Colliers Market Report Denmark 2023

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Office - Colliers Market Report 2023

Substantial hidden office demand in and around Copenhagen

-400,000 -200,000 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000

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Actual change

Estimated change

Accumulated demand

Note: Office premises (sq m), Copenhagen proper and environs. Actual change based on change in tenanted office spaces, with the estimated change calculated based on employment trends. Due to a revised estimation practice by online portal Ejendomstorvet.dk, post-2020 data are not included. Source : Ejendomstorvet.dk, Statistics Denmark, Colliers

Moderate newbuilding and hidden demand may potentially cushion downturn All the while widespread recessionary fears will dampen demand, all other things being equal, new supply was stunted by a rise in financing and construction costs in 2022, with several development schemes being reconsid ered or put on hold. In the short term, this may curb a hike in vacancy rates and a drop in rent levels even dur ing an economic slowdown. Despite recent years’ multiple newbuilding schemes mainly in Copenhagen and Aarhus, we still see a sig nificant amount of hidden demand because finding the right space is difficult at a time when vacancies are scarce. In consequence, some businesses have in fact made do with less space than they were in the mar ket for and will therefore tend to be more wary about downscaling or vacating leases, with a staffing adjust ment not necessarily calling for an adjustment of the required amount of office space. In addition, the strong inflow of businesses into Copenhagen and exceptionally low vacancy rates indicate that a great many businesses are still interested in settling in or around Copenhagen but are potentially prevented from doing so due to the current lack of options.

Will inflation drive up market rent? All the while that office demand has yet to adjust to mac roeconomic trends, several new issues have come to the fore in the office market, including the question whether or not the currently high inflation will leave its more per manent mark on market rent. Many business tenants pay rents that are adjusted in step with consumer prices (the net price index, NPI), and unless the parties have agreed on a cap or limit on annual rent hikes, the rent is subject to full indexation. As of year-end 2022, inflation had hit a 40-year high, and busi nesses due for a rent adjustment subject to the October NPI were facing a hike in rent of approximately 10%. It is difficult to predict the impact on future market rent levels, especially because it remains to be seen if all land lords decide to fully factor in NPI increases in future rent levels, if possible, that is. The claim voiced by landlords in support of full indexation is that property operating expenses have risen, too. However, an increase in such expenses is typically paid by the tenant on top of the rent itself. Overall, this means that the tenant suffers both a sharp rent increase, triggered by indexation, and rising operating expenses, which are settled on a separate