The Netherlands – Winter 2021

Market update on Utrecht office market: flight for quality set to drive future demand for Utrecht office space

CITY SPECIALS

Savills Research


Businesses want high-quality workplaces:

easily accessible, sustainable and with state-of-the-art technology

These are just some of the reasons why companies like Vodafone Ziggo, Zanders, McDonald’s, and Aalberts Industries have opted to set up business in Utrecht CBD (Central Business District). Utrecht is also an affordable and good-quality alternative compared to such places as Amsterdam. When it comes to quality, Utrecht is certainly no longer second-best. New state-of-the-art offices, such as Helix in Leidsche Rijn and Central Park in CBD are facilitating this demand.

Thanks to the improvements in quality achieved in Utrecht, there were high expectations before the pandemic that these offices would be fully let even before completion. However, Covid-19 threw a spanner in the works. Postponed decisions on business accommodation and economic uncertainty caused by Covid-19 led to muted dynamism among occupiers on the office market, as in other Dutch cities.

Recent months have seen a change of mood in the office market. The economy has fully recovered from the pandemic, causing a drop in unemployment, and increasing shortages on the labour market. In 2021Q2, for example, there were 130 vacancies for every 100 unemployed people in Utrecht.

As the economy recovers in the Netherlands, the demand for offices will gradually return.

How this demand develops in the period ahead will depend on how businesses choose to implement hybrid working. In order to gauge the effects on the Utrecht office market, we take a look below at the impact of the coronavirus pandemic on demand, supply, and vacancy rates on the Utrecht office market.

We also highlight the potential of Utrecht as an office city, examining whether each specific area meets the changing wishes and requirements of businesses.

Working from home

Fall in demand set to continue in 2021, despite recovery in second quarter

The fall in demand on the Utrecht office market remained relatively limited in 2020, compared to the other G4 cities. However, demand for office space saw a significant drop in the first half of 2021. In Utrecht, take-up fell by 65% compared to the first half of 2020.

However, demand in 2021Q2 recovered compared to the same period in 2021 (+27%). Low unemployment rates, record numbers of job vacancies and the removal of the 1.5 m social distancing rule all contributed to this recovery.

The recovery in the demand for office space can be attributed to the wide range of different office occupiers. This diversity was unaffected during the pandemic (20Q2-21Q2), a fact confirmed by an analysis of the levels of diversity before and during the pandemic (19Q1-20Q1). Despite the fact that many different types of companies in Utrecht were still in search of office space, there was a significant change in the balance across different sectors of business. Businesses in care, ICT, wholesale and retail, government and commercial services were the most dominant sectors during the pandemic.

Businesses in these sectors generally experienced fewer problems as a result of coronavirus. These sectors accounted for 69% of take-up during the pandemic, compared to 30% pre-Covid. During the months of the pandemic, a small number of players absorbed larger numbers of square metres. They included Zorg van de Zaak N.V. (3,240 sq. m.), Central Government Real Estate Agency (5,400 sq. m.) and Fujitsu Technology Solutions B.V. (3,605 sq. m.). In some sectors of business, such as care, ICT and commercial services, demand for office space increased during the pandemic at the same time as demand dropped among many other business sectors, causing a fall in the total take-up in the Utrecht office market.

Flexibility and smaller floor areas

Currently, this is resulting in reduced activity on the Utrecht office market.

However, the initial signs of recovery are also visible. On the one hand, certain sectors have remained very active while, on the other hand, the demand for flexible offices has seen a sharp increase. The latter is an important sign, since the market for flexible office space generally recovers more rapidly than the conventional office market; that is to say that the flexible market is early cyclical, which means that a recovery in the flexible market is generally followed by a total market recovery.

More broadly, demand for flexible office space has increased across the board, from SMEs to corporates. During the pandemic, some companies aimed to add a flexible shell to their accommodation by leasing small-scale spaces on short-term contracts. As stated, this caused demand for flexible office space to exceed demand for conventional office space.

This meant that there was reduced demand for office space in Utrecht during the pandemic, with the exception of certain business sectors and companies wishing to lease office space on short-term contracts. What impact did this have on demand-supply ratios in the Utrecht office market?

