European office markets remained resilient in Q1 2026, with take-up broadly in line with recent trends and vacancy stable at 9.4%, while a sharp decline in future completions points to tightening supply and rental growth.
Stable vacancy rates amid shortage of prime stock
Economic overview
European government bond yields rose by an average of 20 bps during Q1 2026, following the start of the US/Iran conflict on 28 February, reflecting higher inflation expectations as a result of global energy shortages. The number of vessels entering the Strait of Hormuz has fallen by over 90% since the pre-conflict period, as oil prices fluctuate around the $100-per-barrel mark. In the UK, government bond yields rose in May 2026, off the back of higher domestic political instability.
Eurozone inflation rose to 3.2% in May 2026 following the outbreak of the conflict, albeit this was lower than expected. Inflation is expected to average 3% in 2026 across the bloc, according to Oxford Economics. However, a soft hiring market and inflation from a lower base is expected to shelter the euro area from any repetition of the 2022-23 levels of inflation. The European Central Bank is now expected to increase interest rates by 50 bps to 2.50% in summer 2026, before cutting back to 2.00% during 2027.
Oxford Economics’ 2026 eurozone GDP growth forecast has softened by 40 bps to 0.7%, given higher import costs and weaker investment levels. France, Italy and the UK have recorded the more significant downgrades to economic growth outlooks, given already high levels of government debt dragging on headline growth.
The EU Employment Expectations Indicator fell to its lowest level since January 2021 in April, before recovering slightly in May. Businesses remain in cost-control mode given their expectations of higher energy prices, and they are subsequently holding off on discretionary hiring, particularly impacting entry-level roles.
Occupational market
European net office take-up reached 1.8 million sq m during Q1 2026, down 3% on the five-year average, reflecting a higher proportion of lease renewals. New lease agreements are taking longer to complete, as occupiers remain cautious around the economic outlook and seek to avoid capex spend on new premises.
Dublin (+154%), Budapest (+55%) and Amsterdam (+36%) performed strongest against their respective five-year averages. In Dublin, the City Council acquired the entire Camden Yard site, whilst Amsterdam recorded an increase in the number of >5,000 sq m deals, including defence company Thales signing for circa 7,000 sq m. Performance remains polarised across Europe, with the core eurozone markets of Germany and France dragging overall leasing volumes, given a weaker domestic outlook. Excluding these two markets, European office take-up would have risen by 2% against the five-year average.
Average prime rents rose by 4.3% year-on-year, led by London City, Warsaw and Munich, and we expect to see similar levels of prime rental growth over the course of 2026.
Mike Barnes, Director, European Research
Overall, the underlying level of demand is resilient, and we anticipate take-up to rise by 3% year-on-year (YoY) in 2026, although the speed at which deals are completed will be influenced by how long the US/Iran conflict continues. Occupiers remain cost-sensitive, and deals are taking longer as committees scrutinise operating costs more closely. However, real estate only accounts for an average of 10% of a business’s total costs, and given the concentrated demand for prime stock in CBD locations, we expect continued upward pressure on rents.
Sustainability remains important, particularly for European-headquartered occupiers, as shareholders increasingly demand that listed companies disclose their energy emissions in company annual reports. Blue-chip tenants are therefore increasing spend on smart technology in their offices to track this.
Average European office vacancy rates remained stable over the last six months at 9.4%. Dublin and La Défense both recorded a decline, although vacancy rates remain at elevated levels of circa 15% in both instances. On the other hand, the German top six cities’ vacancy rates rose by an average of 0.8% over the same period to 8.7%, although much of this space is older stock in non-CBD districts. Development pipelines remain low, and higher input costs are restricting viability. More importantly, the volume of prime space remains constrained at circa 2–3% in many CBD office markets, which is applying upward pressure on headline rents.
Average prime rents rose by 4.3% YoY, led by London City, Warsaw and Munich, and we expect to see similar levels of prime rental growth over the course of 2026, supported by a shortage of available prime stock.
Limited development pipeline to keep prime vacancy rates low
Development pipeline
In 2026, Europe’s office development completions volume is expected to remain stable YoY at 3.5 million sq m, marking a 28% fall from the 2022 peak. Labour shortages continue to impact the market and delay project completions – 21% of office stock scheduled for completion in 2025 was not completed and has been pushed into 2026. In 2027, we anticipate that the volume of development completions will fall a further 23% YoY to 2.7 million sq m, given the shortage of development starts since 2023.
Only 1.5% of the office space in the development pipeline is speculative over the next two years, down from 3.0% four years ago. Across Europe, Bucharest (3.6%), London City (3.6%) and London West End (3.2%) have the highest volume of speculative space as a proportion of total stock set to complete by end-2027. Ultimately, the risk of higher vacancy rates remains relatively low as we anticipate much of this space will be absorbed during this period.
German cities have raised the headline 2026–27 development pipeline volumes due to delayed completion dates. Germany currently accounts for 39% of the European speculative completions in 2026, whereas this was only 18% of the total speculative pipeline in 2022–23. However, given that this remains a manageable proportion of total stock, we do not see this impacting market rental tone. Across the Nordic cities of Copenhagen, Stockholm and Oslo, the development pipeline remains very limited, with speculative development accounting for less than 0.5% of total stock over the next couple of years, which we expect will apply upward pressure on prime rents.
Development viability remains a challenge
Development viability
Higher global energy and shipping costs resulting from the US/Iran conflict – including reduced shipping movements through the Strait of Hormuz – are feeding into higher construction costs, particularly for energy-intensive products such as steel. European steel prices rose by 11% during Q1 2026, according to Focus Economics, which has clearly had an impact on developer sentiment. INREV’s Q1 2026 Consensus Indicator for Development fell from 49.4 to 43.8 (anything below 50 marks a contraction). Before the US/Iran conflict, the BCIS anticipated tender prices to rise by 15% over the next five years, although we expect this to rise further, depending on whether the conflict escalates and how quickly vessels are able to pass through the Strait of Hormuz.
Development viability remains challenged across office markets, despite rising rents. An uptick in construction price inflation (with an expectation of yet further higher prices), combined with nervousness around potential exit values, are together countering the positive impacts of rental performance. Although the lending market has become more competitive for speculative development, overall debt costs remain high, too. Site values remain depressed accordingly, and in some cases, developers are now looking at alternative uses or simply a refurbishment of existing stock.
Some bold developers are pushing ahead with schemes in the anticipation of an improving market (higher rents and the hope of a normalised investment market with stronger pricing outcomes), but on the whole, equity remains more selective. Indeed, some owners are able to secure similar risk-adjusted returns on core-plus/value-add stock in CBD locations as with new development, with refurbishment offering better options.
Using the City of London as an example, although rental growth gathered pace over the last 12 months, construction costs remain at elevated levels. This is feeding through into fewer development starts, as the Central London office development pipeline shrunk by 10% quarter-on-quarter over the course of Q1 2026.
Outlook
Clearly, developers are proceeding with caution and seeking pre-lets before starting new development schemes. However, the main concern stems not around the letting risk, but around exit pricing and expectations of higher for longer interest rates, which has resulted in a limited number of core €100m+ lot-size buyers.
We expect elevated levels of global geopolitical uncertainty to push back new development starts into 2027. Given the volume of occupiers competing for prime, centrally located space, we expect prime vacancy rates across European cities to remain at circa 2–3% over the next couple of years. This will apply continued upward pressure on headline rents, creating opportunities for asset managers to turn secondary into prime.