As rents rise but the cost of undertaking new development remains elevated, office investors and developers are increasingly looking to retrofits to capture profits in the Dutch office market.

"You can see it in our redevelopment of ABN AMRO's Foppingadreef home base, our upcoming work on Edge ArenAPoort in Zuidoost, and Cross Towers on the Zuidas," Executive Commercial Director at Edge Technologies Martijn Pasman told Bisnow in an interview. 

"We expect the next generation of prime supply to come from retrofit and redevelopment."

As the prime supply of offices in central business districts across the Netherlands remains low, tenants are becoming increasingly selective when it comes to office leases, underscoring the uptick in the flight to quality.

And they are increasingly likely to stay put, as long as owners can upgrade current offices to meet the needs of modern businesses. 

During the second quarter, the Dutch office market reported takeup of close to 421,000 square meters, a 15% decline year-on-year, according to data from Cushman & Wakefield. Decisions concerning office leases remain slow-moving as occupiers remain watchful of market changes.

"Decision-making now is very different compared to two or three years ago," Union Investment Head of Asset Management Europe Malte Wallschläger told Bisnow. "2024 was a very bullish market. But right now, we have more lease prolongations than new leases."

High fit-out and relocation costs combined with increasing rents and a shortage of prime office spaces are pushing many occupiers to renew existing leases instead of relocating.

Those occupiers, mainly larger companies, that are relocating are looking to move to new developments — even if that means less office space. 

"We saw recent transactions in Rotterdam with EY and KPMG, accountancy firms who signed leases for potentially less square meters in new developments," Senior Fund Manager at Bouwinvest Real Estate Investors Bas Jochims told Bisnow.

With new development having slowed massively as a result of a sharp increase in construction costs, prime rents have risen dramatically in recent years.

"Amsterdam's Zuidas is almost 50% higher than five years ago, and we're seeing similar movement in Utrecht and Eindhoven," Pasman said.

According to Savills data, prime rents for offices have remained constant at €625 per square meter annually in Q2, as median rents grew 7.8% year-on-year to €174 per square meter per year.

With prime rent nationally running at more than 3.5 times the median, it is a clear example of the polarization that is taking place in the Dutch office market.

But such has been the rise in construction and finance costs, rents have still not risen to the point where new development becomes obviously viable. On top of that, investors aren't willing to pay prices that make it clear developers will have a profitable exit when they come to sell new buildings.

"To have a feasible business case for new developments, it requires a high level of market rent values," Pasman said.

"As an investor, this means that if you buy property from a developer, you have to calculate a high rent level from the start, and there’s no upside there.”

He said another constraint is electricity grid congestion, with little new capacity expected for years.

With new construction difficult but rents still rising, that raises the potential for investment in existing assets in CBDs.

Pasman highlighted Edge’s brown-to-green strategy, in which the real estate company refurbishes and upgrades existing assets into prime buildings in line with current environmental, social and corporate governance standards.

Jochims shares a similar view from the investment side and said that Bouwinvest is willing to invest in existing assets, as long as they are in the "right location" and offer flexibility, sustainability and amenities.

As the office market continues to move in two directions, investing and upgrading current stock may help narrow the gap fueled by a lack of new development and the thinning of prime supply.

The question that remains is whether the renovation stock can arrive fast enough to meet the demand new construction can't.