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News Release

Frankfurt

German office lettings market makes a positive start to the year – economic environment remains stable


​Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 5th April 2016 - The economic recovery in Germany has lost some of its momentum because of the slowdown in China and other export markets, but consumer spending, government expenditure on accommodation for and the integration of refugees as well as the positive situation on the jobs market are mainly keeping the economic motor running. Business sentiment in the German economy also improved in March, although the company survey took place before the recent terrorist attacks in Brussels. “We do not expect these attacks to have a fundamental or sustainable effect on the local economy, but they again illustrate the fraught environment in which government, companies, society and ultimately all of us operate,” said Dr. Frank Pörschke, CEO of JLL Germany.
 
The economists continue to believe that spending on refugees both this and next year can be accommodated without new debt. The experts estimate additional expenditure including administration costs at €13.7 billion in 2016 and €12.9 billion in 2017. The influx of refugees is not expected to have a noticeable impact on the jobs market until the coming year. At present, bottlenecks in the asylum process are considerably delaying the integration of migrants into the jobs market. In the current year, the number of job seekers is likely to increase only slightly to just over 2.8 million. In 2017, it could move closer to the 3 million mark.
 
The German economy is benefiting most of all from the propensity of consumers to spend. Thanks to low inflation and wage settlements that are again expected to be above the rate of price increases this year, they have more disposable cash in their wallets. This year, experts expect an average rate of inflation of just 0.3% because of the oil price decline. In 2017, inflation should increase to 1.4%. It would then still lie below the European Central Bank’s target of almost 2%. In the battle against mini-inflation in the eurozone, the currency protectors have only recently flooded the economy with money and reduced the interest rate in the eurozone to zero. Many economic experts are now taking a critical stance over this approach. This loose monetary policy can have considerable side effects. Along with the increased risk with regard to the profitability of banks, ever-decreasing interest rates reduce the pressure for reform in Europe. However, the threat of deflation is still not in sight.
 
Then again, some risks lie in wait for the domestic economy such as the reinstatement of border controls because of the influx of refugees. A prolonged period of identity checks in the Schengen area would hinder the movement of goods within Europe with corresponding consequences for the national economy.
 
However, the bottom line is that Germany’s fundamental data was in good order in the first quarter and is likely to remain so. Companies are looking confidently ahead to the near future. However, these positive signals are currently overshadowed somewhat by the risks that still clearly exist and which dominate public awareness. 

  
Varied development in the Big 7 - momentum mostly in Berlin
 
“The willingness of companies to recruit personnel has ensured continuing strong demand for office space in recent years. We are also expecting a recurrence of this trend in 2016, so that the overall good performance of the German office lettings market should also continue,” said Timo Tschammler, Member of the Management Board Germany at JLL.
 
At approx. 889,000 sqm, the take-up volume in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart increased by 10% in the first quarter of this year compared to last year. This also far exceeded the five-year average for first quarters by 23%.
 
Following the outstanding fourth quarter of last year, this result was not necessarily to be expected. However, a second look at the take-up figures also reveals that Berlin and Frankfurt were primarily responsible for this growth. In the German capital, the momentum continued unabated. Almost 247,000 sqm of space was let or sold to owner-occupiers, which was 60% higher than last year. Frankfurt also registered above-average growth of 51%, although from a much lower basis. Take-up in Düsseldorf and Munich was almost unchanged, while Hamburg registered the sharpest decline of 26%. The take-up volume also fell by 14% in both Stuttgart and Cologne.
 
“These results are the first snapshots of a year that is still in its early stages. The Big 7 cities all have potential, even when record take-up figures are not announced for every quarter,” said Tschammler. He added: “At the end of last year we had already predicted a slightly lower take-up volume for 2016, and we are maintaining this forecast. We forecast a total annual take-up of about 3.3 million sqm for the Big 7, which corresponds to a slight decline of 9%.”

Despite the shrinking take-up figures in some cases, the markets are experiencing a strong level of activity particularly in the small and medium-sized segments. Users are also increasingly focusing on other locations and sub-markets, although the consequence of this is that search phases and decision-making processes tend to be longer.
 
In the first quarter of 2016, the aggregate net absorption across the Big 7 was about 240,000 sqm (thus the amount by which occupied office stock increased) - corresponding to an increase of about 76,000 sqm compared to the previous year.
 
“In 2016 as a whole, we expect net absorption of around 920,000 sqm. This would then be 14% below the 2015 level but still in line with the five-year average of 957,000 sqm,” said Helge Scheunemann, Head of Research Germany at JLL.

 
Vacancies decline further in all markets
 
 
Cumulated vacancies stood at 5.58 million sqm at the end of the first quarter of 2016 and were therefore 16% below the comparable level in 2015. Compared to the fourth quarter of 2015, there was also a further decline of more than 100,000 sqm. The average vacancy rate across the Big 7 reached a new low point of 6.3%, which was 1.1 percentage points below the year ago level. Vacancies fell in all markets at a similar tempo. Stuttgart again registered the lowest vacancy rate of 4.5%, while Frankfurt recorded the highest rate of 8.9%. 
  
“The continuing downward trend in vacancies is increasingly forcing users to look beyond the central locations because of the unavailability of space and towards other locations and sub-markets as well as project developments. We were able to detect increased activity here in the first three months. By the end of the year we expect to see a further slight decline in vacancies, so that the rate could then fall to 6.2%,” said Scheunemann.

 
Need for new space in all markets
 
In the first three months of 2016, around 167,000 sqm of new building space was completed. This was therefore 16% lower compared to the first quarter of 2015. As was the case with the take-up volume, trends varied at regional level. While no new buildings at all came onto the market in Berlin, the completions volume in Stuttgart increased by more than 200%. Frankfurt also gained just one renovated space, although the conversion of spaces into mostly residential units reduced stock by 36,000 sqm.
 
“At all events, there is a need for new space in all markets. The city centres in particular tend to have a shortage of large, continuous spaces,” said Scheunemann. More will enter the pipeline this year, with a further approx. 1 million sqm expected. “This would then be 43% more than in 2015 and well above the five-year average of almost 890,000 sqm. This increase is not the start of a sustained new building wave, however. In 2017 new-building activity is again expected to be on a downward trend,” said JLL’s chief researcher.
 
It should also not be overlooked that of the new space that is still expected for the current year, only around a third (329,000 sqm) is still freely available. “Over recent quarters the percentage that is still available has been relatively stable at about a third, but with the completions volume rising in absolute terms this is evidence of a greater willingness among users to opt for spaces in project developments,” said Tschammler. The bulk of new-building activity is taking place in the three largest markets: Berlin, Hamburg and Munich account for a combined 764,000 sqm and a share of 62%.

 
Rental prices continue to rise

The prime rents increased year-on-year in Berlin (+ 9%), Frankfurt (+ 4%), Hamburg (+ 2%), Munich and Stuttgart (each by + 3%). Frankfurt was the only Big 7 city to register a rental price increase on a quarterly basis. Here, the prime rent rose by one euro to €36.50/sqm/month because tenants proved willing to pay higher rents for certain prime spaces that are currently under construction.
 
On an aggregate basis the prime rental price index increased by 2.4% year-on-year in the first quarter of 2016. “For the year as a whole we expect to see a somewhat moderate rise in the prime rental price index of about 2%. The demand surplus is driving up prices in almost all sub-markets, and higher rental prices are also now evident in contract renewals. Based on this market situation, average rents could outperform prime rents by the end of the year,” said Tschammler.