Q4 2023 - Brussels Office Marketbeat - Belgium

MARKETBEAT

Q4 2023

MARKETBEAT BRUSSELS / Office Q4 2023

323K

YoY Chg

12-Mo. Forecast

Take-up (000s sq m)

7.40%

12-Mo. Forecast

YoY Chg

12-Mo. Forecast

Inflation now stands at around 3%, far from the 10.6% recorded in October 2022, indicating that inflation has ultimately been only transitory. However, the possibility of an inflation resurgence remains a concern. Moreover, underlying inflation, which excludes volatile prices of food and energy, still persists. So, yes, central bank interest rates are expected to decrease in 2024, but perhaps more slowly than anticipated by financial markets, as structural inflation is expected to persist.

YoY Chg

12-Mo. Forecast

Meanwhile, in 2023, despite challenging economic conditions, the unemployment rate remained below 6%, but it is projected to sharply rise to 7% by the end of 2024, a level expected to persist for the next three years. The substantial increase in bankruptcies this year, coupled with a decline in employment linked to more stringent financing conditions and an unpredictable economic environment, is expected to account for the upward trend in the unemployment rate in the upcoming years.

Prime rent (EUR/sq m/year)

5.15%

While the forecasts for the last quarter still anticipated GDP growth of less than 1% and persistent inflation exceeding 4%, the situation appears to be improving, with a decrease in inflation allowing for an upward revision of GDP growth in the last quarter of the year, resulting in an annual growth of 1.48%. However, some trends persist and are expected to impact the Belgian economy in the coming months.

YoY Chg

Vacancy rate

375€

Diminishing inflation and anticipated central bank interest rate decline

Prime yield (3/6/9 lease)

The Belgian economy is expected to gradually expand, with a projected GDP growth of approximately 1.6% in 2024 and exceeding 1.8% in 2025. However, there is a higher-than-anticipated public debt deficit in Belgium. While high inflation allowed for a reduction of the government debt ratio in 2022, at unchanged policy, government debt would increase over the next decade, reaching about 120% of GDP by 2030 23.

Economic Indicators Q4 2023 YoY Chg

12-Mo. Forecast

1.48%

GDP Growth and unemployment rate

Inflation rate

2023 GDP Growth 8%

5.61%

2023 Unemployment Rate

6% 4% 2%

3.97%

2023 Consumer Price Index

0% -2% -4% -6%

Sources: Moody’s Analytics, BNB, Eurostat, Federal Planning Bureau, December 2023 Please note the economic data can vary significantly from one source to the other. Therefore, the figures provided should merely be used as an indication or trend.

20 19

20 20

20 21 GDP Gro wth

20 22

20 23

20 24

20 25

Un empl oymen t Ra te

20 26

10 % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 20 19

20 20

20 21

20 22

20 23

20 24

20 25

20 26

MARKETBEAT BRUSSELS / Office Q4 2023

A new standard for the occupational market In the fourth and final quarter of 2023, no less than 115,000 sq m of take-up was recorded in the Brussels office market. This relatively active quarter in terms of demand, unlike the other quarters of the year, has brought the overall take-up to nearly 323,000 sq m, a level comparable to the years 2022 and 2020, both of which were impacted by significant events.

In essence, the recently recorded level of take-up has become the yearly standard.

Undoubtedly, a sense of hesitation is observed in occupier demand amid this challenging economic environment. This decrease is primarily linked to diminished interest from the private sector, where the consideration of new office spaces is not currently the top priority.

Public sector: a key player in 2023 Already acting as a driving force in the activity recorded since the beginning of the year, the public sector has once more affirmed its leading position in demand in Q4. Indeed, the public sector has secured the largest deals of the quarter, which has enabled the take-up to maintain the level recorded in the previous year.

Out of the six most important transactions recorded this quarter, five are public, and the podium is exclusively dominated by the public sector. The Régie des Bâtiments acquired Gutenberg, a 29,000 sq m building for own use. Similarly, the Haute Ecole Francisco Ferrer acquired the 12,600 sq m Waterside Offices for own occupancy, and finally WallonieBruxelles Enseignement leased the 9,500 sq m Pacheco. These three transactions account for nearly 51,000 sq m, representing almost half of the take-up this quarter.

