Expanding to Europe? Beware the Top Three Toughest Rental Markets

by Knotel: Nov 28, 2018

Thinking about settling your startup in a hot European city? Broadening your operations to Berlin? Maybe Paris?

 

Be prepared for a time-consuming, arduous search for office space. The European vacancy rate is shockingly low, bottoming out at under 2%, which puts pressure on rents, according to data from global real estate consultancy Knight Frank.  In other words, prepare for heated bidding wars as part of your lengthy quest for idyllic workspace in a prime location.

 

Fortunately for tenants determined to go global, Europe’s flexible office market is on the rise. The amount of space dedicated to flexible offices has doubled since 2015, especially in markets like Amsterdam, Berlin, and London, and it’s not slowing down. Flexible offices are expected to grow by 30% in the next five years. The appeal is evident, since fast-growing companies seldom want to be locked into long-term leases that penalize tenants for growing or shrinking their office footprints.

 

This is key when office space is hard to find. If a company outgrows a space with a flexible office provider, there’s no time-consuming hunt for new offices, no need to sublease an existing space, no lengthy contract negotiations for new leases with higher rents. They simply move into another nearby flexible space owned by the office provider.

 

Unfortunately rents are on the rise (shocker), with uber-charming cities like Berlin leading the pack with a staggering 30% increase this year alone. Even historically desirable European markets like Zurich, Geneva, and Paris La Defense don’t compare. In those areas, rents actually fell below the five-year average.

 

We’ve audited the industry trends to break down the challenges you’ll face in the toughest rental markets:

 

Munich

Vacancy rate: 1.8%

The third-most-populous city in Germany, Munich is known for being nestled near the Alps with beautiful historic architecture and great beer gardens. But the city also boasts a powerful economy, and is home to big firms like BMW, Siemens, and insurance firm Allianz. The startup sector is driven by biotech, insurance, and the Internet of Things. Munich is also becoming notorious for having one of the most exorbitantly priced housing markets. And office rentals are following that upward trajectory. The city’s low vacancy rates have driven up pre-lease rates for newly built projects, and rents are still climbing higher, even in cases of large-scale spaces bigger than 10,000 square meters.

 

Berlin

Vacancy rate 2%

Berlin experienced double-digit rental growth (+30%) due to a critical shortage of space in the central business district. So expect to pay higher rents or move to short-term flexible office spaces. Why the leap? It’s no secret that Berlin has emerged as the place to be for Europe’s tech startups. Google, Soundcloud, Facebook, Airbnb, and Apple have planted roots in the German city, and the startup activity is blossoming with a flood of young companies, coworking spaces, VC firms, and accelerators. Knotel recently acquired Ahoy!Berlin and will begin an expansion of flexible office space to serve this dynamic market.

 

Paris

Vacancy rate 2.2%

Paris, the thriving capital of France, has one of the largest GDPs in the world. Art, food, fashion, and culture make the city a huge economic generator for the country. So it’s no wonder that demand for office space has stayed strong in the city, with low vacancy rates of just 2% in the area’s central business district. Sacrebleu, indeed.