Loss of momentum in commercial real estate occupier market
In tandem with the resilient recovery of the Dutch economy, demand for commercial real estate grew very strongly from the end of 2021 through to the beginning of this year. This translated into a sharp rise in take-up figures during that period. A decline in the take-up volume has been evident in the last two quarters, due to the heightened macroeconomic uncertainty. The total take-up volume of commercial real estate in the first three quarters of 2022 consequently fell by 7% compared to the same period last year. That said, take-up volume is still in line with the long-term average.
Dichotomy in the office occupier market
The number of occupier transactions in the office market also rose sharply at the beginning of this year, driven by the economic recovery following the pandemic.
In the past two quarters, however, this number has fallen, and hence so too has the take-up volume: the increased macroeconomic uncertainty has led to a fall in business confidence. This has prompted office users to adopt a more wait-and-see stance. In addition, the new role of the office is still taking shape.
The current market developments are increasingly giving rise to a dichotomy in the occupier market.
Many office users want to be based in a sustainable building at an accessible prime location. Demand for this type of high-quality office space therefore remains high, but is in short supply. As a result, prime rents this quarter have risen further to €520 per sq m per year (Amsterdam Zuidas), a rise of over 15% compared to 2021Q3.
By contrast, the changing role of the office has reduced the attractiveness of outdated office buildings at secondary locations.
This effect will be even greater if no work is carried out to increase their sustainability. Long delivery times for construction materials and personnel shortages have lengthened project completion times substantially. Construction costs also remain high: according to figures from Bouwkostencompas, total construction costs in October 2022 were 8.7% higher than in October last year. Since sustainability costs are fairly uniform across geographic locations, sustainability work is less profitable particularly at secondary locations, where rental income is relatively low. But it is precisely this type of product that badly needs sustainability work in order to remain competitive.
Market set to tighten even further due to Porthos ruling
Construction projects will suffer even greater delays due to the recent Council of State ruling in the Porthos case. This ruling cancels the construction exemption that the Dutch government introduced in 2021. Under this exemption, nitrogen emissions from certain construction activities could be disregarded in applications for building permits.
This made it easier to grant permits for construction projects. However, the Council of State has now ruled that the construction exemption does not comply with European nature conservation law. This means it can no longer be used in construction projects; the impact of nitrogen emissions will have to be examined in each project. 3
As a result of the nitrogen issue, high construction costs and the debate on the “boxing” of the landscape, the logistics market has faced a limited supply of new premises for a considerable time. Land for new developments also remains scarce. The Porthos ruling will cause even more delays in construction and hence in the supply of logistics space. Rents in the tight market for logistics real estate are expected to continue to rise in the period ahead.
The Porthos ruling will also make the ambitious housebuilding plans of housing minister Hugo de Jonge to build 900,000 new homes by 2030 even more challenging. It comes at a time when the number of building permits for homes this year is already lagging behind due to the many challenges facing the construction sector. According to the minister himself, a package of nitrogen reduction measures must be introduced as soon as possible, “so that building can resume.” 4
Sources 3 https://www.raadvanstate.nl/@133608/bouwvrijstelling-stikstof-van-tafel/ 4 https://www.rtlnieuws.nl/nieuws/politiek/artikel/5344168/de-jonge-uitspraak-raad-van-state-fikse-tegenvaller-voor-woningbouw
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