Supply

Higher demand-supply ratios in the Utrecht office market

The drop in demand during the pandemic caused vacancy rates to increase to 6.1% now, compared to 5% before the pandemic (2021Q1). It is worth noting that there are significant differences in the vacancy trends in the different office sub-areas.

Supply increased the most in Kanaleneiland and Papendorp. This was mainly because of vacated floors in a number of office buildings that were not immediately absorbed by the market because of postponed decisions on accommodation.

The demand for offices in high-quality central locations has held up. This can primarily be seen from the fact that vacancy rates hardly increased at all in Utrecht CBD and Leidsche Rijn during the pandemic.

Map Vacancy differences in sub-areas based on analysis in Savills Maps

The increase in the vacancy rate has so far led investors to be more hesitant about acquiring offices in Utrecht.

Investment Market

Effects of Covid-19 on the investment market become clearly visible in 2021

This risk aversion was not yet visible in 2020. The office investment volume actually grew by 69.3% in 2020H1 compared to 2019H1, mainly as a result of a very strong first quarter in 2020.

Activity among investors in the Utrecht office market saw a significant drop in 2021.

The Utrecht office market is not unique in this. More generally, investors partly shifted their focus to other investment segments. Any remaining demand focused primarily on the core product. However, this product was virtually unavailable, because owners were less willing to sell, if at all. This was mainly because of limited opportunities for reinvestment. Expectations are that this is now set to change. This is partly because the risks of working from home are now easier to assess and also because the impact on vacancy rates has remained relatively limited.

The Dutch economy now appears to have almost completely recovered. Investors’ risk perception with regard to offices will gradually increase over the next year, in view of the further recovery of the occupier market. Savills expects that investors will face changes in demand from occupiers. This is important not only for current investments, but also for the future. What will be the most important changes and how should investors respond?

The latest preferences of office occupiers

  1. Accessibility and amenities in the area around an office are becoming increasingly important: in the future, offices close to major transport hubs with local amenities will become increasingly important (Savills Office Fit).
  2. Sustainability & technology: technology can help support a smarter working environment through monitoring of temperature, air quality, noise, and energy consumption. Offices without these facilities will gradually fall out of favour (Savills Office Fit).
  3. Health & wellbeing: office occupiers are looking for workplaces that promote both physical and mental health (Savills Office Fit).
  4. ESG: the ESG principles should form the basis of the corporate culture. A company's objectives and willingness to embrace this can make a difference in attracting employees (Savills Office Fit).

Many organizations currently based in prime locations aim to be able to attract and retain the best talent. Accessibility by public transport, sustainable offices and amenities in an area are criteria that will become increasingly important for companies. This means that it is essential for investors who aim to invest in the core product to gain a good impression of which office locations will meet the changing needs of businesses now and in the future.

What will be the locations of the future?

What will be the locations of the future?

In order to determine which office areas meet the future needs of occupiers, Savills has investigated the various factors that determine an area’s quality, such as demographics, the economy, quality of life, sustainability, accessibility, and office market trends.

This analysis was conducted with the help of the Savills Market Indicator.

The Savills Market Indicator collects data from 45 internal and external sources concerning six key areas and makes a comparison in order to determine how attractive a specific office area is.

With the help of statistical methodologies, it is not only possible to compare and rank a single category, but also to calculate an overall score for an office area, because of the weighted calculations for all categories. This provides a quantitative interpretation of the potential of an office area. This tool enables companies to gain an insight into the extent to which an area meets their criteria for accommodation on the one hand and also provides investors with an insight into the opportunities and risks of an office area.

The Savills Market Indicator reveals that several office areas score above the average while others achieve below-average scores.

Papendorp, Leidsche Rijn and Utrecht CBD make up the top three. The fact that Leidsche Rijn and Utrecht CBD feature in the list comes as no surprise.

After all, Leidsche Rijn and Utrecht CBD rank very highly in terms of quality of life, the number of amenities and the density of sustainable offices, criteria that are set to become increasingly important for occupiers in the future. For example, the housing stocks in Leidsche Rijn Centrum grew by more than 30000% between 2016 and 2019 and Utrecht CBD West does not have a single office with an energy label worse than C. Papendorp achieves a remarkably high score this year. This can be completely attributed to office market growth over the last two years. Take-up quadrupled, the investment volume doubled and vacancy rates fell by half between 2018 and 2020.

