Rents rescued by positive supply side
Low supply, strong demand and a high level of inflation have boosted rental growth. Although prices are rising sharply in the here and now, we expect a cooling-down in 2023 – when the Norwegian economy will probably be experiencing a downturn.
Rents in Greater Oslo have risen considerably so far this year. Figures for the second quarter show an annualised increase of 8.5 per cent.1 This favourable trend continued during the summer, and we estimate that rents are now up by around 10 per cent.
Several reasons help explain why the rental market is very good at present.
The pace of the Norwegian economy is high, and employment has grown strongly in most sectors.
Office premises are in very short supply. Office vacancy in Greater Oslo has continued to fall, and is now 5.7 per cent. Nor is there much newbuilding.
Building costs rose substantially during the pandemic because of raw material prices and bottlenecks in global value chains as well as a tight labour market. Construction and conversion costs are still at a high level, which is reflected in higher rents.
Moreover, it appears that increased home working has not significantly affected demand for offices.
The office rental market remains strong, but clouds are gathering on the horizon. The tightening in monetary policy, the European energy crisis and problems in China are expected to put many countries into recession. Virtually everyone in Norway also expects harder times at home, and employment growth is likely to cease. A strong correlation exists between rent developments and the labour market, and rents have always flattened out or fallen when employment growth stalls.
We expect the same to happen this time as well. If the downturn is not too great, however, we believe rents are more likely to flatten than to fall. That’s because “all” the other factors are pulling in the opposite direction. We’re entering the downturn with low unemployment and little newbuilding. In addition, yields are rising.
Looking at the various office areas, we expect rent developments to be fairly uniform in 2023.
Many tenants in the city centre and central business district (CBD) are sensitive to business trends. On the other hand, vacancy is low and newbuilding very limited.
Vacancy in the areas west of the city centre has declined considerably in recent years, and newbuilding is very limited. Times are also good in the oil industry.
Vacancy in the areas east of the city centre has also declined considerably in recent years. Many newbuilding projects are still being pursued here, but rising yields and higher construction costs are pulling up prices in new projects.
We believe vacancy has bottomed out for this time round. As new space comes onto the market and employment ceases to rise, we expect vacancy to rise slowly but surely. Largely thanks to a favourable supply side, we believe rent growth will resume from 2024. We expect an annual nominal rent increase of five per cent in 2024 and 2025, but this naturally depends on the possible depth and duration of the downturn.
1 Kilde: Arealstatistikk (processed by UNION) – four-quarter rolling average for Greater Oslo.