DTZ Research. Property Times Stockholm Offices Q Weak fundamentals cast a shadow on outlook. 8 November Contents. Author.

Property Times

Stockholm Offices Q3 2012

Weak fundamentals cast a shadow on outlook

DTZ Research

8 November 2012

Contents

Author

Contacts

Head of CEMEA Research + 33 (0)1 4964 4954 magali.marton@dtz.com

Hans Vrensen

Global Head of Research + 44 (0)20 3296 2159 hans.vrensen@dtz.com

Recent signs point to a slowdown in output in the period ahead, and the Swedish economy is expected to record 1.3% growth this year followed by 1.8% in 2013. There are signs that the unexpectedly resistant labour market is about to weaken.

Stockholm has not experienced any major decline in office demand, although the general sentiment in the market has changed and risk awareness has increased.

The total supply pipeline for the next three years corresponds to 2.7% of the total existing office stock in Greater Stockholm. However, when subtracting offices that are taken off the market, the net new supply in 2012-2014 is only 1.1% of the existing stock.

The vacancy rate in Greater Stockholm has begun to increase and is currently estimated at 11%. The vacancy rate in the CBD is still limited to just over 4%. Thanks to stable demand for prime offices and low availability of such space, prime office rents have remained unchanged in Stockholm CBD at SEK 4,700 per sq m per year this quarter. Our short term forecast is for prime rents to hold up due to lack of new supply, while rents for secondary space will suffer from downward pressure.

Figure 1

Prime office rent, SEK per sqm per year

Source: DTZ Research 0 1000 2000 3000 4000 5000 6000 7000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Stockholm Offices Q3 2012

Economic Overview

Last year, Sweden’s economy managed to avoid the worst of the problems that struck Continental Europe, and the economy grew by 3.9% over the year. This year however, the economy has been weaker, recording 1.5% and 1.3% respectively in Q1 and Q2 (y-o-y, working-day adjusted). Yet, compared to other European countries these are enviable strong numbers. According to the flash estimate, Eurozone GDP declined by 0.4% y-o-y in Q2 2012 (s.a.). Growth in EU27 fell by 0.2% in Q2 (y-o-y, s.a.).

Despite Sweden’s relatively healthy start to the year, recent signs point to a considerable slowdown in output in the period ahead. The Economic Tendency Indicator from NIER, fell just over three points in October from 95.6 to 92.3, indicating that growth in the Swedish economy is currently weaker than normally. At the same time, slow external demand, particularly from the Eurozone, combined with a strong SEK is dampening export prospects. The Purchasing Managers Index (Silf/Swedbank) fell by 1.6 point to 43.1 in October. An index value below 50 indicates that the economy is shrinking. However, the situation is not as bad as in 2008 when the PMI reached a trough at 32.7. To sum this up, the economy is expected to record 1.3% growth this year followed by 1.8% in 2013, before rising to 2.6% in 2014 (figure 2).

There are signs that the unexpectedly resistant labour market is about to weaken. The unemployment rate has gradually increased from 7.0% in July to 7.4% in September (figure 3). The number of corporate bankruptcies in Sweden is increasing, according to statistics from UC. In September 501 companies were going bankrupt, which is an increase by 24% compared to the same month 2011. A larger number of people have been given notice this year compared to last year. During the first nine months this year approximately 5,000 people were given notice, which is an increase by 55% compared to the same period 2011. However, this is an increase from low levels and we are not even close to the situation in 2008 when approximately 20,000 people were given notice every month.

The confidence indicator for the private service sector, i.e. the office occupiers, fell five points in October and is now 15 points below its historic average (figure 4). Demand has been weak over the past few months and OIS employment is reported to have fallen somewhat. The consensus forecast point at a fragile labour market this and next year. However, the total employment is not expected to fall but cling to the positive side. This year the total employment is expected to grow by a low 0.4% and in 2013 by 0.1%. The unemployment rate is forecast to reach a peak at 7.9% in 2013 before starting to slowly level down.

Figure 2

GDP growth, annual growth

Source: Statistics Sweden, Consensus Forecast Figure 3

Unemployment rate, seasonally adjusted

Source: Statistics Sweden Figure 4

Business Tendency Survey, Office Intensive Sectors

Source: NIER, the National Institute for Economic Research -6% -4% -2% 0% 2% 4% 6% 8% 1994 1996 1998 2000 2002 2004 2006 2008 2010 20 12 (f ) 20 14 (f ) 0% 2% 4% 6% 8% 10% 2007 -01 2007 -07 2008 -01 2008 -07 2009 -01 2009 -07 2010 -01 2010 -07 2011 -01 2011 -07 2012 -01 2012 -07 -40 -30 -20 -10 0 10 20 30 40 50 60 2003 -04 2003 -10 2004 -04 2004 -10 2005 -04 2005 -10 2006 -04 2006 -10 2007 -04 2007 -10 2008 -04 2008 -10 2009 -04 2009 -10 2010 -04 2010 -10 2011 -04 2011 -10 2012 -04 2012 -10

Stockholm Offices Q3 2012

Demand

As can be seen in figure 5, employment in office incentive sectors in Stockholm has held up pretty well during the economic downturn starting in 2008. Negative growth was recorded only during two quarter in 2010. More recently, Q1 2012 proved to be a weak quarter, but it was then followed by two relatively strong quarters.

