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Research by JLL predicts medium-sized cities will outperform major European cities such as London and Paris. Sebastian Shehadi reports.

Amsterdam, Stuttgart and Stockholm will be European hotspots for office rental growth over the next two years, as shortages of office space drive above-average growth in certain cities, according to research from real estate management and advisory firm JLL.

The report, European Office Rental Growth Hotspots 2018, highlights 10 markets likely to experience outperformance in office rental growth. At the top of the list was Amsterdam, followed by Stuttgart, Stockholm, Munich, Prague, Barcelona, Edinburgh, Dublin, Utrecht and Warsaw.

The UK regional office markets of Manchester, Leeds and Birmingham fell just outside the top 10. With megacities London and Paris not making the top 13, JLL’s findings highlight the economic importance of tier 2 cities, defined as having 150,000 to 10 million inhabitants.

The top middleweight cities are poised to outperform most megacities even in their absolute level of growth, based on three dimensions of the city landscape that matter for their attractiveness – demographics, households, and incomes – according to a McKinsey & Company report.

“Investors are facing challenges with record pricing and so for them, finding those income-driven returns is crucial,” said Peter Hensby, head of EMEA offices capital markets at JLL. “From our research and our conversations on the ground, we know that office supply – or lack of it – is likely to play an increasingly important role in rental growth over the next few years.”

Submarkets will continue to outperform in 2018 and 2019, as the lack of modern, efficient office supply in traditional central business districts drives occupiers to second-best areas offering high quality space. “Understanding which submarkets will be a short-lived bounce and which are supported by long-term factors will be key to success,” said Mr Hensby.

While the amount of empty space in the office sector has declined to almost pre-crisis levels due to a scarcity of supply, rental growth is expected to soften from 2019 onwards as supply increases, says Monika Sujkowska, an analyst at Aviva.

She warns of two potential risks: “[First], supply has [already] begun to pick up in some cities, with the office supply pipeline for 2018-22 exceeding the long-term average in central Paris, Berlin, Stockholm and Stuttgart. Development might expand more quickly than we anticipate. [Second and separately], there’s a risk that the global bond market might begin to price in a more aggressive rate-hiking cycle by the Federal Reserve and other major central banks.”

This article is sourced from fDi Magazine
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