Covid Puts A Stop To The Rise In Office Rents

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Over the years the office market has shown historical resilience to uncertainties, however, it has not been immune to Covid-19. The harsh months of confinement and restrictions caused by the health pandemic have made a dent in the activity of this segment, in which teleworking has experienced a strong boom in most of the companies.

The impact of Covid-19 on office space can vary in different parts of Europe. “While the impact in some countries could be limited due to the pre-existing trend of telecommuting, the impact could be stronger in countries with significant office space under construction, high unemployment and less telecommuting before the pandemic. “says Rigel Patricia Scheller, an analyst at Scope.

Despite the fact that different voices in the sector point out that it is too early to gauge the impact of the pandemic on the market and its evolution, the truth is that Covid-19 has put a brake on the rise in office rents.

And, although increases are expected in the coming years, these will be moderate due to the “limited impact of the pandemic on prime rents in Madrid and Barcelona during 2020,” they point out from JLL. According to the consulting firm’s figures, the annual growth forecasts for prime rents in the period 2021 and 2025 will be 0.3% in Madrid and 0.7% in Barcelona .

The upward trend in rents during the last six years was paralyzed by the effects of the pandemic in 2020, with decreases between 1% and 2% in both cities. During the previous three years (between 2017 and 2019) the annual variation of prime office rents in Barcelona had exceeded 8%, while in the capital the growth in 2019 was close to 6% .

In the first quarter of the year, rents in Madrid experienced an interannual adjustment of 1.4% compared to -36 euros / m² / month in the CBD area (Central Business District) -, while in Barcelona the decrease was 1.8% – € 27 / m² / month CBD area-.

Demand has also been impacted in recent months. According to data from JLL, the occupancy of offices in Madrid and Barcelona decreased in 2020 by 51%, to exceed 470,000 m2 (hiring fell by 42% in the capital, while in Barcelona the decrease was 64% influenced by the low availability). In the first quarter of the year the two cities have shown a different photograph.

The hiring of offices as a whole stood at around 132,825 m², with a year-on-year increase of 4%, driven by the strong upturn in demand in Barcelona, ​​which exceeded 64,850 m² , which represented a year-on-year growth of 131%. For its part, in Madrid the hiring of office space was around 68,000 m², with a decrease of 28%.

A hiring rebound of 50% is expected in Barcelona and close to 20% in Madrid
As economic activity progresses, a gradual recovery is expected in this regard and, after the initial boom, the consultancy firm considers that the influence of teleworking on the demand for offices will be limited in the medium / long term.

“A reduction in permanent positions is foreseeable, but at the same time more surface area will be dedicated to services, common, collaborative and creative spaces,” they point out from JLL. Thus, a strong rebound in hiring is expected, which will be around 50% in Barcelona and close to 20% in Madrid .

“Offices are going to be more important than ever, but they must be redefined based on a new purpose. Offices are going to be reinvented following a model in which space will become a service that responds to collective needs. Companies will make profitable maximum the square meters they hire, seeking a balance between flexibility and the cost of their spaces without neglecting the well-being of their employees, “says Guzmán de Yarza, head of Workplace Strategy for the EMEA region of JLL.

From Merlin Properties, one of the largest office owners in Spain , whose surface area exceeded 43,000 m2 contracted in Madrid and 21,000 m2 in Barcelona in the first quarter of the year, they trust “a recovery of the market in the second half of 2021” .

Furthermore, the company maintains its occupancy forecasts for 2021 -the occupancy rate at the end of the first quarter stood at 89% in the capital and 93.1% in Barcelona. By markets, Merlin Properties highlights that the best performance during the first quarter occurred in Barcelona CBD 22 @.

For his part, Pere Viñolas, CEO of Colonial, indicated in the presentation of the firm’s results that “in the case of contracting in secondary markets one of the problems suffered by some capitals is the oversupply created in these markets that It has been dragging on for 10 or 15 years. Our commitment to the CBD markets comes from our accumulated experience in this sector. We know how the markets react at all times and we verify that the secondary ones have a worse behavior in times of turbulence. “

The rise of flex spaces
Everything seems to indicate that the return to the office is near. Companies are betting on the recovery of face-to-face work, in fact, some giants such as Google or JP Morgan have already announced their return to the offices establishing their return plans .

Telework will not extend much beyond the pandemic or will be combined with face-to-face forms, as it is extracted from the study (Y) our Space: Discover your new world of work , prepared by the international real estate consultancy Knight Frank (with a survey carried out to more than 400 companies with a global presence) and which reveals that only 27% of those surveyed indicate that Covid-19 will have a permanent influence on their real estate strategy .

However, the shift towards a hybrid work model is gaining momentum. According to the data collected in the JLL report, Reimagining Human Experience , 72% of employees want to continue working from home in the future , “although for this the ideal is to maintain a mixed model.

Employees expect that the companies for which they They work to support the change towards a more flexible model, although 70% recognize that there are many activities for which the office environment is much more productive, “explains de Yarza.

The hiring of flexible spaces represented 2% of the ‘take up’ of all offices
In Spain, the drop in demand for flexible spaces has been notable due to exposure to freelancers, startups and SMEs. According to JLL figures, the hiring of flexible operators fell in 2020, with about 3,000 m2 signed in Madrid and about 4,500 m2 in Barcelona .

Together in both cities, hiring represented only 2% of the total office take-up , compared to 16% in 2019. However, although the impact has been significant, the consulting firm expects that this year the activity will resume. rebound and foresee a considerable increase in the demand for flexible spaces in the medium term (from 2022).

Despite the drop in occupancy, the Flexmark report from Workthere – Savills Aguirre Newman’s global platform for flexible offices and coworking – indicates that 82% of flexible workspaces, flex space or coworking are profitable at an operational level .