Luxembourg office market suffering from lack of supply

Real estate advisor CBRE recently produced its analysis of the Luxembourg office market and the outlook for this year. CBRE starts by saying that frictions are developing in the market that will hinder activity in the coming year beyond the persistent lack of available of quality space. Occupiers are demanding ESG-compliant space, but the market has been slow to respond. Occupancy costs are rising, and those that can put off their move are likely to do so until more market certainty returns.

Office take-up was down in 2022 by 44% year-over-year to 207,000 m². The large deals that typically drive the market failed to materialise during the year from disruptions and retooling of occupier strategies. However, CBRE goes on, the breadth and diversity of deals was on trend with recent years, with the lack of available space a persistent obstacle. Demand for quality office space is certainly present in the Duchy's growing market, though 2023 may well be another challenging year given these and macro constraints.

Divergence

While take-up is the traditional barometer for demand in the market, CBRE notes, recent dynamics have seen a divergence between the two. With vacancy of less than 4%, supply constraints are restricting take-up in the face of good demand. Additionally, occupiers are increasingly requiring high quality space fulfilling ESG standards that the market is struggling to meet. The latest designs, materials and techniques are needed to control increasing occupancy costs and meet both governmental and corporate performance goals. Well-designed space also plays an important role in bringing people back into the workplace, and is important to attracting and keeping the talented staff. There is, therefore, a reliance on the new, high-quality projects to meet this requirement. There is little room for occupier movement at the moment. The projected pipeline for 2023 is 383,000 m² of new projects – of which 95,000 m² is still available across the entire Luxembourg market – so opportunities to meet spatial demands remain limited. For those projects that are delivered, demand will follow this supply. Esch-Belval, the CBD, the Cloche d'Or, and Station will be the greatest beneficiaries. Kirchberg is conspicuously absent from this list.

Demand for space is strongest in Luxembourg City. Central districts (CBD, Station, Kirchberg) are often operating at less than 2% vacancy while experiencing strong demand. The successful commercialization of Royal Park is evidence of this. Prime rent in the CBD stands at € 54/m²/month, which equates to € 648/m²/year, or virtually double the prime rent in Brussels. The services and amenities on offer in the CBD districts are a major attraction when it comes to location decisions. Nevertheless, CBRE points out, this has to be balanced with accessibility. The city centre may offer the most appeal, but those who do not need to be there and/or those with a large proportion of frontier workers may be better served by the growing peripheral markets. The large available pipeline in Esch-Belval (53,000 m² in 2023 – 2025), for example, may offer more appropriate opportunities.