There is normally a lag before general economic trends reaches the occupier market and affects the demand side. In Stockholm we have not yet experienced any major decline in office demand, although the general sentiment in the market has changed and risk awareness has increased. According to DTZ’s survey Property Investor Confidence Index for Q4, conducted in September, the proportion of investors with a negative view of near term office demand has grown somewhat from 17% to 20%. The share of investors with a positive view has remained fairly stable at 3% (down from 4%). Worth noting, however, is that still the vast majority of respondents (77%) expect demand to remain unchanged in Q4 2012. The index value came down somewhat from -13 in the Q3 survey to -17 in Q4 (figure 6). Among occupiers there is a strong polarisation in favour of modern office space in attractive locations over more secondary space. Demand seems to be more and more driven by the motive of cost cutting by increasing space efficiency. The occupiers favour either inner city locations or, if they require larger offices or head quarter type buildings, certain suburban areas that have prime office stock and excellent public transportation.

Companies that have relocated, or consider a move, from the inner city to out of town locations include; Swedbank, the Swedish Social Insurance Agency, the Tax Authority and SEB. Should all these plans become reality, the amount of available office space will rise quite markedly in the inner city, and in the CBD in particular. However, this left-over space will come out on the market gradually over a period of 3-4 years. Therefore the general view in the market is that demand should be able mop up this new supply, which is all attractive space, fairly quickly.

Thanks to stable demand for prime offices and low

availability of such space, prime office rents have remained unchanged in Stockholm at SEK 4,700 per sqm per year this quarter. Still there are rental agreements signed at higher levels, in particular in newly produced offices or in smaller premises. This is illustrated by figure 7 where the size of the bubbles reflects the size of the premises. The rent level is on the y-axis and the lease length in years on the x-axis.

Figure 5

OIS Employment Stockholm, annual growth

Source: Statistics Sweden, DTZ Research Figure 6

Development of Office Demand

Source: DTZ Research – Property Investor Confidence Index Q4 2012 Figure 7

Office lease contracts in Stockholm CBD

Rent level, lease length and size of premise

SEK/sqm,year Source: DTZ Research -2% 0% 2% 4% 6% 8% 10% Q 2 2 0 0 5 Q 4 2 0 0 5 Q 2 2 0 0 6 Q 4 2 0 0 6 Q 2 2 0 0 7 Q 4 2 0 0 7 Q 2 2 0 0 8 Q 4 2 0 0 8 Q 2 2 0 0 9 Q 4 2 0 0 9 Q 2 2 0 1 0 Q 4 2 0 1 0 Q 2 2 0 1 1 Q 4 2 0 1 1 Q 2 2 0 1 2 -120% -80% -40% 0% 40% 80% 120% Q3 -08 Q4 -08 Q1 -09 Q2 -09 Q3 -09 Q4 -09 Q1 -10 Q2 -10 Q3 -10 Q4 -10 Q1 -11 Q2 -11 Q3 -11 Q4 -11 Q1 -12 Q2 -12 Q3 -12 Q4 -12 Improve Worsen 2 200 2 700 3 200 3 700 4 200 4 700 5 200 2 4 6 8 10 12

Stockholm Offices Q3 2012

Supply

Since many office development projects were put on hold during the financial crisis, only 42,000 sqm of offices was completed in Greater Stockholm in 2011. This is

significantly lower than the average of 125,000 sq m per year over the period 2000-2010.

This year another 50,000 sqm of office space will be completed and in 2013-2014 construction activity will pick up speed with an estimated 255,000 sqm of office space coming out on the market these years (figure 8). The total supply pipeline for the next three years corresponds to 2.7% of the total existing office stock in Greater Stockholm. Examples of new construction projects due for completion this year include Klövern’s Isafjord 1 (27,300 sq m) in Kista, Fabege’s Uarda 5 (43,000 sq m) and Uarda 1 (24,000 sq m) in Arenastaden, and Atrium Ljungberg’s development of Sicklaön 83:22 (5,600 sq m) in Sickla. Speculative construction is minimal and thus a shortage of grade-A space in attractive locations is already emerging. Since demand for housing is huge in Stockholm, a fairly large amount of secondary office stock is being redeveloped into residential use. The largest projects that are currently under way include Vattenfall’s former head office in Vällingby as well as Tieto Enator’s previous head quarter and Ericsson’s old office in Älvsjö. In total, an estimated 179,000 sqm of offices will be turned into residential use or simply demolished over the period 2012-2014. When taking this volume into account, the net new supply in 2012-2014 is only 1.1% of the existing stock.

