Real estate investment and asset management firm AEW has published its latest research report on the office sector, entitled ‘Increase in Conversions Expected to Benefit European Office Market Recovery.’
Hans Vrensen, Head of Research & Strategy Europe at AEW, comments: “Emerging trends, particularly the impact of generative AI, are shaping the recovery of the European office market. According to Oxford Economics, AI is expected to create higher-value jobs while automating routine tasks, benefiting cities like London, Paris, and Berlin. Additionally, 30 percent of office transactions in early 2025 involved conversions to other uses, a trend accelerated post-COVID that will help reduce vacancies and increase rents. The gap between CBD and non-CBD locations is closing, with rental growth forecast at 3.5 percent per year in five CBD submarkets, similar to the 3.3 percent expected in 14 non-CBD submarkets. Total returns for prime CBD offices are projected at 9.4 percent per year over the next five years, lower than the 10.4 percent anticipated for non-CBD submarkets, offering a compensation for the perceived risk in those areas.”
Highlights:
- In this publication, we update our analyses for European office markets. Our initial analyses show that GenAI is expected to have a positive impact on office employment as it will automate certain routine tasks, while creating new, higher-value AI-related jobs. London, Paris and Frankfurt are expected to benefit most from future AI adaptation.
- Office vacancy rates continued to increase in Q1 2025, even in CBD markets. CBD vacancies had previously trended down as bifurcation has remained a continuing theme so far. However, with less new supply and an increasing number of office conversions, overall vacancy is projected to come down from its 9 percent peak mid-year 2025 to 7 percent by 2029.
- Signs are beginning to emerge that CBD office rental growth since 2020 is pricing out cost-conscious occupiers, with more affordable, non-CBD submarkets looking increasingly attractive in terms of value for money.
- The increasing post-COVID trend of office conversions is also confirmed at an individual market level, with the highest 2020-24 share of office conversion transactions recorded in Frankfurt & Madrid, as shown in the chart below.
- Average 2025-29 prime rental growth is expected to reach 2.8 percent p.a. across all 61 covered European office submarkets. Across a sample of five CBD submarkets, rental growth is forecast at 3.5 percent p.a., which is only slightly stronger than 3.3 percent p.a. for the 14 non-CBD submarkets in the same cities. This might signal a broadening recovery as bifurcation diffuses.
- 2024 office transaction volumes remained muted, down 53 percent compared to their 15-year historic average. As a share of total volumes, offices represented a record low of 21 percent in Q1 2025. But liquidity is expected to improve as more managers believe European values will improve in sharp contrast with the US, where office values are still expected to decline.
- Our latest prime office forecasts show that average total returns are expected to reach 9.4 percent p.a. over the next five years across our 61 covered European markets. The 9.4 percent p.a. cross-market average reflects a high of 12.7 percent p.a. for London City and 8.2 percent for London West End, with no European office market expected to have a sub-8 per percent return.
- In a further signal of a broadening recovery beyond prime, non-CBD submarkets with higher current income yields are expected to have a 10.4 percent p.a. return and outperform lower-yielding CBD markets at 9.4 percent p.a. over the 2025-29 period.