Based on this ranking, it can therefore be argued that Papendorp, Leidsche Rijn, Utrecht CBD and Rijnsweerd are more future-proof and meet the increasingly demanding requirements of occupiers. Besides, these office locations are not only recognized in the Savills Market Indicator but also by the City of Utrecht itself. According to it, these are the only locations where new offices will be permitted to be added in the future, with the exception of Rijnsweerd, because of the relatively high vacancy rate of more than 10%.

Map Utrecht Office Market Ranking based on Savills Market Indicator 2021

Source Savills Analytics

This means that CBD, Leidsche Rijn Centrum and Papendorp are the most future-proof office areas in Utrecht, according both to the City of Utrecht and the Savills Market Indicator. Companies that have set up business at these locations or plan to do so will be more likely to be able to attract and retain talent. Core investors looking for less risk and yield will look to these locations first. Locations that score relatively low based on the Savills Market Indicator and have a low number of amenities and/or public transport connections, for example, will not necessarily be written off by occupiers and investors. Rents in these office areas tend to be lower, making them more attractive for occupiers with less strict requirements for their accommodation. This will make secondary locations suitable for certain types of occupiers and therefore interesting for investors in search of more risk and yield.

Outlook

Savills expects to see the differences in quality between the Utrecht office areas increase still further.

The City of Utrecht has chosen to allow only the most sought-after locations to respond more rapidly to the changing demand from businesses. This means that the gap between the ‘locations of the future’ and secondary office areas in Utrecht will increase still further as a result. In view of the changing preferences of occupiers, they will primarily focus on the ‘locations of the future’.

However, this does not mean that secondary office areas will no longer be of interest to certain types of occupiers and investors in the future. For this reason, secondary locations will also continue to be attractive in the future to certain types of occupiers and investors, based on different accommodation criteria and risk/return profiles, compared to the office locations of the future.

Key Findings

• In the first half of 2021, office take-up fell by 65% compared to the first half of 2020. However, demand in 2021Q2 recovered compared to 2021Q1 (+27%).

• Companies in care, ICT, wholesale and retail, government and commercial services were the most dominant during the pandemic. These sectors accounted for 69% of office take-up during the pandemic, compared to 30% before it.

• During the hard lockdown between October 2020 and April 2021, demand for conventional office space fell by 40% on average, compared to just 15% in the flexible office market.

• The demand-supply ratios in the Utrecht office market increased during Covid-19. The vacancy rate increased from 5.2% in 20Q1 to 6.1% in 21Q2. The office areas of Papendorp and Kanaleneiland saw the greatest increases in vacancy rates.

• During the pandemic, the investment market performed relatively less well and almost grounded to a halt in 2021. Investors are increasingly in search of the core product, placing even further pressure on initial yields.

• Aspects such as accessibility, the number of amenities and sustainability will become increasingly important factors in the accommodation issues faced by businesses in the future. Offices located in CBD, Leidsche Rijn and Papendorp are the most future-proof office areas in Utrecht, according both to the City of Utrecht and the Savills Market Indicator.

Sources Brainbay Database, BAG, Vastgoedmarkt, RVO, City of Utrecht, Statistics Netherlands (CBS), Savills Office Fit, Workthere


Savills World Research We provide bespoke services for landowners, developers, occupiers and investors across the lifecycle of residential, commercial or mixed-use projects. We add value by providing our clients with research-backed advice and consultancy through our market-leading global research team



Ellen Waals

Head of Agency

+31 6 151 82483

ellen.waals@savills.nl


Sander van den Engel

Head of MidCap Investments

+31 20 301 2000

sander.vandenengel@savills.nl


Jordy Diepeveen

Head of Acquisitions

+31 20 301 2000

jordy.diepeveen@savills.nl


Martijn Onderstal

Head of Vaulation

+31 20 237 9955

martijn.onderstal@savills.nl


Scato de Smit

Junior Research Consultant

+31 20 237 9949

scato.desmit@savills.nl


Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK, continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. While every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.



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