Spanish Office Market Q3 2023
In a context of rising interest rates, and high uncertainty, investors continue to show caution and adopting conservative positions which is been reflected in office investment volumes, total investment volume in Madrid and Barcelona stood at €885 million (-50% vs. Q3 2022). In Madrid the total investment volume stood at €645 million transacted, Barcelona the investment volume stood at €240 million transacted in the first 9 months of 2023. Investors prioritize assets in prime locations and ESG-compliant buildings are becoming essential requirements.
Madrid and Barcelona markets have seen an uptick in available spaces, particularly in outlying areas. In Madrid, the total vacancy rate has climbed to 10.4%, while in Barcelona, it has hit 11.7%. The present circumstances are encouraging a surge in the popularity of adaptable workspaces, as flexible space operators have already secured 10% of office leases in both Madrid and Barcelona. Nevertheless, leasing demand is displaying caution, likely influenced by an atmosphere of uncertainty.
Prime rents in Madrid stood at €36.1/sq.m./month, exhibiting an annual increase of 3.4%. Barcelona’s prime rate stood at €29.3/sq.m./month range, showing a 1.4% yearly growth. Both markets have now achieved their highest rental levels. On the other side, average rents for Madrid stand at €21.3/sq.m./month, and in Barcelona, at €19.1 /sq.m./month. According to different reports, it is anticipated that rents will maintain their upward trendin the forthcoming years, with an expected average growth rate of 1.1% until 2026. This projection is attributed to the absorption of new supply and a robust demand for premium office spaces.
Tenants are primarily emphasizing high-quality buildings located in prime locations. Owing to the limited availability of superior properties in specific areas of the city centre, they are open to leasing newly constructed or refurbished buildings that offer more affordable rents in peripheral regions, as long as these locations maintain good connectivity to the city centre. With the substantial influx of new supply, Grade B and C properties face the risk of becoming obsolete. When comparing the rental rates of Grade A offices to other categories, they are generally about 15% higher on average. The potential for a decrease in property value, known as the ‘brown discount’, for properties not meeting ESG criteria, is growing, motivating numerous landlords to focus on achieving Net Zero Carbon status. This holds significant relevance as buildings falling short of quality experience elevated vacancy rates, limited prospects for increases in rents, and are more susceptible to conversion for alternative purposes.