Europe Real Estate
The COVID-19 pandemic brought local, national, and global economies to a standstill, resulting in historic GDP declines. European economic activity in the third quarter likely remained 5% to 10% below its pre-COVID-19 levels, although increased restrictions amid a potential second wave may lead to further declines. The eurozone unemployment rate was officially reported as 8.1% in August—only about 1% higher than the pre-pandemic level. This relatively small change given the grim economic situation is mainly due to government furlough programs that defray employee costs. Actual unemployment figures will likely jump as these programs fade and furloughed workers become officially unemployed.
Moving to the UK, after its initial 26% drop in early 2020, GDP has somewhat rebounded during the second half of the year, with activity down about 10% compared to levels in the fourth quarter of 2019. Like continental Europe, the UK’s unemployment level held relatively stable—at 4.5%—in August due to government support programs, but this figure will likely rise in 2021. The UK faces the added uncertainty of an upcoming Brexit deadline at the end of the year with no clear plan in place.
In the second quarter, European office investment activity declined about 20% year-over-year. Although demand and transaction volume for office assets have weakened, activity varies dramatically across asset classes. There is high demand for industrial and multifamily properties, which have fared relatively well during the pandemic. Activity is virtually non-existent in the retail and hotel spaces, even with growing distressed opportunities. In the third quarter, European office leasing fell approximately 50% year-over-year as businesses wait to see the full economic impact of the pandemic and re-evaluate their use of office space. Despite the slowdown, office vacancy rates in major cities like London, Dublin, Amsterdam, and Berlin remain meaningfully lower than their global financial crisis levels.
UK real estate fundamentals have been similarly affected by the pandemic. Office investment activity was down 40% year-over-year in September, while industrial activity rose 10% year-over-year. In the third quarter, Central London office take-up was down 10% quarter-over-quarter and vacancy rates rose to 6.5%, as compared to 5.3% in the second quarter. This reduction in office demand follows a recent government recommendation for employees to remain at home. Industrial take-up, on the other hand, rose from 12.8 million square feet in the second quarter to 13.3 million square feet in the third quarter.
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Central London office take-up reached only one million square feet in the third quarter, representing the lowest quarter on record.
The Central London office vacancy rate rose to 6.5% in the third quarter, after the government advised employees to work from home.
There was a drastic fall in office investment activity in the second quarter given continued pandemic-related uncertainty.
In the third quarter, European office leasing is down more than 50% compared to 2019 levels as businesses reevaluate space needs.