The vacancy rate in Greater Stockholm peaked in Q2 2010 at nearly 13%, before levelling down to 10.8% in Q2 2012. This quarter the overall vacancy rate has begun to increase and is currently estimated at 11%. Most of the vacant space is found in older buildings in less attractive locations, whereas the vacancy rate in the CBD is still limited to just over 4%.

Figure 8

Office development, sqm

Source: DTZ Research Figure 9

Greater Stockholm vacancy rate

Source: DTZ Research Figure 10

Stockholm CBD vacancy rate

Source: DTZ Research 0 50 000 100 000 150 000 200 000 250 000 300 000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2 0 1 2 (f ) 2 0 1 3 (f ) 2 0 1 4 (f ) 0% 4% 8% 12% 16% 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 0% 4% 8% 12% 16% 1 9 9 9 Q 4 2 0 0 0 Q 4 2 0 0 1 Q 4 2 0 0 2 Q 4 2 0 0 3 Q 4 2 0 0 4 Q 4 2 0 0 5 Q 4 2 0 0 6 Q 4 2 0 0 7 Q 4 2 0 0 8 Q 4 2 0 0 9 Q 4 2 0 1 0 Q 4 2 0 1 1 Q 4

Stockholm Offices Q3 2012

Outlook

Based on the macroeconomic forecasts that are available today and the general view of the market, occupier demand should be fairly weak in the short term but might recover in the second half of 2013. Therefore upward pressure on vacancy rates should continue and any general rental growth cannot be expected in the short to medium term. However, while prime rents should be able to hold up due to lack of new supply, rents for secondary space will suffer from downward pressure.

A similar view is seen in the latest consensus forecast from SEPREF, the Swedish Property Research Forum. According to this survey, prime office rents in Stockholm could rise somewhat in the very short term, but looking one year ahead 50% of the respondents expect prime rents to decline. The other half expect rents to remain stable (figure 11).

Figure 11

One year prime rent view, share of respondents

Source: SEPREF, the Swedish Property Research Forum

-60% -40% -20% 0% 20% 40% 60% 80% 100% Q 3 2 0 1 0 Q 4 2 0 1 0 Q 1 2 0 1 1 Q 2 2 0 1 1 Q 3 2 0 1 1 Q 4 2 0 1 1 Q 1 2 0 1 2 Q 2 2 0 1 2 Q 3 2 0 1 2 Q 4 2 0 1 2

Rents expected to rise

Stockholm Offices Q3 2012

Definitions

Stock The office property stock is the sum of office properties which are in use and office properties standing empty at the time of analysis. The office property stock is not a static amount. Due to new-build or totally refurbished operations it increases (new supply). It decreases due to demolition, change of use or even larger refurbishments that make the space not usable for a significant amount of time.

By our definition, the Greater Stockholm region is geographically equal to the office clusters within the following municipalities in Stockholm County: Stockholm, Solna, Sundbyberg, Sollentuna, Täby, Danderyd, Järfälla, Nacka, Huddinge and Haninge.

Our stock figures include both prime space and secondary space. However, we don’t include office space in properties that are primarily for residential use.

New supply New supply represents the total amount of floor space that has reached practical completion (including major refurbishments) as known on the last day of the quarter. This is regardless of whether or not the space is occupied or still available on the market. Common areas and service areas are not included.

Prime rent Prime office rent represents the top market rent that could be expected for a notional office unit of the highest quality and specification in the best location in a market.

The rent quoted normally reflects prime units of over 500 sq m of lettable floor space, which excludes rents that represent a premium level paid for a small quantity of space.

The Prime Rent reflects an occupational lease that is standard for the local market and would exclude service charges and property tax. Note that the rent figures in this report include heating.

It should be an effective rent that factors in any rent free-periods spread over the life of the lease. It should not be a face rent that does not reflect the financial impact of any other tenant incentives like fit-out contributions, rental payments under existing leases or any other benefit provided to tenants.

It represents the average mean value of all rents achieved on leasing transactions completed during the survey period, but excludes any unrepresentative deals. If there are no prime transactions during the survey period a hypothetical rent should be quoted, based on expert opinion of market conditions.

The rent should not include any additional rent for non VAT registered tenants. The rent should be quoted per sq m and annum.

Vacancy Vacancy represents the total floor space in existing properties, which are physically vacant, ready for occupation and being actively marketed as known on the last day of the quarter. The vacancy rate represents the total vacant floor space divided by the total stock at the survey date.

Stockholm Offices Q3 2012

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