Office Market Denmark Q4 2022
Current market and economic uncertainties driven by the high inflation and interest rate hikes has resulted in a significant slowdown in investment activity in both Q 3 and Q 4 of 2022 compared to both Q1 and Q2 of 2022. Investor demand in Copenhagen continues to be high and yields low, but the uncertainties has put an upward pressure on the prime yield level, which is now at around 3 50 for prime office properties.
In the current market, office tenants have realized that the office hybrid is here to stay Therefore, we expect the high level of activity to continue as the economic uncertainties still impact the occupier market less than the investment market In the near future we expect that the tenants' relocation decisions will be driven by the tenants wanting to have the right solution with the right characteristics in terms of interior, location, flexibility and sustainability It should be mentioned, that the very possible recession might result in a decreasing demand on the occupier market going forward.
Office Space Copenhagen
As expected, the office vacancy rate in Copenhagen increased by 0.5% point from Q1 to Q2 2021.
The increase is primarily caused by the fact that many older properties have become vacant as many larger tenants have moved to newly developed offices in central Copenhagen. In the coming months, we expect this trend to continue.
As a result, the office vacancy rate in Copenhagen is expected to increase further.
Driven by COVID-19 and uncertainties regarding the future and new ways of working, we continue to see an increasing focus on flexibility from the tenants in the form of relatively short non-termination periods, break options before the end of the non-termination period, right to sub-let, and right to assign.
Office Investment Denmark
The figures for Q2 2021 show that the transaction volume in the office sector reached DKK 3.4 bn, corresponding to a 30% decrease compared to Q1 2021.
Despite this decrease investors' demand for prime office properties continues to be high, which is why we continue to witness record low yield levels.
The decrease is not a due to decreasing demand but to a limited supply of prime office properties in Copenhagen.
Another consequence of the limited supply is that the office sector was dominated by Danish investors who accounted for 76% of the transaction volume in the office segment in Q2 2021.
Office Space Outlook DenmarkWe are continuing to experience strong demand for office leases in central Copenhagen. However, as vacancy rates are expected to increase in the coming months, there will be increased competition for the tenants, which is why we expect unchanged rent levels in the short term.
For the next 5-10 years however, we expect significant increases in the office rent levels due to limited opportunities for new construction.
Due to the increasing vacancy rate in the CBD and the expected adoption of mark-to-market taxation, the prime yield is expected to remain unchanged at around 3.25-3.50% for the rest of 2021.
For the long term we expect that a strong occupier demand, limited opportunities for new construction, the fact that large sums of capital are currently accumulated, and a strong investor demand will result in decreases to the yield level.