There are signs that the Norwegian economy is weakening:

• The growth for GDP Mainland Norway was zero percent in the second quarter. 

• In the expectations survey conducted by Norges Bank, the net employment plans among business leaders presently stand at approximately zero. These expectations align with the levels observed during the oil downturn in 2014/15.

• Businesses in the Regional network report a cooler atmosphere. Reported growth so far this year and expectations for the fourth quarter suggest an employment growth of 0.7 percent in 2023. In comparison, there was a growth of 2.1 percent in 2022.

• The sub-indicator for employment in the PMI has been volatile. A three-month moving average shows approximately 51 for September, a clear decline from the May reading of 57. 

Most forecasters expect weak growth in the Norwegian economy and consequently in employment for the coming year. The consensus expects employment growth to fall from just over one percent this year to around zero percent in 2024. A weaker economic cycle will negatively impact the demand for office space.

With low to no employment growth and lower growth expectations among decision-makers, we expect that the growth in space demand will be zero in both 2023 and 2024. In a "normal year," demand growth is just under 100,000 m², which is equivalent to approximately 5,500 office employees. As we move further into the forecast period, we expect demand to pick up in line with the likely recovery of growth in the economy.

Home Office and Space Efficiency

In the US, the wave of remote work has created a negative shock on office space demand. The result of this is high vacancy rates because the supply side is naturally static in the short term. However, there are quite significant differences between the US and Europe that can affect the use of remote work.

• European cities generally have higher population density, better public transportation, and shorter commutes to work.

• Lower housing density in the centers of American cities means many services are only available during working hours. In many places, little happens outside office buildings.

• Less dense cities provide larger homes. Data from the OECD shows that American households have 2.4 rooms per person, compared to an average of 1.7 for the European countries in the OECD. Having more rooms available makes it easier to work from home.

• Surveys show that American (and British) workers have the highest desire for remote work.

In concrete terms, this has led to a much greater increase in office vacancy rates in the USA than in Europe after the pandemic.

There is also few indications that we will experience "American conditions" in Norway. Data from WFH Research shows that the desired number of days for remote work in Norway is significantly lower than in the USA. When we look at requests from tenants or actual signings of new lease contracts, the use of space is broadly in line with what we have seen before.

At the same time, we continue to gather anecdotes from tenants who want to reduce their space due to increased use of remote work. Companies in the IT industry stand out, with particularly high use of remote work. It's hard to believe that the office market in Oslo will be entirely immune to the consequences of increased use of remote work.

However, the trend of space efficiency is not stronger than an extension of what we have observed for a long time, rather than being a new trend. In the period from 2005 to 2020, there was a growth in office employees of 35 percent, while leased area increased by 15 percent. This means that approximately 750,000 m² of office space was "optimized away." This optimization happened gradually, and the supply side adjusted itself. In that sense, we built about 750,000 m² less office space than we otherwise would have.

We have reviewed major lease contracts, and it actually shows that there was a greater reduction in space among large tenants who signed leases in 2017 than in 2022 and 2023. Some tenants who significantly reduced space in the years before the pandemic have also had to expand their space later on.

In other words, we believe that increased use of remote work isolated will lower the demand for office space, but probably not more than the market will adjust as it has done before. Additionally, the extremely low new construction activity is helping in this regard.

High Cost Growth for Norwegian Companies

Tenants with leases adjusted by the consumer price index have seen their lease costs increase by about 12 percent in the last two years. If there is an adjustment of around four percent this year, it corresponds to a cost increase of about 16 percent over three years. In addition, many other costs have increased significantly in recent years.

If we experience a significant slowdown in the Norwegian economy, it will likely lead to a reduction in earnings for many tenants. At the same time, construction, adaptation, and financing costs have increased significantly for most property owners, resulting in the need for significantly higher rents for it to be profitable to start new construction or major renovation projects.

A central question then is how market participants will adapt going forward. At the moment, we see that several choose to extend existing lease agreements instead of incurring further cost increases, a trend we expect to continue in the coming quarters.