbon emission standards, while value-add investors find opportunities in upgrading older buildings. New developments focus on high energy efficiency and certifications to meet demand. Preferences for ESG factors vary among smaller to mid-sized tenants.

Financial highlights Investment volumes for the office segment in the Nordics in H1 2024 vs H1 2023 +27%

Investment volumes for the office segment in the Nordics in H1 2024 3.4€bn

“

International investor sentiment remains under pressure, which can create opportunities for domestic investors.

Thomas Persson Head of Capital Markets, Nordics

Source: Akershus Eiendom, EDC and JLL

Office Stockholm

The Stockholm office property market has continued to experience increased vacancies and lower demand due to the ongoing impact of remote work, more flexible office arrangements and a strive for efficiency gains. However, rent levels remain stable for high-quality office spaces as companies focus on securing premium locations that accommodate their evolving needs. A notable trend during the early part of 2024 has been the gradual increase in investment activity, indicating a growing risk appetite among investors coupled with improved financing terms. These factors contribute to a cautiously optimistic outlook for the Stockholm office property market, as it continues to adapt to the changing dynamics of the modern workplace.

Investment market

During the first half of the year, office properties in Stockholm were traded for approximately SEK 12 billion, according to JLL's measurements, a decrease from last year's almost SEK 17 billion. However, activity was significantly better in the latter part of the period. The gap between buyers and sellers appears to be narrowing, and increased bidding activity is a sign of increased risk appetite. This is evident, for example, by the fact that the six largest deals all occurred in the second quarter of the year. Alecta's office acquisition in Sundbyberg for SEK 2.1 billion is the largest. The initial yield in that deal is likely around 5.0 percent, perhaps even slightly lower, with room for positive rent revisions as well as project development. The third quarter also kicked off with a large office transaction centrally in Stockholm as Folksam (KPA Pension) acquired AMFs Mentorn at Kungsbron, worth approximately SEK 3 billion.

Tenant market

In the tenant market, there has been a decrease in take-up and an increase in vacancies for Stockholm offices. Companies have been choosing to reduce office space, driven by efficiency efforts and the implementation of hybrid work strategies. Despite this, rental levels for prime spaces have remained stable, as tenants are still willing to pay for central, modern and sustainable spaces.

The ‘flight to quality’ trend, where tenants prioritise high-quality spaces, and the ‘rightsizing’ trend, where tenants opt for smaller areas, have been strong. However, the overall vacancy rate in Stockholm has been consistently increasing, reaching 13.5 percent in the second quarter. This is the highest level since 2007, with over 1.5 million square metres of vacant office space in the region, according to Citymark data.

Vacancy rates have increased in all submarkets, with areas including Kista and Solna/Sundbyberg being particularly affected. Even in the central parts of Stockholm, vacancies are increasing, although the vacancy rate in the CBD is much lower and remains around half of the rate relative to the overall Stockholm situation.

To retain existing tenants and attract new ones, offering discounts at lease renegotiations and new lease agreements has become an increasingly common strategy. During the early parts of 2024 there is also plenty of anecdotal evidence that subletting has gained momentum, although transparency on this part of the puzzle is low.