Spike in demand for office space already falling
Last year, catch-up effects from the pandemic and strong employment growth triggered additional demand for office space: In 2022, the demand for additional space amounted to around 840,000 square meters. The trend in office employment is primarily responsible for the increased demand. As a result of increasing digitalization, the proportion of office jobs is steadily increasing across all sectors, with growth in this area outpacing that of employment overall.
The huge growth seen in 2022 is likely to remain an exception, however. In 2023, additional demand is expected to stabilize at a significantly lower level of around 130,000 square meters.
Hybrid working retained
Following the pandemic, many companies have returned to the office and are renting additional new space, but they are also maintaining hybrid working models. Inner-city locations in particular are benefiting from this: Due to the trend toward flexible working models, they have better chances of absorption than peripheral locations in large centers.
The supply of space for new office buildings has declined just as employees are returning to the office from remote working and demand is increasing. However, new space is becoming available for re-letting in existing buildings as tenants leave. Accordingly, as some properties fill up, others become vacant.
Few new builds, but buoyant conversion and refurbishment activity
The supply of new office buildings has decreased in recent years: Building applications are currently 13% below the long-term average across the whole of Switzerland. Building permits are also 11% below the average value since 1995. Over the last 12 months, office space with investment volumes of just CHF 1,710 million was approved.
On the one hand, this is caused by the uncertainty over the future need for office space due to the rise of hybrid working models and remote working. On the other hand, higher financing costs and construction inflation are not conducive to higher investment volumes.
Renovation work, however, is exhibiting an upward trend: Applications for conversions are 23% above the long-term average. Increased ancillary costs are making energy-related renovations increasingly pertinent and changing needs resulting from hybrid working models are also necessitating renovation work. Conversions due to the scarcity of building land for apartments are also leading to increased renovation activities.
Rising contractual rents for office space in large centers
There are regional difference in rent levels. Contractual rents in large centers rose by more than 2% in 2022. However, the situation with regard to overall advertised space is completely different, as demonstrated by the average year-on-year decline in advertised rates of 2.6%.
This trend is due to the fact that many companies are exhibiting a greater willingness to pay for high-quality, energy-efficient, and centrally located space in cities.
The volume of all vacancies assessed remains at a relatively high level. Individual cities such as Geneva and Basel are currently experiencing majoy declines of around 15%, although this will probably not be a sustained trend, as the increased supply is likely to have an effect after a certain delay.
Conversion - when office space becomes living space
Given the shortage of residential space in cities and occassionally empty office buildings, the change of use from office to residential space is an obvious conclusion. However, this is easier said than done. The key problem is primarily profitability, as the construction costs involved in converting a property are usually over half of those of newbuild projects. The expected income generated by new apartments must significantly outstrip the rent generated through office use.
The result is then typically upscale condominiums or rental apartments. Despite elevated office vacancy rates and a scarcity of housing in some places, these prerequisites make conversions in usage challenging. They therefore occur occasionally, but are unlikely to become a mass phenomenon.
Outlook for office space market depends on quality and location
The current strong employment growth should ensure robust demand for office space in 2023 at least. However, the rise of flexible working models will leave its mark in the long term and make the task of marketers more challenging. This is particularly true of space in peripheral areas, energy-inefficient existing buildings, and premises with rigid floor plans that are not easily adapted to new forms of working.
Given the added factor of an impending economic downturn, we are therefore anticipating a rise in vacancies outside of the main centers. By contrast, vacancies should fall further in central locations. We are expecting rent levels to drift sideways.