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Swiss office market recovering from the inside out

Credit Suisse publishes its study “Swiss Office Property Market 2019”

The market environment for office property is positive. Employment growth has surged as a result of the economic upturn, stimulating demand for office space after a long spell of sluggishness. However, the recovery in the major individual office markets is at different stages due to the varied sector composition. The office market in Lausanne, for example, appears to be in much better condition than the Geneva market just a few kilometers away. One thing all markets have in common is that the recovery originates in the central business district (CBD) and spreads from the inside out. These are the conclusions of the latest study on the Swiss real estate market by the Credit Suisse economists.

According to the study "Swiss Office Property Market 2019," which is published today, the market environment for office property has brightened almost unnoticed in the shadow of the growth in residential vacancies. The strong economic upturn is leading companies to hire additional staff, which is reflected in solid growth in employment, and stimulating the demand for office space. The expansion is driven by the tertiary sector, particularly by business services, IT, the public sector, and the reinvigorated industrial sector, where there is also increasing demand for office space. The digitalization process ensures solid additional demand, since the share of desk jobs is rising in all sectors. The robust 600,000 m2 increase in demand forecast for 2018 should be followed by further, albeit somewhat more moderate, growth in 2019.

Office markets reviving from the inside out
In the CBDs of the major centers, the office space available for lease has already declined by nearly one fifth. Meanwhile, in Geneva and Zurich, the recovery has reached the middle business district. In particular, the CBD and easily accessible locations in the middle business district are enjoying growing popularity from companies wishing to position themselves as an attractive employer for professionals. This strategy could well be companies' response to low unemployment and the risk of a future exacerbation of the shortage of skilled professionals.

Nonetheless, most net supply rates have increased further, because in the outer business districts – except for Lausanne – there has been little sign of a recovery yet.  Low interest rates have encouraged construction activity in the agglomerations, so that by now, depending on the major center, 50% to 80% of the available office space is located in the outer business districts. This leads to vacancies and, as a result, up to one sixth of the space available for lease is no longer advertised regularly on the large platforms.

Shifting demand
Important office tenants – such as banks, insurance companies, telecommunications companies, and wholesaling – are facing structural change and are not driving demand. So, the remaining demand is more hybrid in nature, on a smaller scale, and less stable. This means that a flexible office layout has greater appeal. The need to use office space as a service – rapidly, flexibly, and with the fewest possible binding contracts – is increasing, which is also manifest in the trend towards coworking spaces. Office space providers therefore need to adapt to new requirements in terms of layout, flexibility, and contract modalities.

Sector structure determines pace of recovery
Depending on the location, the recovery will either be encouraged in the medium term by a more modest increase in office space (Zurich, Bern) or delayed by more expansive activity (Basel, Geneva, Lausanne). In general, ever since the surge of projects in 2011/2012, investments in office buildings have never been substantially below the long-term average. The stock of office space has therefore continued to grow steadily in recent years. The impetus for an extensive recovery that reaches the edges of the outer business district will have to come from the demand side – first and foremost from the duration and composition of employment growth. In this context, the role played by an economic center's sector mix should not be underestimated. This defines how strongly a regional office market can benefit from the upturn. The local sector structure also explains the remarkable differences between the major centers in Western Switzerland: While the sector mix in Geneva, which is dominated by private banks, commodity traders, and international organizations, is confronted with structural upheaval, the more broad-based market in Lausanne profits disproportionately from the general economic upturn – indeed this has already led to shortages in parts of the office market.

Mid-sized centers offer investment alternatives
The share of available office space in the major centers varies between 4.8% and 9.5%. With few exceptions (Schaffhausen, Lugano), the mid-sized centers report lower supply rates and a modest increase in office space. The mid-sized centers should similarly benefit from jobs growth and the trend toward more office jobs. To be successful here, however, investors need local expertise. The fact is, the demand for office space in the mid-sized centers is narrowly based and more exposed to volatility.

Offices are an attractive investment alternative at the moment
Office space is at a more advanced stage in the cycle compared with residential real estate and is now in a recovery phase again. Nevertheless, in the mid-sized and major centers, investors should not make any compromises in terms of locational quality. It remains to be seen whether the economic upturn will be strong enough to absorb the large supply of office space available in the outer business districts. Meanwhile, shortages are likely to begin emerging in good locations, resulting in a return to rising rents and a widening gap in rents between the CBD and the periphery.

Figure: Situation in office markets in mid-sized and major centers

Expected expansion and supply rate in % of stock  

The complete study "Swiss Office Property Market 2019" is available online in German, English, French, and Italian at: