Strategic retrofitting: unlocking supply in Europe’s tight office market

• As new construction falls to a decade low, availability of high-quality office space in core locations will come under severe pressure. Amplified by rental affordability issues, some occupiers will increasingly expand their search criteria outside traditional prime areas.
• As demand spreads more widely outside CBD submarkets, this will create new pockets of value across European office markets. JLL’s analysis of Amsterdam, Berlin, London, Madrid, Munich and Paris submarkets shows that the potential of office retrofits ranges significantly, with 38% of submarkets showing a yield on cost of 7.5% or higher. 
• Investors can achieve compelling returns given the interplay between competitive pricing and supply imbalances. As the office market matures, investment activity will likely diversify across submarkets following occupier patterns. Pricing discounts in emerging submarkets will boost returns, while in core areas, continued rental growth helps maintain performance.

The European office market faces supply constraints, creating opportunities for retrofit-focused developers and investors. JLL data shows total office construction across Europe peaked in 2020 and has since dropped 24%, with Q1 2025 marking the lowest new construction starts since 2010.
Premium space scarcity is critical in major European CBDs, with average vacancy rates at just 3.6%. Paris' Golden Triangle has only 0.4% new-build availability, while London's West End submarkets face sub-1% vacancy for newly completed space. Vacancy rates are projected to decrease through to 2029, forcing occupiers beyond traditional prime locations.

Despite shrinking availability, occupiers increasingly seek affordable high-quality space in central locations. CBD areas' share of take-up increased from 20% to 28% (2020-2024), while Central locations adjacent to CBDs rose from 22% to 26%. Edge/non-central locations declined by 11%.

Rental disparity between location type is significant: prime CBD rental growth averaged 6.1% across Europe over three years. Whilst central locations saw rents increase by 4% annually they still offer an 18% discount compared to CBDs. Occupiers are now strategically balancing cost with accessibility, amenitisation and access to labour pools rather than targeting only traditional prime locations.

Clear demand hotspots are emerging in every city across Europe where affordability, desirability, viability, and availability converge. In Paris, prime CBD rents reached €1,080/sqm annually (some exceeding €1,200/sqm), with Neuilly and La Defense offering a 30% and 49% discount respectively. In London, Fitzrovia and Victoria offer 30-40% discounts compared to Mayfair prime rents.

2024 office retrofits accounted for a record 33% of completions. This trend, which is set to intensify in the years ahead, reflects converging forces: lower new build construction starts during the pandemic, rising construction costs, sustainability mandates favouring existing structure reuse, and ‘quicker’ retrofit projects satisfying occupier demand for more affordable modern amenities in core locations. In certain cases, extensive retrofits or structural replacements have proven to exceed the cost of new construction. However, thoughtful repositioning offers a compelling middle path, creating strategic opportunities for outdated assets in core locations by unlocking significant rental uplifts.

With the cost of retrofits ranging from 3-12% of asset value according to recent JLL Research, strategic repositioning delivers improvements which can command significant rental premiums while avoiding ground-up development. 

JLL's rental tiering analysis shows upgrading mid-range quality product to high quality (top 10% product) can on average deliver +9% to +31% premiums across different cities.

Whilst Platinum+ (Top 5%) rents are largely limited to new builds, the conservative view is that medium retrofits can still achieve Platinum (Top 10%) levels. Transactional data reveals that these achievable premiums differ across city and location types. In London for example, upgrading from Silver to Platinum product has shown to unlock an additional 29% uplift in rents. The premiums represent market averages, and strategic stock selection might uncover much larger opportunities when examining potential at a specific asset level.

As demand shifts to emerging submarkets, this will create new pockets of value across European office markets. JLL’s analysis of Amsterdam, Berlin, London, Madrid, Munich and Paris submarkets shows that the potential returns of office retrofits range significantly. 38% of all submarkets show a yield on cost (expected return on retrofit investment) of 7.5% or higher due to the significant rental premiums. Average payback periods of capex can be as low as sub-10 years in some instances.

Clearly, submarkets commanding the highest rental premiums often deliver the highest investment returns. Non-central areas with relatively low nominal rent might prove more difficult to source opportunities, even when a significant rental premium is applied. However, lighter touch retrofits might also bring back liquidity in selected buildings. Europe's wealth of broadly built-out historic urban centres and submarkets will make this a particularly appealing prospect for developers aiming at boutique tenants smaller than 1,000 sqm, where sense of place and amenitisation align with premium pricing and higher barriers to entry.

With retrofit costs varying from city to city, the impact return period will naturally differ as well. JLL's analysis reveals that yield on costs for moderate office retrofits (around €2,300/sqm) in Paris ranges from 3% to 10%+. The lower return perspectives are almost exclusively as a result of low rental value submarkets in the periphery, where the lack of competitive tension brings down premiums. Other, central, Paris submarkets are amongst those with the strongest return potential in Europe. In London, average yield on costs range lower between 3.5% and 16.5%, while Madrid and Amsterdam record a yield on costs of up to 11%.

These return perspectives highlight hotspots for opportunity. The actual return is likely to be higher as the rental premium analysis does not factor in additional value drivers such as enhanced capital appreciation, reduced operating costs, reduced void periods, avoidance of carbon tax in some regions, and expanded tenant marketability that typically accompany quality upgrades. 

The financial case for office retrofits presents a powerful investment thesis. With average rental premiums between silver and platinum in these five cities ranging up to 40%, the potential is substantial. Although the upfront costs of such retrofits can be significant, they will be necessary to preserve investment-grade status while also being more attractive on a relative basis compared to the risk of stranding. Cyclical and timing considerations are also at play: owners and developers embarking on retrofits now will benefit from first-mover advantages and a larger potential occupier pool as well as lower inflation-adjusted input construction costs into the 2030s.

Current market conditions enhance this opportunity. From a pricing perspective, yields for core assets are still elevated compared to historical norms, aided by strong rental growth forecasts in strategic submarkets. Investors can achieve compelling returns given the interplay between competitive pricing and supply imbalances. JLL's bid data shows close-ask spreads turning positive (+0.2%) with multiple bidders competing for quality retrofit opportunities. This is occurring at the same time as the share of tenants with complementary requirements such as carbon reduction or energy efficiency targets is increasing, but before the level of development either through new construction or retrofitting accelerates enough to place downward pressure on rents. For opportunistically inclined investors, this is a good time to be proactive.

As the market matures, investment activity will likely diversify across submarkets following occupier patterns. Pricing discounts in emerging submarkets will boost returns, while in core areas, continued rental growth will help maintain performance even as entry yields lower through cyclical compression. 

This strengthens the case for strategic office retrofits as both an immediate opportunity in prime markets and a future strategy in emerging submarkets benefiting from shifting occupier preferences.

You may also be interested in our latest research on obsolescence: ‘Opportunity through obsolescence – protecting and creating value in properties and places at risk of stranding’: https://www.jll.com/en-uk/insights/opportunity-through-obsolescence