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News Release

Frankfurt

German office lettings market on track


Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 2nd October 2015 - Economic sentiment is currently positive in Germany. Low interest rates, the low oil price and the good euro exchange rate ensure that news from companies is largely positive and far removed from concerns about a slowdown in the economy. Neither a possible increase in US interest rates nor the threat of a banking crisis in China, and neither increasing stock market fluctuations nor geopolitical conflicts are having a dampening effect on the overall climate. Accordingly, the Ifo business climate index also increased slightly in September with a particular improvement in expectations.
It remains to be seen whether and to what extent the VW exhaust emissions scandal will create a risk for future expectations. Linked to this is the question of how successful VW will be in managing the crisis on one hand, and whether other car manufacturers are guilty of similar infringements on the other. However, the consequences for the German economy, such as an immediate decline in exports for the car industry, the damage to the image of products “made in Germany” and sales losses for the car parts industry, would not to be dismissed. According to serious estimates, a 20% fall in exports by the German automobile industry to the US could cost Germany around 0.3 percentage points in economic growth. This scenario still has no basis in reality, but shows the consequences that exogenous factors could have even under circumstances where the signals are positive. Assuming the migration to Germany of 1 million refugees by the end of 2016, this factor will also have an effect on the economy because the provision of housing and care to the refuges could boost economic output by up to 0.2 percentage points.
“However, the low oil price is having the strongest effect at present. It reduces the burden not only on companies but also on consumers and thus provides a mini recovery plan with a rise in private consumption, which has become an important pillar of the German economy,” said Dr. Frank Pörschke, CEO Germany at JLL. Against this background, Consensus Economics forecasts that the German economy will grow by 1.8% by the end of 2015 and by a further 1.9% in 2016. “And so, all in all, the underlying economic data and outlook remain solid and robust,” said Pörschke.
 
Timo Tschammler, Member of the Management Board Germany at JLL, added: “Consequently, the jobs market in Germany - particularly in the service sector, which is so important for the office market - will continue its positive development. This beneficial effect will remain in place in the fourth quarter of the year, and we therefore expect the take-up volume to reach up to 3.3 million sqm in 2015 as a whole,” said Tschammler. “The concerns of some market participants that the investment markets will move away from their fundamental markets are unfounded. On the contrary, the very good overall performance of the lettings markets during the first three quarters of the year ensures that the gap is closing further.”

 
Significant upturn in demand – market booms especially in the capital
 
In the first three quarters of the year, take-up across the seven German property strongholds increased significantly by 18% (Q1-3 2014: 2.11 million sqm) to 2.49 million sqm. Thus take-up growth gained further momentum compared to the first half of the year. A notable and positive development is the ongoing increase in pure lettings, which grew by more than 20%.
 
“The quarterly review reveals an absence of large lettings above 10,000 sqm. That such a good take-up was achieved nonetheless shows that the market has a very broad base and, to put this in positive terms, is not fully dependent on such large contracts,” said Timo Tschammler.
 
An analysis of each of the Big 7 markets reveals strong take-up growth in Berlin (+47%) and Düsseldorf (+45%) compared to the previous year. While Cologne was almost able to offset its decline in the first half of the year with a good third quarter, Hamburg came bottom of the ranking with an approx. 5% decline in take-up.
 
The office densification trend that was evident after the financial crisis has now been forgotten. With growing mobility, technological advances, the rising pressure to improve cost efficiency and the increasingly high speeds to market, the current trend is towards the design of activity-based working environments. This also involves using the existing space “differently” in terms of more open areas and fewer individual workspaces. This trend is becoming increasingly evident in the letting and search processes of office users, and was heralded by the growing activities of technology and start-up companies in Berlin.
 
With regard to the VW exhaust emissions scandal, some may be thinking about the possible effects this will have on the property sector. Apart from speculation on the possible impact on other sectors, the automobile industry is in fact only a small player on the office lettings markets in the Big 7. In the last 10 years, the total sector (including parts suppliers) leased close to a combined 480,000 sqm of office space. This represents just 1.3% of the total take-up volume in this period.
 
Vacancies fall further still
 
Compared to the first half of the year, the change in occupied office stock again increased significantly to around 326,000 sqm - a clear indication that office users remain in expansion mode.
 
As well as Berlin, tenants in Düsseldorf appeared particularly eager to expand in the third quarter. Occupied office stock increased by almost 100,000 sqm and was undoubtedly also a result of numerous large lettings.
 
Cumulative vacancies stood at 6.17 million sqm at the end of September, down 12% from the previous year’s level. The average vacancy rate across all strongholds is 6.9%, which is 1 percentage point lower than a year ago. Looking back over the longer term, almost 3 million sqm has vanished from the vacancy statistics since 2010. As things stand, two-digit vacancy rates are not to be found in any of the Big 7 cities.
 
Vacancies in Düsseldorf (-19%) and in Berlin (-15%) declined by a disproportionately high level, reflecting the strong demand in the recent quarter. As before, Stuttgart (end Q3 2015: 4.9%) had the lowest vacancy rate within the big 7. This means that the vacancy rate in a German stronghold has again fallen below 5% for the first time since the new economy boom at the beginning of the 21st century. “In our view there is currently no evidence that demand will fall significantly in the medium term. In conjunction with the continuing very moderate growth in the new-building volume, we also expect to see a further reduction in vacancies in other cities,” said Helge Scheunemann, Head of Research Germany at JLL.
 
The current discussion about refugees, and the related question about housing, has also now reached the commercial property markets. In addition to the requisition of property by local governments, questions are now also being raised about the conversion and use of office properties. “We anticipate that cities and communities will step up their activities in the coming weeks and months and seek individual solutions together with owners. This could also ensure the removal particularly of older office spaces from stock or vacancy statistics,” said Scheunemann.
 
Little change in construction activity - no significant expansion in supply expected
 
In the first nine months of the year, a total of around 563,000 sqm was completed. This is almost 9% down on the previous year, illustrating the prevailing view that there is a particular lack of new building space in central city locations. An expansion on a large scale is very unlikely in view of rising land prices and growing competition from other types of property (especially residential). Across all seven strongholds, almost 2 million sqm is currently under construction, of which only 650,000 sqm (almost a third) is still available on the market. At regional level, building activity is focused on locations in Hamburg and Munich with a combined 940,000 sqm.
 
“In the final quarter of the year we expect to see about 431,000 sqm of new-building space. The total completions volume in 2015 would then amount to 995,000 sqm, which would be more-or-less in line with last year. For 2016, we expect to see a volume of almost 1.2 million sqm,” said Scheunemann.

 
Prime rents continue to grow

In the third quarter, all prime rents stabilised at the half-year level. The corresponding aggregated prime rent index for all seven cities was thus unchanged at 176 points, equating to a 1.7% increase year on year. A further 1.5% increase is expected by the end of December following an increase in rents by 50 cents apiece in Hamburg, Munich and Stuttgart and by as much as 1 euro in Berlin.