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Two faces of the Swiss office market

Credit Suisse publishes its "Swiss Office Property Market 2020" study

The Swiss office market is currently showing two different faces. On the one hand, central locations are in high demand, office properties in some city-center locations are actually in short supply, and there is evidence of rising rental prices. On the other, the outer business districts of the major centers are characterized by high supply rates and difficulties in marketing. The price and vacancy gap between urban centers and periphery is therefore likely to widen even further in the wake of the economic slowdown currently under way. In the western Swiss office property markets of Lausanne and Geneva, increased construction and planning activity has resulted in a further rise in total advertised office space. By contrast, the latter has fallen significantly in the centers of Zurich and Bern. The latest data on approved construction projects show that the project pipeline is likely to shrink markedly in the future, thereby ensuring a continuation of the recovery. These are the conclusions of the latest study by Credit Suisse economists on the Swiss real estate market.

Central locations are in high demand, according to the "Swiss Office Property Market 2020" study published today. The buoyant economy of 2018 played a major role in the recovery of the office property markets. However, this upturn has not reached all areas of the office property market in equal measure. The volume of advertised office space in the outer business districts of the individual office property markets continues to climb. With an economic slowdown now under way, the recovery in the office markets is therefore unlikely to reach the farthest-flung corners. Although the Credit Suisse economists expect further, additional demand for office space in 2020, it is likely to amount to just 253,000 m2 or so – significantly less than the 551,000 m2 figure for 2018. Going forward, the existing gap between the urban and peripheral areas of the office markets is therefore set to widen.

Faster space absorption in city centers
The revival in the demand for office space has led to faster absorption of available office space in the city centers in particular. Companies are increasingly renting office space in prime locations, as the competition to attract specialist labor forces them to offer their employees attractive workplaces. With the exception of Geneva, which is still suffering from structural change in its banking sector, advertised office space in the city center has fallen in all other major centers. This is due in part to the demand from numerous new providers of co-working space, which typically favor central locations. In Zurich, where the recovery in the office property market is furthest advanced, tenants in the city center need to move quickly if they are to secure rental space in prime locations.

Co-existence of scarcity and excess supply
The state of affairs in the outer business districts of the major centers, on the other hand, is very different in most cases. Demand is less buoyant, which is why the absorption of new office space is stalling. Many properties have been on the market for years, with no identifiable progress having been made in letting. Sooner or later, such space will be redeveloped. This is especially evident in Bern, where the demand for larger properties is currently very slack. In addition, cheap money has also caused that various new development projects also vie for attracting tenants. Because most of these new properties are being built at locations with good transport links – often in the middle business district, i.e. closer to the center – areas on the fringes are under even greater pressure, which is forcing their owners to cut prices. In Geneva and Lausanne in particular, increased planning and construction activity is additionally swelling the supply of office space. All in all, the supply of office space in Switzerland has therefore increased slightly to 5.2%.

Fall in construction activity has reduced vacancies, especially in Bern and Zurich
Interestingly, individual office markets in the five major centers show a very mixed trend overall – aside from a similar center/periphery gap. Whereas the total volume of advertised office space in Zurich and Basel – and to some extent Bern as well – has not changed much compared with the previous year, Geneva and Lausanne stand out on account of a significant increase in the supply of office space. In addition, both western Swiss office property markets now have the highest supply rates. In Lausanne the rate has risen to 8.2% from the previous year's figure of 5.8%, while in Geneva it has gone up from 9.5% to 11.9%. While demand in Lausanne is relatively intact, with strong construction and planning activity contributing to the increased supply of office space, the rather sluggish demand in Geneva unfavorably coincides with various development projects. The developments in Geneva, which are to some extent leading to a realignment of locational qualities, have been triggered by the opening of the new Léman Express rail line. A common feature of the German-speaking urban centers is the fact that their planned investment in office space has been declining for many years. This has contributed to a significant decrease in vacancy rates, especially in Bern and Zurich.

Weak project pipeline likely to ensure a continuation of the recovery
The office property market has shown an astonishingly high level of construction and planning activity in recent years, despite a trend to excess supply. This is likely to be one reason why the recovery in the office property market has not yet affected all business districts in equal measure. Now, however, the latest figures point to a marked decrease in construction projects. Over the last 12 months, the approved volume of investment in office space has fallen to its lowest level in 19 years. The figure for Switzerland as a whole is nearly 22% below the long-term average, while in the major centers it is almost 41% lower. In the medium term, the reduced production of new space is therefore likely to ensure a continuation of the recovery on the office market.

Offices currently offer an attractive investment alternative
In an environment of continued low interest rates, rising rental prices and a limited volume of new space in the medium term provide interesting prospects for investors. With the exception of Geneva, where a full recovery will clearly take a bit longer, investments in office properties offer good prospects provided they are not too heavily concentrated in the outer business districts.

If you would like to receive the full version of the study "Swiss Office Property Market 2020" please contact media.relations@credit-suisse.com.