Swiss office market: pandemic is leaving its first traces
The office space market cannot escape the effects of the COVID-19 pandemic. The supply of space increased from 5.5% in the previous year to 5.8%, but remained below the feared high levels. According to the real estate economists at Credit Suisse, demand is holding up better than expected. The trend towards home office is likely to give the office market a few difficult quarters. In the long term, on the other hand, the change in the world of work promises a substantially higher demand for modern office properties, which puts the influence of home office into perspective in the long term.
While the advertised space in London and New York skyrocketed in the wake of the COVID-19 pandemic, the space available in Switzerland increased only moderately at the end of the 2nd quarter of 2021 compared to the same quarter of the previous year, from 5.5% to 5.8%. Although the uncertainties about the future need for office space are still very high for many tenants, a number of lease extensions and new contracts have been observed on the market – mostly for the purpose of optimizing or concentrating the location.
Reluctant demand for office space
The usually close link between the growth of office work and the demand for office space has decoupled during the pandemic. Despite a relatively robust development in office employment, many customers were reluctant to rent new space, especially since coping with the pandemic is dragging on and the trend towards home offices is consequently becoming entrenched. The demand for space is likely to suffer in the next few years from the fact that more and more companies are enabling their employees to partially work from home, even after COVID-19. The real estate economists at Credit Suisse still consider last year’s forecast, according to which the corona-induced breakthrough in home offices to reduce the need for office space by around 15% in the medium term, as a good benchmark. However, economic growth and the increasing proportion of office work due to the digitization effect are counter-trends, which is why real estate economists expect demand for office space to stagnate in the medium term.
The supply of space is increasing again – but less than expected
As a direct consequence of the sluggish demand, the office space advertised for rent is currently increasing again in all regional sub-markets without exception. In the office markets of the major centers, the supply in absolute numbers increases most strongly in the agglomeration communities around the central cities (outer office markets). In percentage terms, however, the supply has increased most in the city centers. Higher supply rates can be observed above all in those sub-markets that are currently recording a high level of space access. For example, the increased construction activity in Basel is making a significant contribution to the increase in the available space at the knee of the Rhine. In contrast, the comparatively intact market situation on the Zurich office market is closely related to the low level of construction activity. The comparison between Lausanne and Geneva is interesting: While weak demand was responsible for the increase in the supply of space to 12.3% in the city on the Rhone, Lausanne benefited from relatively robust demand despite higher construction activity, so that the supply of space here increased significantly less.
Investors are planning less office space
In the past twelve months, building permits for office space with an investment volume of CHF 1,598 million have been granted. This is around 17% below the long-term average since 1995. Investors have become more cautious about investing in office buildings and are holding back on new projects as long as the uncertainty regarding future space requirements is not cleared up. In a long-term comparison, the amounts approved for office renovations remain at a low level. In most cases, replacement new buildings are preferred to renovations today. Conversions in apartments, which are increasingly being considered – especially in the Bern office market – are not included in these figures. This reluctance on the part of investors should help ensure that most office markets are unlikely to develop too large imbalances over the next few quarters.
Home office only slows down space requirements temporarily
Based on a study commissioned by two federal offices on industry developments up to 2060, the real estate economists at Credit Suisse derive the development of office employment up to 2060 and use this to forecast long-term demand for office space. Current trends such as employment growth, the digitization of many work areas, but also the trend towards home offices are developing in the opposite direction. While home office reduces space requirements in the medium term, the increasing digitization of all areas of life and work is increasing the office quotas – i.e. the proportion of employees with an office workstation – in all industries and thus generating a large need for additional office space in the long term. Between 2000 and 2019, the average office rate in Switzerland climbed from 34% to 45%. According to the modeling, it should increase further to 60% by 2060. Over time, this effect is likely to overshadow the trend towards home offices, which is reducing space, and generate significant additional demand for office space in the long term.
Immediate view streaked through
In the short term, there are two opposing developments that are having an impact on the demand for office space. On the one hand, the absorption of space is likely to continue to be resinous, despite stronger employment growth, and to lag behind the usual level. A further increase in the supply of space is therefore possible, especially as there have only been a few cases of large-scale abandonment or reductions in space due to the COVID-19 pandemic. However, such dismantling plans exist. On the other hand, a certain amount of demand is likely to have built up. The real estate economists at Credit Suisse are forecasting a renewed increase in supply, particularly for large and peripheral spaces. They also expect a further increase in vacancies next year and ongoing pressure on rental prices, which could be a little higher than the current minus of 0.1%.
Figure: Expansion and supply in the large and medium-sized centers
Circumference: stock of office space; Expansion: building permits for the last four years compared to the long-term average; Supply quota in% of the 2018 portfolio
The full study on “Swiss office space market 2022” is available in German here .