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Strong employment growth temporarily buoys Swiss office market

Credit Suisse publishes "Swiss office property market 2023" study

Driven by strong employment growth, demand for office space is currently running at a high level. Those who predicted disruption for the office market in the wake of the COVID-19 pandemic have been proven wrong. Indeed, the recovery in demand has boosted the uptake of advertised space and led to a reduction in available space. There is a fly in the ointment, however: The reduction in the supply rate is modest given the growth in employment. Compared with previous periods of recovery, supply is falling less sharply. In other words, working from home is still a significant factor and is reducing the demand for office space.

The strong growth in employment since the second half of 2021 has buoyed the demand for office space. Many companies that were reluctant to rent space during the pandemic were no longer able to wait and were forced to act. Reports of successful lettings began to rise, with tenants feeling compelled to snap up opportunities in certain locations to avoid coming away empty-handed.

Working from home is here to stay
The creation of a more flexible working environment following the pandemic-related surge in remote working is now a reality. Even though many employees have returned to the office, occupancy rates remain well down compared to pre-COVID levels. Although there are striking differences depending on the sector and company, a large majority of firms now offer flexible working models – partly in order to remain attractive as an employer. The fact that employees are only present part of the time means the role of the office is changing. The importance of the office as a place for communication and exchange is increasing significantly, which is in turn reflected in the changing demands of tenants.

Supply of office space is falling but less sharply than anticipated
The strong recovery in the demand for office space can be expected to result in a corresponding reduction in the volume of advertised office space and consequently a falling supply rate. Indeed, the supply rate in Switzerland fell from 5.8% to 5.6% year-on-year. In the office space markets of the major centers, around 54% of advertised office space of over 1,000 m2 was successfully let. At the same time, however, existing space elsewhere starting to be re-let. This means less of a reduction in total available space and in some cases, it simply entails a shift from one property to another. The relatively modest reduction in the supply rate, despite the growth in employment, points to only moderate uptake. The remote-working trend is leaving its mark, in that any growth in employment no longer triggers the same demand for office space as it did in the past.

Zurich and Lausanne performing well
The decline in the supply rate is mainly attributable to the office space markets in Lausanne and Zurich. In Lausanne, strong demand has led to a decline in supply despite considerable construction activity. In Zurich, the modest expansion of office space in recent years has helped reduce the supply rate further. By contrast, Basel has had more trouble absorbing the high level of construction activity seen in recent years and now has the second-highest supply rate after Geneva. Geneva appears to be stabilizing, although the supply rate has increased again marginally due to the ongoing construction of new office space.

Outlook: Stronger into the downturn
This temporary buoyancy has come at just the right time for the Swiss office market. Thanks to falling vacancies and higher agreed rents, the market is in a slightly stronger position ahead of next year's expected downturn. Furthermore, because the investments approved in the last 12 months remain 11% below the long-term average, there is no risk of excessive expansion of office space. The cloud on the horizon is the relatively high supply rate by Swiss standards. In an increasing number of areas, marketing has become increasingly difficult in recent years – particularly in the suburbs of the major centers – and this trend is continuing. Changes of use consequently remain on the agenda, although they are much more difficult to implement than is generally assumed.

Conversions: Easier said than done
When too much office space is empty, demand for a change of use increases quickly – especially given the shortage of housing in cities. Even so, a number of requirements need to be met before a property can be converted into an attractive living space. First, the change of use needs to comply with the zoning plan. Then there is the need to solve construction issues and above all reabsorb high investment costs via higher revenues. This is not possible at all locations, for conversion costs can often amount to 75% to 80% of the cost of a new building. Clearly, investors will only bite the bullet and go for a conversion if there is a risk of long-term vacancy. In other words, a change of use is no easy matter. Although such projects are underway at various locations, they are unlikely to become a major trend.

Sources: Various regional statistical offices, Swiss Federal Statistical Office, Credit Suisse

The full study "Swiss office property market 2023" is available in English here.