Commercial real estate in Luxembourg: opportunities and challenges ahead

As the largest investment fund center in Europe, Luxembourg has established itself as a global hub for cross-border investments. The commercial real estate sector is crucial in reinforcing this position, encompassing properties used for business or professional purposes to generate income.

Luxembourg boasts a highly diversified economy, primarily driven by finance, technology, and logistics. Its status as a financial hub has fueled demand for commercial properties, particularly office space. The country’s GDP has shown consistent growth, providing a solid foundation for real estate investment.

Given these factors, what lies ahead for such an important sector of the Luxembourg economy?

The demand for high-quality commercial spaces remains strong, especially among multinational corporations and financial institutions. This is despite the sector in Luxembourg – like in many other places – facing challenges in 2023 due to rising inflation, energy concerns and interest rates, exacerbated by the war in Ukraine.

The office market currently has a low vacancy rate (of 2.5% to 5%), with prime rents averaging €54 per square meter per month which is relatively high within Europe. The Luxembourg office market has been more resilient than many other countries, and notably withstood the post COVID-19 work-from-home trend. In fact, Luxembourg was the first European country in terms of GDP to rebound after COVID-19, with its services industry not being heavily impacted by working from home patterns. This was also partly helped by the fact that many foreigners work in Luxembourg and are incentivized to come to the office for fiscal and social security reasons.

The office market in Luxembourg has seen significant development in recent years. Key areas like Kirchberg and Cloche d'Or have become increasingly popular, offering modern amenities and proximity to essential services. The recent and modern tram infrastructure (Luxembourg public transport is free for the population) and its additional connection to the airport soon is also expected to be a driver of value. Overall, demand for quality office space continues to rise, driven by an influx of multinational corporations and startups.

Turning to retail, we see a number of evolving trends. While traditional bricks-and-mortar stores in most countries face increasing competition from e-commerce, Luxembourg’s retail market remains resilient. The city center continues to attract shoppers, and mixed-use developments are gaining traction by combining residential, commercial and leisure spaces. Prime rents have reached as much as €145 per square meter per month.

What’s more, Luxembourg's strategic location at the heart of Europe enhances its appeal as a logistics and distribution hub. The growth of e-commerce has further increased demand for warehousing and industrial spaces, leading to the development of new logistics parks catering to both local and international businesses.

However, while the Luxembourg commercial real estate market certainly remains resilient, it is not immune to the wider changes evidenced elsewhere – and must adjust to the demands of the new reality.

The rise of remote work and e-commerce has impacted both corporations and retailers. Remote work has introduced flexibility, with many employees opting for hybrid setups, prompting businesses to rethink their office space utilization. E-commerce has elevated the presence of foreign retailers, such as Amazon and Alibaba, as consumers increasingly favor the convenience of online shopping. This trend has pushed local retailers, including Auchan and H&M, to enhance their e-commerce offerings.

In short, to remain viable, commercial real estate must adapt. Companies should embrace hybrid work arrangements, allowing employees to choose between remote and in-office work. Agile office designs that accommodate both setups and foster collaboration will be key. Retailers must also leverage technology to enhance both online and in-store shopping experiences, creating innovative and customer-centric environments that draw consumers back to physical spaces.

Although Luxembourg's commercial real estate market has strong foundations, it remains vulnerable to rapid changes, requiring adaptation to sustainability commitments, technological innovation, and strategic positioning. There is increased interest from foreign investors, especially from Germany, France, and the UK, with many seeking stable yields and capital appreciation – but the sector must ensure it evolves in order to stay attractive. As sustainability grows in importance, investors are increasingly prioritizing green buildings that meet stringent environmental regulations. The government is also prioritizing sustainable development, meaning that the integration of green technologies into commercial properties must become standard practice.

Other challenges include limited land availability in prime locations, which drives up prices, and regulatory frameworks that can hinder development. Additionally, economic uncertainties, including inflation and workforce dynamics, may affect demand for office space, adding complexity to the market outlook.

Overall, the market offers numerous opportunities for investors and businesses, supported by strong economic foundations, a strategic location, and commitment to sustainability. As it adapts to emerging trends and challenges, commercial real estate will remain a vital component of Luxembourg's dynamic economy.

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This article has been co-authored by Pierre Kreemer (Partner, Tax, Alternative Investments) and Armin Solomon (Manager, Audit, Alternative Investments).