Real estate, conversions drive office market recovery

Pushing for conversion - from offices to residences, hotels, student residences - to reduce vacancy rates in the office sector. Where the fork in the road is now a one-way street. On the one hand, Grade A buildings, in the centre or in strategic areas, digital and compliant with ESG criteria. On the other, dated, peripheral or out-of-the-way buildings, unattractive, in need of heavy renovation and for which the market is stagnant and values have plummeted.

According to Aew's latest office report, in the major cities where office property development is most oriented, the percentage of sqm bought and sold for conversion purposes grew more in the period 2020-2024 (i.e. post-covid) than in the period 2008-2019. The European average rose from 9 per cent to 12 per cent. But in Frankfurt, the sqm doubled from around 10 per cent to almost 20 per cent. Behind, Madrid's sqm increased from 14 to 17 per cent, but also the Dutch 'conglomerate' (Randstad, which brings together Amsterdam, Rotterdam, The Hague and a total of 17 medium-sized cities linked by state-of-the-art infrastructure) saw an increase in sqm for regeneration from 6 to 17 per cent. London and Munich bucked the trend.

And Milan? The only Italian city in the sample almost doubled: the square metres transacted for conversion purposes rose from less than 6 per cent to over 11 per cent. However, the same study warns that there are signs to be monitored, in Europe.
On the one hand, explains Irène Fossé, director Research & Strategy European team of Aew, "the risk-averse attitude of lending institutions towards office space may limit the availability of new financing for real estate development. Moreover, beyond 2026, we estimate that new office supply will decline further, as investors will seek to diversify investments versus allocating them to new office development. Cbre expects the office stock to grow by 0.7 per cent per year over the next two years, compared to 1.3 per cent per year (2003-2024)." In general, "European office transaction volumes in 2024 remained low, down 53% compared to the historical average of the last 15 years. As a percentage of total volumes, office space reached an all-time low of 21% in the first quarter of 2025. However,' Fossé adds, 'liquidity is expected to improve, as more managers believe European values will improve, in stark contrast to the US, where they are expected to remain declining. Average gross prime office yields in Europe are close to 5 per cent.

According to Jll, overall, the office segment in Italy recorded investments of around EUR 1.4bn in the first six months, an increase of 43% over the first half of 2024. The second quarter was particularly positive with around EUR 700 million, doubling the volume compared to the same period in 2024 (around EUR 360 million). "What clearly emerges," explains Stefania Campagna, head of markets at Jll Italy, "is the growing importance of value-add strategies, with over 30% of office volumes in the first half of the year destined for conversion operations (almost half of the deals in the period) that enhance the potential of assets through new uses, mainly residential, Pbsa and hotels.

Reconversions aside, Campagna further explains, "the Milanese market shows a stronger demand from the commercial sectors (professional services, bank & finance, tech), which drive 60 per cent of absorption. The Rome market is strongly influenced by public administration, which concentrates 67% of its activity in the city centre near government institutions. Milan, with around EUR 800 million invested in the first six months, is once again a reference point, with investments concentrated on core products in central locations'. Although the slowdown in activity between the urban planning enquiry and the reorganisation of administrative offices will have to be quantified.