Short-lived downturn
Rent increases have been driven since 2016 by solid employment growth in office-based sectors and by a limited supply of new space. We had anticipated a shift in this trend during 2020, but the reversal was naturally sharper than expected because of the pandemic. However, the downturn looks like being short-lived.
We experienced a vacuum in the office letting market during the second and third quarters of last year, and the average office rent fell by almost five per cent. On the other hand, figures for the fourth quarter were surprisingly strong. The average rent in signed leases for Oslo was NOK 2 470/m², which is the highest level ever registered. Even allowing for the likelihood that the statistics contain much data noise, last year undoubtedly ended on a stronger note than many had envisaged. And there are at least no signs that rents will continue to fall.
Office vacancy bottomed out at 5.4 per cent towards the end of 2019 and has subsequently risen to 6.6 per cent. It is expected to peak at 7.5 per cent towards the end of 2021. That is substantially lower than we estimated last spring, and primarily reflects the fact that office-based companies have managed significantly better than feared. The signs are that the letting market has stabilised, and we expect a flat trend for rents in the present year.
From 2022, however, office vacancy is likely to decline again since newbuilding is declining dramatically at the same time as we anticipate a normalisation of the Norwegian economy. We expect the market to tighten eventually, with nominal annual rent growth in 2022 and 2023 at around five per cent.
Limited newbuilding and very low office vacancy in the most central areas of Oslo have led in recent years to substantially higher rent growth there than for the rest of the market. However, developments over the past year show that vacancy has also risen substantially in the city centre. It is currently 6.3 per cent for Vika, Aker Brygge, Bjørvika and the rest of the central area, an increase of no less than 3.5 percentage points over the past year. We expect vacancy to rise further, both because more refurbishment projects will be coming onto the market and because these areas contain many tenants sensitive to cyclical conditions.
Vacancy in the Outer East area fell by 1.3 percentage points over the past six months and is now 8.8 per cent. This is because some of the many vacant spaces in newbuilds are filling up. However, much space remains to be filled and we therefore believe rents will continue to develop horizontally.