Allan Saunderson is managing editor of Property Finance Europe and a contributor to GlobeSt.com.

MILAN, ITALY-Enquiries for office space in northern Italy's largest conurbation Milan rose by a third in the final quarter of last year and into Q1 2009, compared with the average in prior years, while requested space volumes almost doubled, according to international property advisor Savills.

However demand for Rome office space diminished, and in both the main Italian commercial centers demand was in any case mainly due to a large portion of office occupiers reviewing property options in the light of a reduced headcount and/or the need to modernize and maximize space efficiency through consolidation. There was also a notable gap between enquires and space let, suggesting net absorption will be negative.

In Milan, the market will need to address rental values but also layout and specifications, Savills said. Occupiers there are looking for newly-built well connected offices that allow further optimization, while energy efficiency is also becoming a prerequisite. Rents have fallen on average by 2.5% in Milan and 3.1% in Rome in the first quarter against Q1 2008, but now show signs of stabilizing. Pressure remains on secondary rents however. Savills Italy research head Susan Trevor-Briscoe commented: "Moving forward, developers will also have to focus on redevelopment or restoration of second-hand accommodation, which, if well located, will have a higher chance of being absorbed."<pIn line with other European countries, Italian office investment is at a standstill due to restricted lending conditions and uncertainty around pricing. International banks have eliminated activity, while those Italian banks that remain active are lending much smaller investment volumes sub-€50 million and more realistically €20 million, with lower LTV ratios. Italian funds are the most active buyers although there is reluctance since they anticipate further capital falls. Prime yields vary between 6% and 6.7% in Milan and Rome.