On Thursday 25 January 2024, real estate agency JLL Luxembourg took stock of the Grand Duchy's 2023 office and investment real estate market.

Marked decline in Luxembourg office occupancy market

“It is an undeniable observation that 2023 was characterised by unusually low activity on the part of occupiers,” says Emna Rekik, Country Lead and Head of Markets at JLL Luxembourg. “The decision-making processes were particularly slow, and this had the consequence of postponing several transactions from one year to another.”

JLL noted that while 2022 was already a complicated year, 2023 showed a further decline in take-up which fell by 17% to nearly 176,000 m². The number of transactions fell even more steeply with a decline of 31% on an annual basis to only 172 deals.

Major transactions

The figures for the year were, however, somewhat embellished by a few acquisitions:

• KPMG took occupancy of 31,000 m² in BPI's Kronos project in Kirchberg;
• take-up by the European Parliament of the last phase of its new Konrad Adenauer building for 30,000 m². This move has been planned for a long time and is therefore not representative of the market in 2023;
• the takeover by a financial services company of the White House building at Cloche d’Or. The company, advised by JLL, will occupy 6,479 m² in the building and has also taken up almost 1,800 m² in the neighbouring Emerald building;
• JLL also recently advised the Luxembourg Business Register in its acquisition of the Connex Avenue building in the Gare district, a mixed-use building, comprising just over 2,000 m² of offices.

Lessons from 2023

“One of the major lessons of the year 2023 – but this observation has been in effect for a long time and is not about to stop – is that these are essentially new goods, that is to say less than five years old, and the projects in progress, which are the most successful,” explains Jonathan Morand, Director Office Agency at JLL Luxembourg.

In percentage terms, no less than 66% of take-up is made up of new properties, compared to 60% in 2022. Sustainability criteria and even carbon neutrality have become must-haves over the years, and this can only continue to increase in the future.

The other notable fact was the clear decline in the activity of the Luxembourg State which now represents “only” 10% of the transactional volume compared to almost double in 2022. On the other hand, the “usual suspects” which are customer services Businesses and financial institutions contributed 30% and 23% respectively, levels slightly higher than in 2022. Europe, which was not active in 2022, represented 17% of the total.

Availability is on the rise, but remains well below the European average

The vacancy rate in Luxembourg is increasing significantly due to several speculative deliveries, both in the Centre districts and in Belval for example. Total speculative deliveries increased by 50% on an annual basis to 53,078 m², which contributed to raising the vacancy rate in Luxembourg from 3.5% to 4.2%.

Most deliveries in central areas are largely pre-let, JLL added, but is “more complicated” in the outlying districts as well as in Esch-Belval, where the vacancy rate has doubled to more than 8%.

In 2024, a further increase in availability, in particular due to speculative deliveries currently estimated at more than 45,000 m². No less than 36,000 m² is expected in Hamm in two competing projects, namely Connection and Motion. Inevitably availability in this small, out-of-the-way area will explode and this will impact the total vacancy in Luxembourg which should tend towards 5%.

On a European scale, the rental vacancy in Luxembourg remains “very reasonable”, JLL stressed, the average being 7.7%.

Focus on rents

As a direct result of rising construction costs but also the scarcity of new properties available, rents are increasing in several neighbourhoods, but especially in the Luxembourg-Gare district (5.3% more expensive than in 2022 at €40 / m² per month), observation at the Cloche d’Or (increased rent of 2.8% to €37 / m² per month and in the Findel Airport district (with inflation of 6.7% to €32 / m² per month). The neighbourhoods on the rise are those served (or which will be served in 2024) by the Luxembourg tram network. These values are exclusive of VAT.

Looking to the future, JLL estimated that rents are expected to increase further in 2024, mainly in the Central districts, largely due to the scarcity of new properties available.

In 2023, the investment market in Luxembourg faced significant challenges, with a transactional volume of only €531 million, marking a 39% annual decline. The increase in interest rates by the European Central Bank led to higher financing costs, deterring institutional investors, and causing a shift towards bonds. The yields on "prime" offices in Luxembourg increased, leading to a 28% drop in sales prices over two years. However, 2024 promises to bring improvements, with inflation gradually under control and the prospect of a rate cut by the summer, potentially attracting investors back to the market and reversing the downward trend in yields.

“This easing of rates could be the starting signal for both private and institutional investors to seize attractively priced opportunities on the market,” commented Vincent Van Brée, Head of Capital Markets JLL BeLux. 

In conclusion, 2023 was a year to leave behind but it will nevertheless be a landmark in its all-round weakness.