News / From the associates

The AEW report highlights the gradual recovery of the office market in Europe, driven by a reduction in new supply and a sharp increase in the conversion of obsolete buildings to other uses.

Generative artificial intelligence is seen as a positive driver of demand for space, fostering the creation of new highly specialized jobs. AI-related roles will rise from 0.3% to 3.2% of the workforce by 2040, equivalent to approximately 1.2 million new jobs, benefiting cities such as London, Paris, and Frankfurt in particular. Occupancy, however, will grow at a slower pace (0.7% annually between 2025 and 2029, compared to 1.6% in the previous five-year period), and space per occupant has already fallen from 25 to 18 square meters since 2005, signaling a structural shift toward flexibility.

Conversions represent a key trend in Europe: in the first four months of 2025, they accounted for over 30% of transactions by floor area, compared to 17% in 2024 and 8% in the post-financial crisis period. Driven by write-downs, refinancing difficulties, and more flexible regulations, conversions to alternative uses (residential, student housing, hotels, logistics, self-storage) allow properties to retain value, provide access to liquidity, and serve as a more sustainable alternative to demolition. Frankfurt and Milan showed the most significant growth in conversions between 2008–2019 and 2020–2024, while London and Munich recorded modest changes.

Between 2020 and 2024, prime rents in major European markets grew by 5% annually, compared to a 3.8% increase in average rents, signaling a growing polarization that is expected to continue through 2029. However, signs of recovery are also emerging outside CBDs. Contract incentives remain high, continuing to suppress actual rent growth.

In 2024, investments in the office sector reached €43 billion (+1% compared to 2023), but remain 53% below the 15-year average. In Q1 2025, they stood at €8 billion (-10% year-over-year), with a share of the total at a historic low of 21%. Large core transactions confirm the concentration of demand, while over 40% of fund managers expect values to rise over the next 12 months.

Prime yields in CBDs are expected to peak at 4.7% in 2025, then decline by 20 bps by 2029. In non-CBD markets, the expected compression is 30 bps, narrowing the current record spread of 145 bps. The vacancy rate, currently at 9% (vs. 5.7% in 2019), is expected to peak in the first half of 2025 and fall to 7.6% by 2029. CBDs remain more resilient (5.6% versus 10.6% in peripheral areas).

Prime rents are expected to grow by 2.8% annually through 2029, with CBDs slightly outperforming (+3.5% vs. +3.3%). Expected total returns stand at 9.4% annually, with peaks of up to 12.7% in the City of London.

Sustainability is increasingly central: over 70% of lenders exclude assets lacking ESG requirements or a conversion plan. 57% offer better terms to those who meet environmental or social targets. Incentive mechanisms are prevalent, but penalties—if applied—are more severe because they are tied to regular monitoring.

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