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Prime office markets across Europe are witnessing a supply shortage as new construction has declined to its lowest level in nearly a decade, even as demand and rents continue to rise. According to research by Cushman & Wakefield, space under construction stood at 10.1 million sq ft at the end of last year, the lowest since 2016. The shortage is being driven by high construction and financing costs, while occupier demand has strengthened with return-to-office trends. Prime office rents have recorded sustained growth, with limited availability forcing many occupiers to retain existing space. Geopolitical tensions and energy price volatility are expected to add further uncertainty to the sector's outlook.
Prime office markets across Europe are experiencing a tightening supply environment, as construction activity has slowed significantly while demand for high-quality workspace continues to recover. Research released in the past week by Cushman & Wakefield indicates that office space under construction declined to 10.1 million sq ft at the end of last year, marking the lowest level since 2016. Advertisement
The slowdown in new supply has been attributed to elevated construction and financing costs, which have constrained developer activity across key European markets. At the same time, occupier demand has strengthened as companies have increased in-office attendance following the pandemic period, supporting continued absorption of available space.
This imbalance between supply and demand has contributed to sustained rental growth in prime office segments. Data shows that prime office rents have recorded growth for 20 consecutive quarters across Europe, reflecting the limited availability of high-quality space in core business districts. The trend is particularly evident in cities such as London and Paris, where demand for Grade A office space remains strong.
Separate research by Knight Frank indicates that demand for new office space in London alone exceeds 11 million sq ft, around 20 per cent above the long-term average. However, constrained supply has limited occupier options, with estimates suggesting that nearly one-third of tenants may renew or retain existing space due to a lack of suitable alternatives or higher rental costs.
Developers that have delivered new office assets in the post-pandemic period are benefiting from reduced competition. For instance, a recently completed office tower in central London developed by Brookfield has achieved full occupancy, with premium rents reportedly reaching GBP 160 per sq ft for top floors in the City's financial district. This reflects a broader trend of occupiers prioritising high-quality, well-located assets.
The demand shift towards premium buildings has also influenced leasing patterns. Data indicates that 52 per cent of all leased space across Europe, the Middle East and Africa in the past year comprised top-tier office assets. Vacancy levels for such properties have declined to 3.5 per cent, significantly lower than the overall office vacancy rate of 9.8 per cent.
While investment in office construction rose to EUR 52 billion in the past year, this remains substantially below the long-term average, highlighting the cautious approach adopted by developers and investors. Industry participants have indicated that supply constraints cannot be addressed in the short term due to long development timelines.
The outlook for the sector is also being influenced by geopolitical factors. Ongoing tensions in the Middle East have introduced uncertainty around energy prices and inflation, which could impact construction costs, financing conditions and transaction activity in the near term.
The current market dynamics point to a prolonged period of limited supply in prime office segments, with implications for occupier strategies, rental levels and development pipelines across major European cities.
Source - Reuters
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