European Rents Fall Again

Rental declines were experienced in Brussels and London's West End (both at -3.4%), but the report added that that West End prime rents are readjusting after unusually strong growth last year.

Rents rose in Lyon (4.7%) and Madrid (1.0%). Rental values were unchanged in all other indexed cities. Considerable investment from real estate funds, equity valuations and asset-backed securities are relying on a European office rental recovery. In anticipation of recovery, there have been huge capital flows into the sector in the past few years that have pushed yields down and boosted capital values.

"The economic drivers for Europe's office markets are positive but nevertheless are proving to be patchy across Europe with most countries expected to experience slower economic growth in 2005 than in 2004," says Nigel Roberts, head of European research at Jones Lang LaSalle. "With continued low interest rates, especially in the euro zone, leveraged investment continues to look attractive, but with slower economic growth a broadly based recovery in the rental markets may take longer to materialize."

Take-up of European office space in the first quarter, mainly from the financial-services sector, was in line with the same period of 2004, the report said. But the five major German office markets saw take-up of space 30% above the first quarter of last year. Frankfurt saw its highest level of quarterly take-up since 2003 and Berlin the highest since 2001, though market conditions are still weak in these cities. In central London, take-up was 50% down on the very high level seen in the last 3 months of 2004.

Jones Lang LaSalle officials say Western European office vacancy rates remain high with the index average of 9.8% in the first quarter, slightly above the fourth quarter of 2004. While vacancy rates declined in Brussels, central London, Madrid, Paris, the Hague and Utrecht, all other index cities continued to register increased availability.