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The key to success: Locked office markets come at a premium
Office rents in Europe have traditionally been more volatile than in the other commercial real estate sectors, as shown in the “Higher volatility of office rents” chart in the print edition. The main reason for this comes from the supply side of the market. Office supply tends to lag the economic cycle by two to three years; thus, in an upward economic cycle, new supply cannot keep up with demand, thereby putting upward pressure on rents. When demand falls, at the end of the cycle, new supply tends to be at its peak, putting downward pressure on rents.
Yet this pattern is not uniform across office markets. In some, supply tends to be “sticky” and cycles tend to be largely demand-driven. This is because office stock hardly increases. This may be due to an array of factors, such as planning, geography, etc, but the most important is history and preservation of the existing built environment. In such markets, it can be particularly challenging to create modern stock, let