Written by head of research Robert Nystad. The article was published in Kapital on April 21, 2022

I think the general impression is that property in Oslo is expensive. And, in many ways, that is true. But one group has done well, and they are the tenants. Yields have declined a lot, which means lessees are paying ever less – at least relatively speaking. And, in many cases, in absolute terms too.

It is currently possible to rent new office space at Økern for around NOK 2 000 per square metre. The level of rents is fairly similar to the one we saw in 2014. Over the same period, the consumer price index has risen by around 20 per cent, which means a substantial decline in real rents. You read that right. Three kilometres from Oslo’s central station, the level of real rents for new office premises is down by 20 per cent from 2014.

The main explanation is that yield (the cost of capital) has fallen over the period. For tenants, the office is a leased operating asset. When the cost of capital falls, so does the cost of leasing – at least in a perfect market. Naturally, the property market is far from perfect. The supply side has little flexibility, particularly in the short term and especially in the most central areas of Oslo.

We therefore see that rent developments have varied between different areas. In the centre, where securing new space is more challenging, real rents have risen. After adjusting for the increase in capex, however, the growth in rents has been more moderate than many think. The decline in yields has contributed to many landlords absorbing much of the capex growth.

Space used per employee has contracted over time. Many tenants have converted to open-plan, free seating and underprovision, while parts of the office building stock have been modernised. The rent cost per employee is not particularly high, virtually regardless of how you measure it. That also applies in the city centre.

If the interest-rate trend does not reverse, it is reasonable to assume that yields will rise somewhat in the time to come. Viewed in isolation, a simple back-of-an-envelope calculation, and a rather bold assumption that yield will rise by 50 basis points, indicates that the level of rents should rise by about 10 per cent for newbuilds outside central Oslo.

Developments in construction costs are pulling in the same direction. It is difficult to know exactly how much these have risen but, based on a mix of indices, surveys and anecdotal evidence, at least 15-20 per cent seems a reasonable assumption. And the trend remains sharply upwards. The market will eventually normalise, but it is not certain the new normal will be like the old one.

• We must probably be prepared for higher energy prices than before, perhaps particularly for electricity – an important input factor for further processing of raw materials and for producing many complete and semi-manufactured building products.

• Ukraine must be reconstructed. How much that will demand and when it will happen depends on when the atrocities end. Hopefully, however, Ukraine – with good help from the west – will get back on its feet. That will be very demanding.

• A number of countries are planning to strengthen their defence forces. Germany, which has Europe’s biggest economy, has already approved at least EUR 100 billion in additional military spending. Many countries will follow suit. Demand for many types of metal will increase.

• Europe intends to scale up the supply side for renewable energy more quickly than previously planned. The EU has long been a driving force for cutting greenhouse gas emissions. Strong security policy arguments now also exist for obtaining alternative energy sources. Constructing wind turbines, solar power arrays, batteries and associated infrastructure will call for many input factors – perhaps particularly metals.

• Landlords must meet higher environmental standards set by government, tenants, investors, banks and other stakeholders. Many will have to invest more in their buildings.

In other words, a number of factors point towards a higher cost level than before, even after today’s acute needs have been meet. At the same time, capital costs are rising. Given that the rental market otherwise remains unchanged, rent levels will follow suit. The alternative is that land values must fall, but that depends on enough space securing planning permission in the right place at the right time. Given today’s planning regime, that is a little hard to believe.