A transaction setting a new prime rent Although the public sector represents a decreasing share of annual activity, it remains the driving force behind the recorded increase in prime rents in recent months. Despite a decline in demand, prime rents continue on an upward trajectory due to the automatic indexation of rents, increases in construction costs, and ever stricter environmental requirements.

The prime rent has increased for the Brussels office market this quarter, with a new transaction recorded in the Leopold district at a record rent. Indeed, JLL has just pre-leased 1,100 sq m at a rent of €375/sq m/year in the new Cofinimmo project, M10, located on Rue Montoyer, representing an increase of over 10% compared to the previous prime.

Take-up by quarter (000s sq m) 60 0 50 0 40 0 30 0 20 0 10 0 0 20 18

20 19

20 20 Q1

20 21

Q2

Q3

20 22

20 23

Q4

Take-up: Public and private split (000s sq m) 60 0 50 0 40 0 30 0 20 0 10 0 0 20 18

20 19

20 20

20 21

Priva te

Pub lic

20 22

20 23

Prime rents (€/sq m/year) 50 0 40 0 30 0 20 0 10 0 20 18 CBD

20 19

20 20

De central ised

20 21

20 22

Peri phe ry

20 23

20 24

Avg. We igh te d rent

MARKETBEAT BRUSSELS / Office Q4 2023

The upper threshold of yields reached (?)

While inflation continued to decline in the last quarter of the year, the real estate investment market, on the other hand, continued to slow down. Corrections in yields always have a lag period with financial markets, which is why prime yields were revised upwards again at the end of 2023, and they stand at a theoretical level of 5.15% for standard leases in Q4.

However, despite encouraging forecasts for the near future, central bankers are still concerned about a possible resurgence of inflation, especially since underlying inflation remains persistent. Therefore, even though central bank interest rates are expected to decrease in 2024, they are unlikely to decrease as quickly as financial markets expect, and certainly not as quickly as they increased in 2023.

Following the recent changes in the ECB’s monetary policy and new forecasts, we have decided to rerun our yield forecasting model, which now shows a theoretical yield of 5.15% in Q4 2023 and anticipates a slow decline in yields starting from the second half of 2024 to a new prime yield of 5.00% by the end of 2024.

A volume comparable to post-2008 financial crisis levels The slowdown in the investment market persisted throughout the last quarter of 2023. Only 87 million euros were invested in Q4, resulting in an annual total of nearly 640 MEUR, a level akin to those observed in the aftermath of the 2008 financial crisis.

The increasingly complex financing landscape has not only constrained the number of transactions recorded in 2023 but has also curtailed the invested volumes. The average volume for investments in 2023 was at 19 million euros, in contrast to the previous five years' average of 44 million euros, signifying a decrease of more than 50%.

Prime yields 7% 5% 3% 1% -1% 20 18 20 19 Ce ntral LT Prime

20 20

20 21 20 22 De central ised 10 y. Bon d

20 23

Investment volumes by quarter (MEUR) 4,00 0 3,50 0 3,00 0 2,50 0 2,00 0 1,50 0 1,00 0 50 0 0 20 18

20 19

20 20 Q1

Q2

20 21 Q3

20 22

Q4

Investment transactions by type

Redevelopment transactions support the investment market Although the investment market is slowing down this year, redevelopment transactions are supporting the market, as nearly 40% of the deals recorded this year are redevelopment transactions.

20 24 Peri phe ry

27% 38%

Generally, redevelopment transactions are negotiated at lower volumes, which is ideal in a complicated financing context, and allows investors and developers to generate value by redeveloping obsolete schemes.

9% 26% Add -valu e

Co re

Co re+

Re deve lop ment

20 23

MARKETBEAT BRUSSELS / Office Q4 2023

The market is gearing up for new environmental requirements In terms of deliveries, 2023 has been a productive year, with a substantial 130,000 sq m of office space introduced to the market. However, this pales in comparison to the nearly 300,000 sq m anticipated to be delivered in 2024.

