European office development: Navigating hurdles

The development pipeline for European offices remains remarkably active. In 2024, some 7 million square metres of new office space is expected to be delivered, surpassing the 10-year average by nearly 3 million square metres.

However, a more nuanced reality lies behind these optimistic supply figures.

Financing difficulties, concerns over location, sustainability, and evolving occupier requirements are making it increasingly challenging for landlords to keep up with tenant demand. 

The high cost of construction continues to pose challenges, resulting in potential delays to project completions. Securing financing for construction projects remains an uphill battle, hampering the timely delivery of office space. This could potentially result in a shortage of office space earlier than anticipated. The projected delivery of offices is expected to drop below 4 million square metres in 2027. Further, a 20% discount on projected completions should be taken into consideration, due to project delays witnessed in previous years.

Aligning with evolving occupier needs is also a key consideration for developers and investors. As hybrid working becomes more prevalent, occupier requirements within the office space are undergoing significant transformation. Both developers and investors must carefully examine whether office spaces are in the right locations and meet the evolving requirements of occupants.

The Central Business District (CBD) and central locations remain focal points for office development, accounting for around 80% of Europe’s current space under construction. Demand levels of around 10 million square metres per year are projected to outstrip supply over the next five years, underscoring the urgency to meet occupiers' spatial requirements, according to JLL's latest forecasts.

While much of that demand will be for pre-letting, existing supply will also absorb a large portion of demand. In any case, the mismatch between Europe’s existing supply and upcoming demand is becoming an increasing problem.

Central to this mismatch is the current development pipeline, which falls short of meeting the demand for green office spaces. By 2030, existing pipelines across major European cities are projected to fulfil only 46% of low carbon lease demand, leaving a significant gap of 54% unmet, JLL research indicates. Meeting these sustainability goals requires a deliberate shift towards environmentally friendly design, energy efficiency measures, and green building certifications.

When considering all these factors, it’s expected that rental polarisation will intensify even more across Europe. The role of location strategy is crucial in the dynamics of supply and demand. Investors should meticulously assess micro-locations with favourable amenities and transportation options that have the potential for future rental growth. Focusing on more than just traditional real estate metrics will be key.