Construction boom may be moving too fast

To let: is office supply outstripping demand? Keystone

Empty office and retail space may soon become a feature of many Swiss cities unless the pace of construction slows, a real estate report has warned.

This content was published on March 10, 2010 minutes

While the residential market is expected to remain largely stable, the global economic recession is more likely to hit demand for business premises. But this is not mirrored by the rate of projects under construction.

The latest real estate market report by Credit Suisse bank has warned of a probable disparity between supply and demand this year. A building boom that started during the prosperous years is only now nearing completion, leading to a situation where the “peak output of property coincides with a trough in demand”.

In Zurich, for example, some 400,000 square metres of office space is currently under construction or being planned.

Credit Suisse estimates that an extra 20,000 office-based jobs would need to be created to absorb the increase in supply. However, the city saw an increase of just 13,300 such jobs between 2001 and 2008, while around 9,000 positions could be lost in Switzerland this year.

The re-emergence of the shopping mall boom and the arrival of German supermarket chains Aldi and Lidl have also stimulated supply in the retail sector. Credit Suisse also found that a third of retailers surveyed planned to increase shop floor space this year with only two per cent looking to downsize.

Small shops in danger

At the same time, economists are predicting a significant downturn in retail trade this year as unemployment rises along with the cost of living.

“The absence of any serious failures of new projects or major retail properties has given rise to a false sense of security. As sales growth is unable to keep pace with floor space expansion in the long run, the current phase of retail development will sooner or later give way to an accelerated purge of unprofitable locations,” the report stated.

In other words, the face and location of shopping in Swiss cities is changing and that will create winners and losers. As malls, large supermarkets and convenience shops situated near transportation links expand, local stores in less accessible parts of town will disappear.

This in turn will make it more difficult to find retail tenants in less fashionable areas, leading to a disparity of rental income from one location to another. The losers in this case would be small shops and property owners in the worst venues, while new construction sites are set to be filled.

Lessons of 2003

The excess of office space, however, could affect property owners across the spectrum. The problem is also likely to be exacerbated by a slowdown in immigration from peak levels in 2008, further drying up the employment market.

The only solution would be to slow down the construction of offices, and Credit Suisse said it had seen evidence of a scaling down of such projects. Between July 2008 and July 2009, the number of permits for new office space had fallen 46 per cent.

Even this deceleration cannot halt the future problem of empty office space as many projects are too far advanced, according to Credit Suisse. But the bank’s head of real estate analysis, Fredy Hasenmaile, told that the lessons of 2003 – that also experienced an office space over-supply – had been learned.

“Planners and constructors have reacted fast enough to avoid problem vacancy rates of ten per cent that we are seeing in some European cities,” he said. “We will still have an overhang in office space supply in Switzerland but it should not last as long as in 2003.”

Baby boomers change address

In contrast to the commercial real estate market, the Swiss residential housing sector looks more stable. Unlike in many parts of the world where housing crashes led to the financial crisis, Switzerland’s policy of tighter lending has kept volatility in check.

That stability now faces a test with rising unemployment, stagnating pay and a reduction in immigration putting pressure on demand for housing. However, Credit Suisse is confident that the market will experience a soft landing.

The only area for concern is the single family home segment that is likely to experience less demand as the baby boomer generation starts to retire and move to smaller flats.

Matthew Allen,

Construction boom

Construction in Switzerland across all sectors appears to show little signs of slowing down despite the difficult economic conditions.

A Credit Suisse construction index, released last month, shows a particular strength in civil construction projects.

Using a mixture of data, including the rate permits and orders, the index rose to a historic high of 132 points in the first quarter of this year.

Civil engineering showed a 10% rise in revenues quarter-on-quarter, while commercial projects staged an 11% rally – part of which was explained by a dip in activity earlier in 2009.

Credit Suisse believes residential and commercial construction will dip later this year while civil projects continue to be buoyant.

Civil construction is being kept going by a number of road and rail improvement projects throughout the country.

However, even this boom will have a limited shelf life, according to the index, as cantons and the federal government are in the process of cutting budgets.

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