While the market is gearing up for new environmental requirements with all these deliveries, notably Chancelier, a 15,000 sq m project delivered in Q4 2023, and all these projects in the pipeline, occupants are also increasingly shifting towards energy-efficient properties. This is evidenced by the significant share of pre-leasing for the next year, as nearly 60% of the pipeline is already reserved for 2024.

Office pipeline (000s sq m) 30 0 25 0 20 0 15 0 10 0 50 0 20 23

20 24

20 25

20 26

Pre-l et

Avai lab le

Co mple te d

20 27

A slight increase in vacancy The vacancy rate has slightly increased in the last quarter of 2023, rising from 7.17% in Q3 to 7.40% in Q4. The numerous deliveries recorded this year, sometimes entering the market vacant, have had the effect of weighing on overall vacancy. Coupled with sluggish activity, the market experienced a net negative absorption this year. Although many renegotiations took place this year, the trend only served to limit the increase in vacancy.

In more detail, vacancy continues to decrease in the Periphery, which undeniably demonstrates significant demand in this district. However, while vacancy remains stable in the Decentralized area, significant (re-)conversions in the district mask the subdued activity in the office sector in the district.

The energy transition comes with a price tag As public authorities set new net-zero goals for the real estate sector, environmental policies and socially responsible investment movements have led to an increase in prices of environmentally friendly products and services, a phenomenon known as ‘greenflation’.

The green transition is likely to create additional pressures on structural inflation over the next decade due to factors such as ‘greenflation’.

This transition will involve significant investments in decarbonization technologies and renewable energy sources, as well as the introduction of carbon taxes. All of this will leave a significant mark on medium-term inflation.

Vacancy rate by districts 22 % 17 % 12 % 7% 2% 20 18

20 19

20 20

20 21

20 22

CBD

De central ised

Peri phe ry

Brusse ls overa ll

20 23

MARKETBEAT BRUSSELS / Office Q4 2023 Market Statistics SUBMARKET

STOCK (SQ M)

AVAILABILITY (SQ M)

VACANCY RATE

Q4 2023 TAKE-UP

2023 TAKE-UP

UNDER CONSTRUCTION (SQ M)

PRIME RENT (€/sq m/year)

PRIME YIELD

Leopold

3,407,901

110,756

3.25%

8,193

51,793

27,257

€375

5.15%

Centre

2,497,284

123,677

4.95%

26,360

37,473

90,813

€285

5.25%

North

1,522,992

103,422

6.79%

15,947

63,511

78,786

€270

5.80%

Louise

844,208

43,890

5.20%

6,656

30,709

49,839

€340

5.30%

Midi

628,938

19,937

3.17%

30,997

30,997

-

€195

6.00%

Decentralised

2,463,474

288,062

11.69%

13,464

33,875

130,000*

€200

7.35%

Periphery

2,236,330

316,547

14.15%

13,584

74,408

130,431

€185

6.85%

Brussels (Overall)

13,601,127

1,006,291

7.40%

115,201

322,766

507,126

€375

5.15%

* Including new HQs for RTBF and VRT

Key Lease Transactions Q4 2023 PROPERTY

SUBMARKET

TENANT

SQ M

TYPE

Pont du Luttre

Midi

Régie des Bâtiments

29,000

Purchase

Waterside

North

Haute Ecole Francisco Ferrer

12,619

Purchase

Pacheco

Centre

Wallonie-Bruxelles Enseignement

9,428

Letting

M10

Leopold

Jones Lang LaSalle

1,100

Pre-letting

Key Investment Transactions Q4 2023 PROPERTY

SUBMARKET

BUYER / SELLER

VOLUME (in MEUR)

YIELD

Royal Center

Centre

Growners / P&V

22

-

Park Hill Tervuren Plaza Pulse

Airport

License to Construct / Cofinimmo

21

-

North-East

Baltisse / AIK

20

-

Airport

Ghelamco / Bayer

10.80

-

Benjamin DEVIE Research Analyst | Belgium & Luxembourg +32 492 11 35 10 benjamin.devie@cushwake.com Maximilien MANDART Head of Occupier Services | Belgium +32 478 24 08 02 maximilien.mandart@cushwake.com Michael DESPIEGELAERE Head of Capital Markets | Belgium & Luxembourg +32 476 82 08 59 michael.despiegelaere@cushwake.com

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The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.

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