In July 2013 two nationwide real estate brokers reported sobering news about the situation in The Netherlands’ office market – at least for the supply side of the market. DTZ Zadelhoff informed us that in the first half of 2013 the supply in the market had reached 8 million m² and that vacancy in the Dutch office market was running at almost 15%. At the same time, Dynamis published a similar story in which it placed the emphasis on the decline in average rents.
While both these well-known parties differ substantially in their empirical justification, it is clear that there is something afoot in the office market. Reason enough for Redept to look closely at the structural situation in the market and to conclude that at the present time the tenants’ market is a given that will probably become even more pronounced in the years to come. We have set out five reasons to support our assertion.
1. THE AGING POPULATION
The Netherlands is getting older, and quickly. The ‘babyboomers’ are retiring in increasing numbers and leaving empty desks behind. Will those empty desks then not be taken by new entrants into the employment market? Undoubtedly in part but it is interesting to look at the population prognosis of the Central Bureau for Statistics (CBS) in which it is predicted that between 2012 and 2025 the total working population (20-65) will decline by 150,000.
In the DTZ report ‘Nederland Compleet’ in July 2013 we can read that in 2012 the total number of office jobs was 2,280,800. By comparing this with the figures from the CBS – a total working population of some 6,973,000 over the same timespan – we can assume that around 33% of the working population sits at a desk.
According to the Annual Report on Offices 2012 (Jaarbericht Kantoren 2012) published by the Netherlands Facility Costs Index the average workplace occupies 20 m² of lettable floor area. If we apply these details to the decline in the working population predicted by the CBS, we can postulate that during the next 12 years the shrinkage in office jobs purely due to the aging population will amount to some 50,000. This means an addition of around one million m² of vacant offices. An increase of 14% in comparison with 2012. That does of course assume that every workplace is occupied by just one FTE.
2. ALTERNATIVE WORKPLACE STRATEGIES (HNW)
Currently the Dutch term “Het Nieuwe Werken” is routinely applied to every conceivable type of flex-working. Even though the effect on workplace strategies is in principle a by-product of HNW and not the ultimate aim, the fact that every application thereof leads to a fall in the demand for office space is undeniable.
Empirical information on the effect of HNW on space utilisation is scarce as is concrete information over the number of organisations that have actually implemented HNW. However, anecdotal evidence suggests that implementing HNW can lead to a space reduction of 30-40%. In the ‘National HNW Barometer 2012’ from the Rotterdam School of Management the following picture has emerged based on the results of its research into 500 Dutch companies.
| 2011 | 2012 | |
| HNW not important / not implemented | 11% | 5% |
| Orientation / preparaton implementation HNW | 46% | 42% |
| Pilots / partial implementation HNW | 25% | 40% |
| Total integration HNW | 18% | 13% |
This gives a shocking picture if you are active on the supply side of the market. As many as 82% of the respondents indicated that they are actively considering implementing HNW. That HNW – or in any case flexible working – leads to space reduction is no longer in dispute. In the scenario which is set out, therefore, 82% of the remaining office stock in use is vulnerable to HNW which means that 30-40% is no longer required. That means that, according to DTZ’s figures, of the approximately 41 million m² that is currently in use, between 10 and 13 million m² will be surplus to requirements. That would then mean that the vacancy will increase to more than 40%. In May 2013, AOS Studley calculated the total functional vacancy already at 27%. With 12 years to go with the prognosis of decline in the working population, rental agreements that have yet to expire and the implementation of HNW this could indeed become reality.
3. THE CHANGING EMPLOYMENT MARKET
Irrespective of increasing unemployment, a structural change in the employment market is being witnessed – the movement towards flexibility. In the CBS and TNO report ‘Dynamism in the Dutch employment market: the focus on flexibility’ it is reported that between 2001 and 2012 the number of employees with a flexible employment relationship increased from 12% to 16%. Concurrently, the proportion of self-employed people without personnel rose from van 7 to 10%. It was also remarked upon that the economic circumstances have a limited effect on the scale of the flexible workforce.
What does this mean for the demand for office space? Flexibilisation of employment contracts does not necessarily mean that demand will change proportionately. The increase in the self-employed does however have a discernible effect. Every new self-employed person that carries out deskbound activities means around 20 m² less demand for offices by organisations. That loss will not be compensated on a like for like basis by the self-employed. If this tendency continues at the same tempo, then every year the number of self-employed will increase by around 20,000. If just half of those are deskbound and half of the deskbound work from home, that means a further fall in the demand for offices of some 100,000 m² per year.
In practice what Redept is seeing is an increase in demand for (and supply of) flexible accommodation. For organisations that breathe in and out by using the flexible workforce, flexible office concepts offer the answer. The new growth of ‘small’ office users will however not be acquiring large amounts of square meters for periods of five years on the basis of the ROZ rental agreement.
