Europe calls time on falling rents

Our office clock has been a staple Jones Lang LaSalle output for a good 20 years. Its simple visuals are immediately understandable and it has withstood the test of time. So what “time” is it in the European office market? Well, more and more markets are bunching up around the 6 o’clock mark – either experiencing growth, anticipating growth or enjoying some stability. Indeed, more than half of the 35 markets plotted are now at or beyond 6 o’clock compared with 12 months ago when it was just three markets.

During the course of the year, we are challenged to balance the increasing positivity emanating from local markets with informed caution, mainly based on the economic side. But the annual outcome across European leasing markets have, by anyone’s standards, surpassed expectations with 5.4% annual prime rental growth in total.

So is everything rosy going into 2011? Not quite. The supply side still drives things – either rental growth or stability. Robust demand is required to make a truly sustainable recovery but demand, with one or two exceptions, remains questionable despite the increasing confidence. Sovereign debt and solvency issues remain – as does the risk of contagion to economies that do not deserve to be tainted. Plus experience shows how quickly occupier sentiment can change. But let’s not be too downbeat. The stats show more positives than negatives. The clock shows how far markets have progressed this year, and is a good visual for displaying how far they have to go – vital in a market where rents will drive the majority of investment performance in a relatively flat(ish) yield environment.

Predictions for this time next year? I think we’ll see the first markets enter the rental growth slowing quadrant (although let’s not rule out further acceleration down the line) and the vast majority entering the growth phase. No surprises for guessing which will be rooted at the 6 o’clock mark – but for investors, with the left hand side “good” and the right hand side “bad” it will be a refreshing change to see that left hand side fill up with more markets.

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