THE PROPERTY PERSPECTIVE September 2017 BRABANT’S OFFICE MARKET at a GLANCE
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THE PROPERTY PERSPECTIVE September 2017 BRABANT’S OFFICE MARKET AT A GLANCE The office markets in Eindhoven, Breda and ’s-Hertogenbosch share two common features: central locations are popular and, broadly speaking, not enough good-quality space is available. On the whole, vacant offices in this region meet few or none of potential tenants’ wishes and requirements. Open-plan spaces allowing for flexible working and optimum internal communication rarely come onto the market. Developments supporting new, healthy workplace concepts are still in their infancy. All in all, there is a substantial quality deficit to be made up. Positive signs 3% The province of Noord-Brabant has a strong economic student 80% 15% 2% base, and the region’s potential is increasingly reflected housing residential other education in its distinctive innovative strength. It is no coincidence that the province has more successful campuses than any other in the Netherlands. In terms of employment, the High-Tech Campus Eindhoven is the national number one. But Pivot Park in Oss, the Automotive Campus in Helmond and the Science Park in the grounds of Eindhoven Technical University Eindhoven 226,000 sq m office space transformed are all growing. A number of other campus initiatives in Eindhoven, Breda and s-ertogenbosch are in their early stages. This solid economic activity translates into an expanding market for commercial property, and the forecasts for next few years remain favourable in this respect. According to figures from Oxford Economics, office-based employment in Eindhoven and Breda, in particular, is expected to keep rising until 2025 – in fact, even faster than the average in Amsterdam, Rotterdam, The Hague and Utrecht. Time for action The market situation described above offers exciting opportunities for owners and developers conscious of Brabant’s potential, especially that of Eindhoven, and willing to invest in the future. They can respond now to the increasing demand for high-quality premises in central locations. If the shortage of good office space persists, then Eindhoven in particular could find itself in much the same situation as Amsterdam. There, scarcity has pushed up rents substantially. In Noord-Brabant’s three main cities, office users in the technology, media and telecoms (TMT) sector and business services are especially keen to base themselves in multifunctional central locations. But the property there has to meet their stringent expectations. © 2017 CBRE Research Second life To counter structural non-occupancy in Noord-Brabant, the government and the market have initiated a variety of transformation projects in recent years. Relatively speaking, in the past five years Eindhoven has converted the largest proportion of its redundant office stock – 11%, or 160,000 sq m – to other uses, primarily housing. Almost three-quarters of these premises were previously used by Philips (source: Stedplan). In ’s-Hertogenbosch, approximately 45,000 sq m have been transformed. In Breda, the figure is about 21,000 sq m. Given the ongoing demand for new homes, CBRE expects this trend to continue – especially at suitable, well-sited locations. Popular city centres Thanks to economic growth, increasing demand and transformation projects, non- Top-end rents increased from occupancy rates in Eindhoven, Breda and ’s-Hertogenbosch have fallen. In their popular city centres, that fall has been quite dramatic. With their good public-transport links and € 175 per sq m in Q3 2016 relatively lively atmosphere, these are preferred locations for many tenants. By contrast, monofunctional peripheral locations are far less popular and still characterised by high non-occupancy rates. We strongly advise the government and owners to look to € 185 per sq m in Q1 2017 critically at property in such areas, and to bolster the quality of both the buildings and their surroundings. For example, by improving local public-transport services and encouraging the opening of cafés, restaurants and other ancillary services. Creating homes also adds to the quality of such an area, by generating a dynamic mix of living and working, shopping and other consumer activities. In practice, we find that these are the principal requirements expressed by tenants when considering potential locations. Meanwhile, the shortage of space in all the city centres is only expected to increase further. Declining non-occupancy is making it more and more difficult for office users to find high- quality alternative accommodation. In Eindhoven especially, we expect significant scarcity caused by a combination of growing demand, limited new construction and the ongoing withdrawal from the market of structurally unoccupied premises. Non-occupancy figures of 6-7% – the so-called frictional vacancy rate – normally result in upward pressure on rents. We therefore expect the price of high-quality city-centre property to increase, and the availability of incentives to decrease. 