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News Release

Frankfurt

German office lettings market achieves best half-year result since 2011


Short commentary including overview tables [PDF]

Charts [PDF]
 

FRANKFURT 2nd July 2015 – The German economy appears to be in good shape as we head into summer. Despite the recent fall in the ifo Business Climate Index by 1.1 points in June, Germany remains the growth engine of Europe and the region’s most stable market. The gross domestic product continued to grow in the first quarter, although the rate of growth slowed to 0.3%.
 
Private consumption remains an important pillar of the German economy and is supported by very good data from the labour market. The rate of employment is at a high level, and unemployment is falling as a consequence. Consumption is also boosted by the current low interest rates for financial investments. After the consumer price index increased for the fourth consecutive month by 0.7% in May, latest figures from June show a return to a lower inflationary impact of just 0.3%. Deflationary trends are no longer a subject of discussion. Since the beginning of the year, Consensus Economics has raised its forecast for GDP growth this year by 0.5 percentage points to 1.9%.
 
All in all, the general economic data and outlook look good. However, these are offset by risks that should not be underestimated. Recent developments have caused the situation in Greece to evolve from being an established, long-term risk into a highly charged conflict situation. The planned referendum marks a watershed in the five-year marathon round of negotiations. The great uncertainty is caused by the fact that a country could exit the euro for the first time and a chain reaction cannot be ruled out. Added to this is the crisis in Ukraine. The threat of a further - also military - escalation on the eastern border of Ukraine cannot be dismissed. This situation should be helped by the now permanently established sanctions against Russia. These in turn are certainly having a far more negative impact on the real economy than previously assumed. Last but not least, the recent increase in interest rates for long-term bonds could mark a turning point in the current phase of low interest rates.
 
“Despite these risk scenarios, the positive economic situation and the very good labour market data in particular are having a positive effect on the office property market,” stressed Dr. Frank Pörschke, CEO JLL Germany. Pörschke added: “More people are finding work, and this is especially evident in the business service provider sector, which is so important for the office market. We are looking ahead with optimism to the second half of the year. In 2015 as a whole we expect to see space take-up in the Big 7 exceed the previous year’s result.”

 
Market development improves further – take-up forecast raised to more than 3.1 million sqm

In the first six months of the year, take-up across the seven German property strongholds increased significantly by 11% to 1.57 million sqm (H1 2014: 1.41 million sqm). This represents the best first-half take-up result in the past four years. Both the first and second quarters performed at a similarly high level.
 
An analysis of the different cities reveals that Stuttgart (+29%), Berlin (+22%) and Hamburg (+15 %) achieved significant take-up growth in the first six months compared to the previous year. Cologne was able to considerably reduce its high minus value (20%) from the first quarter to -5%. In Munich, where unusually there was only one letting above 5,000 sqm in the second quarter, the half-year volume was at a similar level to last year. The shortage of first-class office space in central locations - a key focus of users - remains a problem and limits take-up.
 
In Berlin, Düsseldorf and Stuttgart, more than half of the take-up volume from the whole of last year had already been attained by the end of June. The other four cities are just below the 50% level. Based on several large searches that should be closed in the second half of the year as well as the good labour market data, the cumulative take-up forecast has been raised to more than 3.1 million sqm. This would then be slightly above the average for the past 10 years and would represent the highest take-up result since 2011.
 
The “war for talent” remains a growing challenge for companies. The trend in some sectors - particularly advertising agencies, legal firms and consultancies - to rent high-quality office space in prime locations is continuing and falls within the context of being able to offer an attractive working environment to employees. “Most users keep a very close eye on the efficiency of their office spaces. They are ready to pay higher prices per square metre if the overall property costs increase very little or not at all. Space efficiency accompanied by smaller spaces overall have to compensate for the higher rental prices,” said Timo Tschammler, Member of the Management Board Germany at JLL.

 
Users are keen to expand – Vacancies sink on a broad basis
 
The willingness of users to expand picked up significantly in the second quarter. Occupied office stock increased by more than 280,000 sqm. Growth was particularly strong in Berlin at around 190,000 sqm. Some Berlin IT companies appeared to be very expansive in this market. Including at least 140,000 sqm from the first quarter, net absorption in the Big 7 reached a total of around 420,000 sqm in the first six months. This indicates that the growth trend from last year is continuing without pause.
 
Cumulative vacancies amounted to 6.44 million sqm by the end of June and were therefore slightly lower. In a year-on-year comparison, it was possible to reduce the absolute vacancies as well as the vacancy rate in all seven strongholds. There was a particularly sharp decline in the vacancy rate in Düsseldorf (-1.8 percentage points). The aggregate vacancy rate fell further to 7.2%. This corresponds to a drop of 0.9 percentage points compared to last year or more than 3 percentage points compared to the previous peak in 2010. “By the end of the year, we expect to see mostly a further reduction in vacancies,” said Helge Scheunemann, Head of Research Germany at JLL. “Higher speculative building activity could be promising especially in the top locations because of the absence there of modern, spacious and connected spaces.”

 
Building activity increases slightly
 
Building volumes increased in most of the Big 7 cities compared to the previous quarter. The largest rises were evident in Munich, Hamburg and Stuttgart. In contrast, building activity fell significantly in Berlin in the second quarter because of the very high completions volume. In total, 1.9 million sqm are currently under construction with a regional focus on Munich, Hamburg and Berlin.
 
While some projects with a planned completion date in 2015 were postponed in the first three months, a higher completion volume was indicated after the second quarter (+45,000 sqm). In the year as a whole, 984,000 sqm is expected. Of this volume, around a quarter was still available by the mid-point of 2015. “Looking ahead to 2016, we also expect to see an increase in the completions volume to 1.2 million sqm in the Big 7,” said Scheunemann. “However, the increase is likely to be very moderate at around 135,000 sqm and does not signal significant growth in supply, especially since 45% of this space is already spoken for. This also indicates that suitable space in existing building stock is in short supply. On the other hand, a pre-letting implies a longer-term commitment for users. Firstly, it takes two or three years before a user can move into a project development. Secondly, the lease generally has a term of over 10 years - providing security for the financing bank and thus also a prerequisite for the activities of the developer.”

  
Prime rents continue to rise
 
The aggregate prime rental price index for all seven cities stands at 176 points, tantamount to an increase of 1.2% compared to the previous year. A further increase of 0.9% is expected by the end of December. The short supply of office space in top locations has caused a further increase in prime rents in Berlin, Frankfurt and Munich. Over the course of the year, particularly strong growth has been registered in Berlin (+4.5%) and Munich (+3.1%). The rate in Cologne is stable, while Düsseldorf is the only city where the prime rent has declined (-5.5%). “We see potential for growth by the end of the year for Hamburg, Munich and Stuttgart due to the dynamic demand alongside the increasingly scarce supply,” said Tschammler.
 
Scheunemann added: “While savings through higher levels of space efficiency will certainly play a central role for some users, there are other users for whom higher property costs for prime spaces are completely acceptable due to strategic plays such as market entry, expansion measures or increasing their own appeal to employees.”