A perfect storm for European office markets? Potential price effects of the Covid-19 pandemic

The Covid-19 pandemic is not only endangering the health of people worldwide, but is also causing an economic recession. Given past experience, office markets, particularly the prime market, are reacting very strongly to economic downswings. This paper attempts to derive a likely scenario for the effects in selected European office markets. As a first step, the impact of the economic downturn on prime rents is estimated based on data provided by PMA (Property Market Analysis). As a result, prime rents could decrease by between 5 and 23 percent. In most cases, the reductions are comparable to developments in past crises and in some cases reductions exceed those of former crises. Yet, given the severity of the crisis, this is not implausible. The crisis will also affect expectations, which in turn will affect prices. Based on an analysis of the spreads, a likely effect on prices can be deduced. Prices will drop by 15 to 47 percent. Obviously, the results can be viewed critically, especially since local factors have not been taken into account. Thus, results for cities should be regarded with caution. Nonetheless, the broader view clearly indicates that the downturn in the office market looks set to be severe. In addition, there is the potential for a perfect storm in the office markets since structural changes are also likely. Specifically, workers will push for more remote work and employers are likely to favour this in order to save costs. Also, digitisation offers more potential for saving costs for staff. As a result, office demand could be impaired in the long term, posing challenges for owners and investors in the office market.