11% 9% 12% VACC S-ERTEBSC VACC 5% C E 5% I T R VACC BREA VACC T Y E C E N N Y T I T C I R E C I E T T R Y E C E N N T Y T I R E C I VACC EIVE VACC 7% C I E T T R Y E C E N N T Y T I R E C I 6-7% is the minimum frictional vacancy rate needed to give users sufficient choice. © 20162017 CBRE Research The Property Perspective Rotterdam +11% +8% EINDHOVEN Increase office-based employment +8% RA +7% RGE 'SROGENBOSCH 2005 2010 2017 2019 2021 2023 2025 An extra 150,000 sq m The past three to four years have seen strong economic growth in Eindhoven, ’s-Hertogenbosch and Breda, with a concomitant rise in office-based employment. Between now and 2025, Oxford Economics expects this to continue in Eindhoven and Breda in particular. Assuming that the net space required per employee remains stable, this means that an additional 150,000 sq m will be needed across the region. To meet this increasing demand, dated existing offices in central locations will have to be improved. A renovation or upgrade can enable owners to satisfy the requirements of the modern office user. It is now essential that quality be raised, both within buildings and in their surroundings. More and more users today are looking specifically for sustainable, healthy, flexible premises in lively city-centre locations. Healthy Offices People are more actively interested than ever before in their personal health and well-being, and they expect their workplace to accommodate that concern. At our own head office, CBRE recently conducted a seven-month study of 120 members of staff, in conjunction with the University of Twente, looking at the relationship between attention to occupational health and employee effectiveness. Dubbed “Healthy Offices”, this found that participants not only felt better working in healthy surroundings, but also performed 10% better on average. Considering health aspects when selecting an office location should therefore be regarded as normal behaviour. And these factors should definitely be taken into account when improving existing office buildings and developing innovative new ones. Good returns Investors and developers who recognise Brabant’s potential and want to invest in its future are doing good business. They are in a position to plug the gap in the current market by adding distinctive contemporary property to it or upgrading existing premises, and so responding to current demand for buildings in which people are able perform to the best of their ability. Our expectation is that growing demand and rising rents will result in good returns on their investments. At present, there is a substantial discrepancy between initial yields in “prime” areas such as the Randstad conurbation and the yields in the G3-cities in Southern Netherlands. In the past two years, the demand for office property from both domestic and international investors has focused very much upon the prime locations in the Randstad conurbation, which has put downward pressure on initial yields there. These parties are currently in the market to buy property and areas like Eindhoven’s central business district, with its good fundamental qualities, are of particular interest to this kind of investor. Offices can still be acquired relatively cheaply there, and current market forecasts indicate that investments in premises at attractive locations have the potential to grow in value. © 20162017 CBRE Research Eindhoven leads the way location can be a decisive factor in the war for In 2016, Eindhoven had the highest office talent. Consider, for example, a building with take-up figure of any local-authority area distinctive architecture, a unique hospitality in the Netherlands apart from Amsterdam, concept or amenities like sports facilities and Rotterdam and Utrecht. A substantial restaurant business. A strategic approach to proportion of this was accounted for by office accommodation is becoming more and Fontys University of Applied Sciences, which more important for employers. signed a contract to rent 24,000 sq m The majority of take-up is concentrated in the Expiry forecast city centre: 35% in 2015 and 60% in 2016. Looking at those leases with known expiry dates, in theory a large amount of seeking The developments outlined here are office users in Eindhoven, ’s-Hertogenbosch expected to put substantial pressure upon and Breda will come back onto the market city-centre property markets, especially between 2018 and 2020. Eindhoven again leads in Eindhoven but also in Breda and the way here. All tenants with lease expiration ’s-Hertogenbosch. Although rents in within 5 years together account for 292,000 m² Eindhoven had stabilised for several years, of office space. they have increased recently. And in the city centre they are set to keep on rising due It's clear that tenants will go in search of to improving market conditions and the new opportunities when their present leases quality deficit on the supply side.