The global spread of Covid-19 and the resultant lockdown of Denmark will have severe economic consequences – also in the property market. However, Cushman & Wakefield RED do not expect the office rental market in central Copenhagen (CBD) to suffer a drop in rent levels, and there are three primary reasons why this is the case.


Reason no. 1 – Low vacancy levels and few speculative construction projects

Speculative construction projects are often seen late in an economic upturn where rent levels have been increasing over a period and vacancy levels have been decreasing, making the construction of new office space an attractive business opportunity. With a construction period of typically 12-24 months, however, the new projects are often put on the market at a time when the economic climate has changed. Thus, supply is increased in a period when demand has decreased.

As illustrated by the table below, the corona crisis has hit Denmark at a time when very few speculative construction projects have been initiated and when 50% of the area has already been let:

In addition, the clients involved are very strong financially and therefore have the financial capability to see the projects through to completion, including Skanska, KLP, PFA and Danica. At the same time, the institutional clients have no interest in reducing the rent for their projects as this would affect the value of their remaining office portfolios.

Finally, vacancy levels for office space in Copenhagen have dropped considerably in recent years, and in central Copenhagen vacancy levels were as low as around 6.7% in Q1 2020. The office market in CBD Copenhagen will therefore be able to absorb an increase in vacancy levels of 2-3%, without the market rent being affected.



Reason no. 2 – From a Nordic perspective, the office rent in Copenhagen is low

As opposed to Stockholm and Oslo, the development in prime office space rent in central Copenhagen has been flat for decades. This is primarily because, historically, a lot of development sites have been available in CBD Copenhagen and we have therefore been able to obtain new office space as and when demand has grown. The CBD sites have now largely been developed and, at the same time, some of the earlier office space properties have been converted into hotels or residential use.

At the beginning of 2020, therefore, RED was expecting to see a marked increase in CBD office rent over the coming 10 years. This expectation was based on the fact that the CBD office market is now largely seeing the same conditions as those prevailing in the office markets in Oslo and Stockholm for a great number of years. As a result of the corona crisis, however, this original expectation has been replaced by an expectation for a flatter development curve in the coming years, but not by an actual drop.


Reason no. 3 – The rent represents a minor part of expenses

Compared with many other segments, the expenses of the office segment with regard to rent represent a significantly smaller part of the enterprises’ turnover. As illustrated by the table to the right, the expenses incurred by the office segment with regard to rent represent around 3-5% of the enterprises’ turnover. If we compare this figure with hotels and retail, their expenses for rent represent a significantly larger part of turnover.

”The larger the share of the enterprise’s turnover which is represented by rental expenses – the more sensitive the rent to changes in turnover.”

For the office segment, the biggest item of expense is payroll expenses, and this will therefore be the first item of expense which enterprises will take into account when considering savings opportunities.

For CBD Copenhagen, we will therefore only see any pressure on office rent if the enterprises carry out large-scale dismissals and also downsize their space so that this will have a significant effect on vacancy levels. Moving to new office space being a relatively costly exercise, however, we often see that the enterprises will accept having office space which is slightly too large for a period of time until they are sure of the amount of floor space they need. Accordingly, a drop in the employment rate does not necessarily result in an equivalent increase in vacancy levels.


Conclusion

Based on our knowledge as at end April 2020, we do not expect the corona crisis to affect the office rent for CBD Copenhagen. In cooperation with Estate Media, RED’s expectations to the effect on the residential and retail market can be seen on the webinar available on the following link:

https://estatemedia.dk/dk/ejendomsmarkedet_post_corona/#webinar.

For further information:

Nicholas Thurø, Managing Partner
E-mail: nt@cw-red.dk
Tel.: 26242040