The first quarter saw a total of 781,900 sq m taken up in the German office letting market in the top locations, a result which therefore exceeded the 10-year average for a first quarter by a good 24 percent. This is the conclusion drawn in a current analysis prepared by the global commercial real estate services company CBRE.
“The demand for office space in the Top 5 locations is still extremely high. Rents are on the rise, vacancies at a historically low level and property developments are already pre-let at an early stage – all very pleasant for office property owners but a growing challenge for users on the lookout for office premises,” stated Carsten Ape, Head of Office Leasing at CBRE Germany, summarizing the situation on Germany’s office letting market.
Munich number one despite slight decline
Of the prime locations, Munich achieved the best result of 241,000 sq m that had nevertheless dropped eight percent below the first quarter of 2017. At a strong 210,400 sq m, Berlin even outperformed the year-earlier result by five percent. “The greatest year-on-year change was seen in Frankfurt with an increase of almost 27 percent (146,300 sq m). The pre-letting of a property development on the Europa-Allee to Frankfurter Allgemeine Zeitung was decisive for this outstanding result,” Ape says. According to current planning, the project covering 24,000 sq m is to be ready for occupancy by the fall of 2020.
With one of the two large-scale deals of more than 20,000 sq in the Top 5 locations, Munich also performed well. The IT service provider to the City of Munich rented 23,000 sq m of the QUBES property development that is already under construction and scheduled for occupancy by the start of 2020. CBRE acted in an advisory capacity during this letting transaction.
The most active user groups consisted of banks and financial service providers with a share of just under 11 percent in take-up. More than 25,000 sq m were taken up in Berlin and Frankfurt respectively, and in Munich even more than 26,000 sq m. Demand emanating from industry and the construction sector was similarly high with 10 percent of the take-up volume.
Vacancies in steady decline
The reduction in vacancies is ongoing in all prime markets. Taken as an average of the Top 5 markets, the vacancy rate stood at 4.8 percent, equivalent to 3.54 million sq m (down 16 percent year on year). Sustained strong demand caused the vacancy rate in Berlin to fall below the three percent mark for the first time since records began, with Munich only slightly above at 3.1 percent. In Hamburg, the vacancy rate dropped by six basis points to 4.7 percent. Of Germany’s top locations, Berlin reported the lowest vacancy rate. In essence we can say that we have full occupancy in central locations,” Ape says. “Space completed was not able to ease the situation either,” Ape adds. By the end of the first quarter, 178,600 sq m of new or refurbished, and therefore updated, office space had been completed. This represents a decline of more than 17 percent (Q1 2017: 216,200 sq m) and falls far short of satisfying the very high demand and of stabilizing the vacancy rate. The largest increase in space was reported in Berlin at 69,800 sq m (down 10 percent), largely through small developments. In Hamburg, double as much space at 41,700 sq m was completed compared with a year ago.
High pre-letting rates for property developments
Due to low vacancies in the top markets, in particular in contemporary office space, demand for property developments is exceptionally high. Based on current information, 746,000 sq m of new office space can be anticipated in the top locations in 2018, of which only 30 percent is still available. “The situation is at its most tense in Düsseldorf, Frankfurt and Berlin,” Ape says. Of the 86,500 sq m expected here in 2018, only 18 percent is still available (Düsseldorf), 20 percent of 114,800 sq m (Frankfurt) and 21 percent of 199,500 sq m (Berlin). In relation to the top markets, no great change can be expected in 2019 either. Only 44 percent of 1.52 million sq m is still available at the present point in time. Similarly, of the 2.09 million sq m due for completion by the end of 2020, somewhat more than 44 percent is still available. “If demand continues to run at a high level, this still available proportion will rapidly dwindle the closer the due date of completion comes,” Ape predicts.
Average rents accelerate – prime rents only in Berlin
With the exception of Düsseldorf, weighted average rents increased in the Top 5 locations, reaching their highest level since records began in 2009. There were two first places: Frankfurt with an average rent of €21.13 per sq m (up 14 percent) reported the highest figure of the prime locations and Berlin the highest growth with an increase of almost 22 percent to €19.58 per sq m. “There is veritable user competition for the little available office space, which is causing average rents to accelerate rapidly,” Ape explains.
As before, the highest prime rent, unchanged at €40.00 per sq m and month quarter on quarter, was seen in Frankfurt. Compared with the first quarter of 2017, this nevertheless represents an increase of 1.3 percent. Berlin was the only city where the prime rent rose again as against the previous quarter. Here the price for premium office space in top locations recently stood at €31.00 per sq m, reflecting growth of almost 13 percent in a year-on-year comparison.
Outlook: dynamic economic growth as driver of office markets
At the end of the first quarter, the ifo business climate index had settled at a high level, and the gross domestic product forecast of 2.4 percent also suggests that the upswing will hold steady in 2018. Consequently, in the wake of a growing labor market, growth in office employment figures of two percent is anticipated through to 2022. This positive outlook suggests that demand will stay at high level. “In view of the extremely low vacancy rate, users are currently forced to plan way ahead if they want to grow or relocate, or to consider modern workplace strategies that facilitate a more efficient use of space, among other aspects,” Ape says.
“All that stands in the way of an excellent year-end result is the deterioration in supply that will be a limiting factor on the take-up achievable in some markets by the end of the year. For this reason, we expect an outstanding result on the office letting market in the full year 2018 as well,” Ape predicts.
Source: CBRE Research