On the plus side, the increase in the amount of flexible offices does mean a positive impulse for the market. However, the wild variation in concepts will also lead to competition with the traditional suppliers. This will undoubtedly lead to even more competition as new suppliers are competing against each other as well as against the established landlords. Increasingly we are also seeing the traditional suppliers entering the market with flexible solutions: NSI with Het Nieuwe Kantoor, Annexum with FlexOffiz and Merin which is currently also working on its own concept.
4. THE REAL ESTATE MARKET ITSELF
Since 2008 the real estate market has been operating in crisis mode. The underlying cause is the turning off of the money tap by the banks whereby the excesses of the boom years have nowhere near been digested by the system. Characteristic is the number of large-scale bankruptcies (Eurocommerce, TCN, etc.) and the deeply discounted real estate disposals (Uni-Invest portfolio, Regulusweg in The Hague, Quadrant in Diemen). Both phenomena lead to situations where – due to the losses incurred – the new owners are able to compete aggressively on rents and incentives.
The question is of course, where will this ‘race to the bottom’ end? On 21 June 2013 the Dutch central bank asserted that: “Given the existing low-interest environment, the difficult economic situation and the falling real estate prices, banks will remain alert as to the risks in respect of the real estate portfolio” (source: Vastgoedmarkt.nl). The central bank expects that the banks will suffer increasing losses on their real estate lending. This will inevitably lead to compression in real estate values and the consequent willingness of owners to retain existing tenants and attract new ones on the basis of extremely attractive conditions. However: At the Expo Real in Munich the whisper was that the market was on the turn. There is once again more money available to be invested in Dutch real estate. Due to the fact that Dutch real estate is ‘relatively cheap’ in comparison with other territories, the interest of foreign parties is growing and the initial yields are beginning to contract again. This development is therefore purely driven by the availability of money to invest and not by the intrinsic quality of the real estate. History seems, in this respect, to be repeating itself extremely quickly. The counter to this is nevertheless that with yield compression, the incentives available to tenants will inevitably increase.
5. THE RETREATING GOVERNMENT
Apart from the fact that the government, by far the largest office occupier in the country, is tenaciously reducing its number of workplaces at every level, the cabinet is not interested in the vacancy problem. There is no point looking to the government for a (contribution to the) solution.
At local level a number of municipalities have appointed an ‘office pilot’ to support owners that want to transform their office ownership into other uses. A drop in the ocean, it seems.
The government is active in reducing its own office space. Minister Blok recently emphasised the State’s intentions by which its office space will be reduced by 30% between now and 2020. The government will predominantly withdraw from rental properties. In 2020 70% of the State’s portfolio will be in its ownership, as opposed to the current 55%. It will therefore disproportionately affect ‘the market’.
The Covenant on Vacant Office Space (Convenant Leegstand Kantoorruimte) seems to be dying a quiet death. It should have been a solution that was supported by all parties, including a demolition fund. But the sacrifices for the participants are too large, the commitment too weak and the calculated effect too limited. Landlord that have invested in the right properties do not want to subsidise landlords that bought ‘hopeless’ real estate. Then rather the competition to the ‘death’ that will follow.
It seems therefore that the coming years will indeed be a party for tenants. It is clear that rents will continue to fall and the incentives will still be necessary when desperate office owners are competing to the death in order to secure the few scarce tenants. Redept considers this conclusion premature for a number of reasons.
Firstly it is becoming increasingly clearer that the office market is segmenting. The difference in vacancy between various sub-markets is stunning. Delft is at number one with a vacancy of just 7% while at the other end of the spectrum Capelle aan den IJssel leads the way in empty offices with almost 30%. These sorts of differences can also be seen in the regional context: Amsterdam for instance, where vacancy in the Zuidas has slipped below 8% and in Amstelveen is pushing 28%. If as occupier you choose the Zuidas you will be confronted in the coming years with a shortage of supply and an assertive attitude amongst landlords. Look for space a couple of kilometers down the road and the red carpet will be rolled out for you. Due to the dangers sketched earlier, investment in commercial real estate will be selective. In that respect the ratio of suitable supply to ‘obsolete real estate’ will become increasingly smaller. Total supply may well be significant but the amount of suitable supply will bubble around the frictional level.
Redept experiences on a regular basis that the best real estate deal is not always the most suitable accommodation solution. It is very easy to negotiate a financially advantageous transaction. This ignores the fact that various landlords are in a desperate situation. For instance, if they have given away large incentives in the fight to haul in the tenant it is very possible that there is insufficient liquidity remaining to carry out normal maintenance. As occupier you may well be renting cheaply but with unhappy employees as a consequence of lack of maintenance to the building’s technical installations, this could be a double-edged sword.
A tenants’ market it will remain, with the exception of a few high-demand markets. However, as occupier, always seek professional advice. With increasing pressure on costs within your organisation it can be all too tempting to go for the financial deals that are out there. Don’t be saddled with a sub-standard accommodation solution.
