Market Trends of Italy Office Real Estate Industry
This section covers the major market trends shaping the Italy Office Real Estate Market according to our research experts:
Occupier and Investment Focus in Milan
The activity recorded during the second quarter, with a take-up of 150,000 sqm (+ 35% on Q1 2022), reinforced the strength of the office market and brought the total figures for the first semester to a record value of 260,000 sqm (+ 60% on H1 2021).
The physical office space continues to be a key component of company structure and operations, but the new space planning philosophy is flexible and takes a fresh look at the workplace; now, employee wellness and sustainability are the main demand-creating factors.
The Centro Direzionale di Milano (CBD) was the busiest sub-market, accounting for 33% of total H1 absorption. However, there is a clustering of the market in commercial areas with convenient transportation, amenities, and an established by other tenants.
Following the pandemic-related slowdown, the demand for flex offices has since picked up; many centers are now completely booked, and operators have resumed projects that had been put on hold.
Prime rents increased during the second quarter and are now at EUR 660 (USD 702.66) per square meter per year (+3% vs. Q1 2022), driven by robust absorption and the availability of spaces, which reflects new office concepts and quality requirements.
Although the investment market has slowed down since Q1, Milan still contributes about 60% of the office volume invested in Italy, with half-year volumes hitting EUR 1.2 billion. Investor confidence in the city is still being driven by steadily rising absorption and rising rental rates.
Despite its high risk, the CBD is still attracting investors, whereas, in secondary locations, they are concentrating on stable assets. The second quarter saw a decrease in value-add acquisitions, which predominated in the first quarter due to the adverse effects of the current macroeconomic and geopolitical conditions, which hampered the availability and costs of funding.
The Need for Offices has Altered due to the Pandemic
The pandemic highlighted a number of long-standing trends in demand for office space. Firstly, there has been a greater understanding of the shocks that significant global events might bring, which has led to a greater emphasis on environmental and social sustainability. As a result, businesses have started to adopt or strengthen their ESG policies and have become pickier about the buildings they choose, based their decisions on sustainability and energy efficiency standards.
Secondly, the use of remote working has increased due to the necessity to stop the virus's spread. In order to boost employee engagement, the proliferation of "hybrid" work styles has reshaped occupier expectations about space efficiency and functionality.
The sustainability of buildings in such a setting entails not only reducing the environmental impact but also emphasizing employee health and well-being, particularly through the growing adoption of policies, procedures, and technologies that enhance the monitoring and reporting of underlying ESG performance and the comfort of interior environments.
By the end of 2021, the proportion of certified buildings in Milan's overall take-up increased from 11% in 2016 to roughly 41% by the end of 2021, exceeding the growth rate of the major European cities.
All newly constructed office buildings in Milan have ESG certification, and 60% of the stock that is being upgraded and renovated will also have this certification. However, as sustainability becomes more significant, certification is being used more frequently, even for stock updates. The office sector will continue to be marked by a trend of ongoing ESG performance assessment of existing buildings through 2022 and beyond.
