COVID-19 effects strengthen polarisation trend of Dutch office market locations

Determining sustainable office locations in COVID-19 times, an occupier perspective.

Real rental office rent development over the last 30 years shows prime office rents on average cannot keep up with annual inflation development.

Out of 153 monitored office submarket locations a centralization tendency pattern is getting clear. Sublocations of G4 cities (Amsterdam, Rotterdam, Utrecht, The Hague) take over in popularity from municipalities close to G4 locations as well as regional cities.

On the surface the Dutch office market is coping well at the start of COVID-19 outbreak. Just over a decade ago (2005) 15 municipalities recorded a prime office rent at or above national average (€160 sqm per year). Today this count still adds up to (not the same) 15 municipalities (average of €163 sqm per year). However, breaking down the analysis to submarket (153 sublocations in 54 municipalities) level shows a totally different picture. In 2005 39% of submarkets recorded a prime rental level at or above national average, today just 22% manages to do so.

Above conclusions are derived from SCG’s inhouse data analysis based on 30 year office rental evidence over 50+ municipalities and 153 monitored sublocations.

Whilst the office stock reducement (transformation) in the last decade did take out outdated stock bringing down vacancy rates, it didn’t take into account stagnating office demand, which still pushed down rental levels further to bring average rental growth nationwide to just +0,1% (2010 – 2019).

Satellite cities (For example Capelle aan de Ijssel (Rotterdam), Zeist (Utrecht), Woerden (Utrecht) and Rijswijk (The Hague)) of G4 cities are finding it difficult to compete as office locations with the popularity of the likes of Utrecht and Amsterdam.

Public transport mobility matters.

Evidence shows that walking proximity of intercity train stations  helps office locations thrive. This is seen in Amsterdam and Utrecht (Centre/CBD office locations) which outperform the national average by annual growth rates of 3%. At the same time popular submarkets in these cities like Amsterdam Southeast and Rotterdam South also experienced an average growth rate of 3%. Above mentioned satellite cities Capelle aan de Ijssel (-2,8%), Zeist (-2,9%), Woerden (-3,2%) and Rijswijk(-2,8%) all recorded annual prime rental declines of on average 3%.

Early signs of COVID-19 effects on the office occupier markets show to have a dampening effect on take up levels. Companies (have to) adapt to the work from home mentality, reducing the demand for extra square meters. Bearing this trend in mind, investors and occupiers will need to cope with tightening of office sustainability legislation and have to be able to provide a healthy work location with respect to COVID-19 measures (e.g. ventilation and 1,5 meter distancing). In Utrecht vacancy rate evidence shows vacancy rates in grade A buildings is twice as low as vacancy rates in non grade A.

Effect of above will be seen at stagnating rental growth for many of The Netherlands submarkets.

At SCG the SLIX methodology helps to objectify the basic ingredients of a future proof office location in order to be able to attract Green finance.