The Portuguese office market: a moderately optimistic outlook for 2023 and beyond

 In News, Offices, Real Estate

Pundits who attended a major real estate conference in Estoril this month are “moderately optimistic” about growth in Portugal’s office market for 2023 and going forward despite a lack of supply.

A group of experts from three major commercial property consultants Cushman & Wakefield, Savills Portugal and CBRE had compiled their take on the local market and its place within the wider European commercial offices segment context at the Portugal Real Estate Summit which took place on 21-22 September.
This year has registered the strongest second quarter and the second highest occupation in a single quarter in the last 20 years for the offices segment in Portugal, totalling 128,470 m2 — four times higher than for the same period in 2021.
The first half of the year saw a total of 198,590 m2 transacted and has already exceeded figures for 2021 in terms of full-year take-up. Take-up comprised 60 deals in Lisbon amounting to €168,300m2, while Porto saw a 30,290 m2 take-up in H1, 2022.
Lack of office space to rent compared to the demand has meant that prime rent values have remained stable.
“If you look at the office market today the data confirmed for 2022 in Greater Lisbon is higher than the data for the previous whole year records, with just over 200,000 m2 of office space committed to date, although it did include some older occupational and pre-let spaces”, said the Executive Partner of C&W, Eric van Leven who gave a snapshot of the market which included data compiled by the other two consultancies.
Prime rents in central Lisbon are at around €25 per square metre, €18 per sqm in Porto. “We all feel that there is a lot of demand in the market and not enough supply”, he said.
In terms of supply, vacancy rates stand at around 6%-7% although much of the available stock is “quite outdated and/or in out-of-town locations”.
“There are multiple intentions to build new offices, with about half-a-million square metres expected. Of that, 50% are already under construction; the rest is either subject to planning permission or finance”, explained the C&W head. However, there is still a question mark as to when these 230,000 m2 will come into the market.
“The office segment is a popular asset class for institutional investors, but there is little stock and if only there was more”, said van Leuven.
Eric van Leuven points out that until recently investors would have considered almost any office location in the two main cities, with large transactions out-of-town and many in less central locations.
However, in prime locations, such as central Lisbon, there has not been much investment; not because of a lack of appetite, but rather a lack of supply.
What has also been seen is that core players who had bought secondary renovated but outdated stock have turned these office assets into core products and then sold them on to core institutional buyers and funds.


Today, the increase in interest rates and swop yields, coupled with uncertainty in the finance market is not helping maintain values.

On the part of the occupiers, and particularly on the part of the investors, there is an increasing relevance of ESG criteria (environmental, social and corporate governance factors that are taken into account when investing in a company).
“When prospective investors are considering an office property investment, the questions they ask now are just as much about ESG as they are on the return on the investment”, said van Leuven.
Prime yields are just under 4%, but these could move upwards over the next three to six months, and in terms of rents both Lisbon and Porto are very competitive on a par with Budapest in Hungary or Warsaw in Poland.
However, inversely, the yields in both Lisbon (3.75%) and Porto (4%) tend to be higher than other cities such as Budapest, Warsaw and Prague with which the cities compete and which is “quite surprising”.
Looking at the occupation of offices from a staffing point-of-view in various locations, and focusing on working from home and hybrid methods, the average office occupation is around 70% of what it had been before the pandemic.
“The conditions we see for people who are working from home are not ideal at all, so in Portugal there is a need to work in an office”, said van Leuven who added that the bonus in Lisbon and Porto was that the commuting times tended to be of a shorter duration, lending weight to preference of working from the office”.
“The flexible office scheme is gaining traction in the market, but it is still rather unexplored in Portugal, with only 3% of total space given over to flex, but will likely be consolidated over the next few years”, he predicted.
And statistics from ratings agency Moody’s on employment expected to be created over the next few years in Europe has Lisbon in 5th place in terms of the markets that are expected to create most office-based jobs, much of this driven by the shared services industry which is booming in Portugal.
In terms of office rents, most markets have increased since 2019, not surprising given that during Covid-19 there was little occupation for that period.
Lisbon is also the fourth city where rents have grown the most. And in terms of office yields, these are at their lowest ever in most markets, illustrating a lot of investor interest in the assets class.
In terms of office works (new offices), both the occupier and investor markets are very active, but there is clearly a lack of new quality supply, with supply “dripping through” but not very quickly.