Madrid Poised to Outperform European Commercial Market Peers

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According to global real estate consultant Knight Frank, after staging a strong recovery, Madrid is forecast to be one of the best performing European office markets within the next two year.

This change reflects the much improved economic backdrop, providing occupiers and investors with renewed confidence and optimism. Historically, the Madrid office market has correlated closely with corporate performance and employment levels.

Prime rents reached their floor in 2013 and increased by 14% in H1 2014, to currently stand at EURO28 per sq m per month.  Office investment has risen sharply, with volumes amounting to EURO 700 million in H1 2014, compared with EURO 400 million for the whole of 2013.

There has been limited development over recent years, which has helped to stabilize the vacancy rate at 11.5%. With limited development in the pipeline, a shortage of good quality stock is expected in the medium term, which is expected to lead to further rental growth.

An increasing number of companies are looking at relocating; having delayed their expansion plans throughout the recession which adds weight to the view that increasing demand will further boost take-up over the coming months.

At a recent investor breakfast hosted by Knight Frank, a live opinion poll of the 200 attendees showed that Spain was year's top target country for investment, chosen by 26% of the audience, knocking the UK off the top spot.  This is unsurprising given the strength of the rebound currently being seen in the Spanish market. However, the UK and Germany again featured strongly on investors' radars, gaining 25.3% and 19.2% of votes respectively.

Humphrey White, head of commercial, Knight Frank Madrid said, "Overall office vacancy stands at 11.5%, however, Grade A supply in Madrid's centre stands at just 2%; this, coupled with a 25% increase of take up year-on-year, will lead to significant rental growth in the capital. We are also seeing a polarization of the office market as tenants become more demanding, leading to a flight to quality - the best within the CBD dramatically outperforming others in the immediate surroundings."

Darren Yates, Knight Frank's global head of capital markets research commented, "As 2015 approaches, the combination of a more active occupier market, limited development pipeline and low rents offers a realistic prospect of strong rental growth. In turn, this will further increase Madrid's appeal to investors, leading to yield compression and enhanced growth in capital values. The investment case for Spanish property is compelling."