Tech sector supports European office demand

Economic overview

The Eurozone economy grew by 0.4% during the second quarter of 2026, surpassing analyst expectations despite energy market volatility from the US-Iran conflict. Eurozone Services PMI data indicates that companies were not significantly impacted by conflict in the Middle East, with July data indicating strong performances from Spain and Italy. Oxford Economics has upgraded its Eurozone economic growth forecast to 0.7% in 2026 and expects growth of 1.5% in 2027. Central and Eastern European (CEE) and Iberian markets, led by Poland, Spain and Portugal, are expected to see some of the strongest growth through 2026 and into 2027.

The ECB held interest rates at 2.25% during its July meeting, and there is now more pressure to raise interest rates during the September meeting in response to the prospect of higher inflation. Inflation is expected to average 2.6% in 2026, followed by a fall to 2.0% in 2027.

Occupational market

European office take-up fell by 6% year on year during H1 2026, and remains 3% below the five-year average as leasing deals take longer to complete. Hiring sentiment remains cautious given the prospect of higher inflation due to the ongoing conflict in the Middle East.

During H1 2026, Dublin (+63%), London West End (+36%), Berlin (+30%) and Munich (+28%) performed strongest against their respective five-year H1 averages. London WE was supported by strong activity within the AI sector, whilst Berlin and Munich were supported by large deals from Commerzbank and JetBrains respectively. Strong owner-occupier activity from Dublin City Council during Q1 2026 lifted the Irish capital above its historic levels.

Analysing take-up by business sector during H1 2026, professional and business services accounted for 24% of the market, down from 26% in 2025, as lawyers, accountants and consultants remained active. The banking, insurance and finance sector fell from 21% to 16% of demand, which remains more in line with the long-term average share. The tech sector rose from 14% to 22% of total activity – an increase due to both expanding AI firms and traditional tech firms resuming their activity. Flex offices accounted for 3% of office demand, in line with last year, as companies seek interim space amid prime vacancy shortages and show a preference for plug-and-play services.

Average European office vacancy rates remained stable at 9.4% during Q2 2026. Savills recent analysis shows that CBD vacancy rates currently average 4.9%, with prime CBD vacancy rates estimated at around 2%, adding upward pressure on prime rents. Relative to previous cycles, the CBD vacancy rate is comparatively lower, reflecting occupiers’ heightened preference for centrally located office stock.

Paris CBD’s vacancy rate rose to 6.8% during the first six months of 2026, breaching the 6% mark for the first time since 2009, as a result of a slowdown in take-up and resulting slower absorption of new space. There were marginal increases in Hamburg, Berlin and Lisbon, offset by falls in La Défense, Amsterdam and Warsaw.

Prime rents rose by an average of 3.7% during the 12 months to end Q2 2026. Munich (+11%), Frankfurt (+10%) and Warsaw (+10%) led the charge, as occupiers report a shortage of prime stock across the major cities. The weakest new-build development pipeline in over ten years is sustaining rental growth across the major markets.

Has the definition of 'prime' become even more selective?

As the supply of new quality space becomes even more scarce, has the definition of prime become even more selective? Analysing Savills European prime office rents against the MSCI top quartile of rents for selected markets since 2015, the average prime rental premium has remained stable at 38%.

So, ‘prime’ is not generally becoming more disconnected from ‘very good’ quality space, as occupiers are paying the same rental premium as ten years ago, supporting the theory that a brown discount is more observable than a green premium. Landlords will benefit from delivering either very good or great space to the market, but not by sitting on secondary offices.

Feature: Why asset managing secondary CBD offices should be back on European investors’ agendas

As the new-build development pipeline remains at a ten-year low, and prime CBD rental growth continues to surpass expectations, comprehensive refurbishments in CBD locations are providing a compelling opportunity for Europe’s office landlords to capture rental uplift.

Savills analysis indicates that average prime rents have risen by 27% since end 2019, three times the average secondary CBD office rent of +9%. This is largely attributed to occupiers seeking better-quality space in CBD locations to attract and retain staff, alongside seeking to modernise their office premises to reduce Scope 3 emissions.

Office space which is no longer meeting tenant requirements is trading at a discount, nowhere more so than London City. Since 2019, prime rents have risen by 49%, whereas secondary office rents have fallen by 19%. From a cost perspective, comprehensive London City office refurbishment costs have risen by 30% over the last five years, which have increased more recently due to the US–Iran conflict.

As such, since end 2019, the payback period for a landlord to undergo a comprehensive CBD refurbishment to turn secondary into prime, (assuming a self-financed, 12-month refurbishment period where the landlord has forgone rent) has fallen from ten years to five. Adopting a similar methodology to continental European office markets, the payback period has fallen by around a third. Of course, should the landlord opt to sell once the refurb is completed, they would also benefit from capital value uplift from turning secondary to prime.

Occupational markets remain undersupplied with high-quality, well-located space. Despite this, developers are seeking evidence of large lot size investment comparables before commencing new-build development schemes. Asset managers and developers who are willing to hold on to refurbished stock will be rewarded by higher rents.

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