Office vacancy rates in Greater Oslo have increased from 5.5 percent to 6.0 percent so far this year. The vacancy rate is still lower than the average for the period going back to 2010, which stands at 6.3 percent. In 2023 and 2024, we expect the growth in demand for office spaces to be nearly zero percent. Nevertheless, vacancy rates are not expected to increase beyond 7.3 percent by the end of the forecast period in 2026, given the extremely low supply of new office space.

We are in a period of exceptionally low new construction. Very low new construction volume in 2022, with only 30,000 m², can be traced back to high uncertainty at the beginning of the pandemic. Increased construction costs, combined with rising interest rates and consequently higher yields, have limited the number of new office buildings, even in a strong rental market. In total, from 2022 to 2026, it is expected that 390,000 m² (gross) will be completed. This is the lowest volume for a five-year period since the period from 2005 to 2009.

In the current situation, where the outlook for the rental market are uncertain, interest rates are high, and property values are falling, it is difficult to make projects profitable. To bring the construction market back into equilibrium, either rents must rise or land prices must fall, or a combination of both. Most developers of office buildings in Oslo are large, solid, and long-term, and land banks constitute only a small part of their balance sheets. The practical consequence is likely to be low construction activity for a long time to come.

Although raw material prices have come down somewhat, construction and adaptation costs are still at high levels. An important reason for this is that the Norwegian krone has significantly weakened against the EUR and USD. In addition, wage growth is higher than normal, which isolatedly pushes prices up. Wage costs account for about half of total enterprise costs. The weakening of the krone may also contribute to additional pressure on wage development, as a large share of the workforce in construction comes from the EEA area.

In addition to enterprise costs, there are project costs, client costs, and financing costs. Total borrowing costs were at 2.5 percent in August 2021, but now borrowing costs have increased to 7.5 percent. Interest costs have thus tripled in this period. Total costs, excluding land, have increased by 35 percent in a couple of years.

The increase in yield may be just as detrimental as increased costs. We estimate that the yield for the best properties along Ring 3 has increased to 5.30 percent. This is up by 150 basis points since the first quarter of 2022. This indicates that rents must be significantly above 3,000 per square meter for the developer to make a profit.

In 2025, the volume of construction increases significantly to 190,000 m². The largest projects are Construction City, the first stage of the Government Quarter, and Campus Ullevål, accounting for about 80 percent of the area. These are projects "earmarked" for specific industries or departments and were decided upon a long time ago.

In 2026, we expect low construction volume, with a forecast of 60,000 m². Of this, the new construction of Fredrik Selmers vei 2 at Helsfyr accounts for about 24,500 m² is planned, but existing buildings of about 13,000 m² will be demolished. The net addition will then be just under 10,000 m².