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News Release

Frankfurt

Invigoration on the German office leasing market at the start of the year


Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 2 April 2015 - The German economy ranks amongst those with the highest rates of growth in Europe at the beginning of 2015. According to consensus, the gross domestic product saw a sharp rise in the last quarter of 2014, bringing the rate of growth over the whole year to 1.6%. In addition to the traditionally strong export economy private consuming has been boosted. Low rates of interest on savings and minimal price increases have put German consumers in the mood to spend. Increased capital expenditure from both private investments and the state means that the recovery of the German economy rests on multiple supports, leading many economic research institutes to increase their forecasts for 2015. Consensus forecasts currently range from 1.2 % to 2.5%, with the average forecast increasing from 1.3% in December 2014 to a current rate of 1.8%.
 
With a recovery that is steadily gaining momentum and a continually favourable situation on the employment market, the conditions are set for the German inflation rate to rise again in the mid-term to an ECB reference value of 2%. However, due to relatively weak position of other euro countries, this is unlikely to happen before 2017.
 
Dr. Frank Pörschke, CEO of JLL Germany, emphasises that “In this context, we consider both the current situation and the mid-term outlook for the German office leasing market to be both positive and stable”. Pörschke added: “In the light of the highly sensitive handling of the cost factor of space in business, we cannot expect to see any significant surge in demand, although moderate growth at an already high level can be expected. At present we do not see any cause for concern that the leasing markets will detrimentally drift apart from the investment markets. There may also be greater scope for rents to increase in the mid-term.”

 
Market development appears invigorated - moderate increase in take-up
 
The office leasing markets began the new year of 2015 with a collective marginal increase of 6% take-up volume across all seven major real estate markets. Between January and March, over 766.000 m2 was leased or brokered to owner occupants. Although the leasing market appears invigorated, a closer inspection of the quarterly results reveals that the slight increase in turnover is predominantly attributable to the take-up of space by owning occupants. Compared to the quarter of the previous year, the volume went up by 20%, whilst pure leasing volume went up by just 3% compared to the first quarter of 2014. Over 40% of owner occupant transactions were made in Hamburg alone at around 50.000 m². Timo Tschammler, Member of the JLL Management Board Germany, said: “All in all, this presents a very diverse picture of the German office market. Even though an annual forecast after the first three months should be considered with caution, we still expect a take-up volume of around 3 million m2 over the whole year. The favourable employment opportunities in the service sector that is essential for demand, combined with the current searches on the market should ensure sustained activity in the office markets for the rest of the year.”
 
A detailed geographic analysis of the Big 7 sheds further light on the contrasting picture. Whilst Stuttgart and Hamburg have enjoyed take-up volumes of over 19% each in the 12-month comparison, Frankfurt and Cologne were in minus at just 6% and 20% respectively. There was a lack of major deals in Frankfurt, where only one was made for an area of 5.000 m².

 
Upward trend in net absorption continues with steadily falling vacancies
 
The last three months of 2014 saw a turnaround with increased sales, which continued into the first quarter. This also led to increased rates of occupancy of office properties by over 720.000 m2 in the annual comparison, indicating that tenants are looking to expand and that new companies are being founded or moving to new locations. At 150.000 m2, the net absorption rate for the first quarter of 2015 was also positive; only in Frankfurt and Stuttgart was this figure in minus.
 
Vacancies in all seven major real estate markets hit a new low at the end of the first quarter of 2015. A vacancy level of 6.63 million m² was recorded at the end of March, corresponding to an aggregate level of 7.5%. Compared to the previous year, this represents a decline of a further 0.2 percentage points, and for the five-year comparison, 1.4 percentage points. Helge Scheunemann, Head of Research Germany for JLL, said “We anticipate similar levels of vacancies for 2015. Unlike take-up volumes, levels of vacancies across the major real estate markets are very consistent. In each of the Big 7 markets, both the volumes and vacancy rates declined in the annual comparison. This was the most apparent in Frankfurt and Cologne, where vacancies sank by over 10%.”

 
No increase in new construction projects - high rates of pre-leasing
 
The shortage of high quality office properties available at short notice is particularly felt in the prime locations, and it is exactly these types of properties that companies are looking for. In this respect, a lack of increase in leasing activity could, in certain cases, also be triggered by a shortage of offers, meaning that companies that may be looking to move to new premises decide to stay where they are due to a lack of suitable alternatives. Another possibility - although this does not apply to all companies - is ensuring space in properties that are being planned or under construction in good time. However, the trend has changed. Many new construction projects have been postponed, meaning that the originally scheduled volume of completed projects for the overall year has now been reduced by 100.000 m2 to 939.000 m². This works out as around 5% less than in 2014. A little over 200.000 m2 were completed in the Big 7 markets during the first quarter of 2015, around 12% less than in Q1 2014. Scheunemann added. “Unlike previous cycles, the offering has not yet really gained momentum. This is presumably a remaining consequence of the financial crisis, with the banks choosing to be more selective when it comes to financing construction projects.” 
 
Out of all projects that were completed in the first quarter, 83% were already leased or assigned to owning occupants at the time of building completion, i.e. only around 35.000 m² of space is left available for use. Around 737.000 m² of new space is expected to be finished over the remaining nine months of the year. The fact that only one third (245.000 m2) of the space remains available is testament to the high number of pre-leases.
 
The rescheduling of certain planned projects will mean that the present volume of new construction will slightly increase in 2016, reaching levels of over 1 million m². However, in the light of the experience of 2014 it remains to be seen whether a “domino effect” will arise, leading to a continued rescheduling of projects. The regional focus of construction activity during this year and the next will be on Berlin, Munich and Hamburg. The scheduled volume is currently in the range of 350.000 m2 to 500.000 m2 for 2015 and 2016 combined.

 
Stable to slightly increasing prime rents

Scheunemann said: “The favourable and positive market developments mean that we will see increases in rent prices in several cities in the course of this year that were originally forecast for 2016. This will be seen in Hamburg and Stuttgart, where we expect increases in rent prices of 2% and 5.3% respectively. In the state capital of Baden-Württemberg, a fraction of this increase has even been observed in the first quarter. Prime rent increased by 50 cents to 19,50 euro/m²/month compared to the previous quarter, and in the further course of the year the prime rent is set to increase to 20 euro/m²/month for the first time.”
 
Across all locations, the prime rent index for the first quarter of 2015 saw a plus of 0.6% in the annual comparison.

Scheunemann estimates that “Due to sustained positive demand for prime real estate in central locations, we expect to see further increases in prime rent prices in the remainder of 2015. Overall, the Big 7 markets will see a slight plus of 1.8% for the whole year. As well as the above increases in Hamburg and Stuttgart, an increase of 3.0% in Munich and 2.3% in Berlin could be expected.”