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News Release

Frankfurt

German office lettings market in very good shape thanks to positive economic performance – Brexit brings risks and uncertainties


​Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 4th July 2016 – Brexit has come at a time of sound and robust economic development in Germany. The ifo business climate index increased in May as well as June and has risen by almost 2 points over the quarter. In the first three months of 2016, GDP increased by 0.7% on a quarterly basis when adjusted for price and seasonal factors. The domestic market again provided the impetus for growth: consumer spending is still running at a high level, with private consumption proving to be a pillar of the economy. At the same time, investments (equipment and construction expenditure) are also having a positive impact on growth. However, while exports increased further, a stronger rise in imports means that the trade balance is currently hampering growth in Germany.
 
The robust economy is having a positive effect on the employment market. Over the course of this year, employment has increased by around 0.5 million workers (+1.3%). The service sector was primarily responsible for job creation. A bigger workforce boosts consumption and also implies that companies are carrying out expansion measures and thus availing themselves of more space to meet their needs.
 
In contrast to the good domestic economy, the situation is brightening very slowly in the external economic environment. Growth has stalled in the USA and Japan, while China remains behind expectations. The early indicators point only to a very slow improvement. In 2016, the overall global economy is only expected to slightly outperform last year with growth of 3.2%.
“Because of Brexit, the end of June has brought huge challenges to the positive fundamental economic data in Germany and the tender shoots of recovery in the global economy. This is the next big shock on the global stage following the financial, sovereign debt and banking crisis and the simmering Greek crisis. Against all expectations, the majority of British people voted to leave the European Union, with multi-dimensional consequences both for the UK and Continental Europe,” said Dr. Frank Pörschke, CEO of JLL Germany. The financial markets, the British pound and the euro experienced considerable losses. There is also great political and economic uncertainty. At present, many things appear to be possible (including that the referendum result is either implemented or disregarded by the government; that a second referendum is held; and that the United Kingdom could be broken up) and the outcome is unknown. This uncertainty is poison for the economy because investments in cities and countries require secure political and economic conditions.
  
Setbacks to economic growth in Europe are already anticipated. According to Consensus Forecasts, the outlook for Germany and the UK in 2017 has been downgraded by 0.5 and 1.7 percentage points respectively.
 
At present, there are only questions with no answers: 
 

  • How quickly will the political course be established?
     
  • Will the United Kingdom be broken up as a result of an exit by Scotland and Northern Island?
     
  • What effect will the referendum have on the other member states of the EU?
     
  • Which companies will move back from the UK or cease investing?
  • Which cities and countries of the EU will ultimately benefit from the departure of the UK?

 
Pörschke: “With regard to the property market, we expect to see a devaluation of London property because of the reduced demand for space. Demand for space falls when companies move away or downsize, and this has an indirect negative impact on rents. Although this is a period of great uncertainty, there is no evidence of panic-induced or precipitate moves by property market players. The motto for now is: assess the situation and wait for the British government to make its move and the development of negotiations with Brussels. There is certainly a considerable need for discussion among market participants.”

 
Mixed picture in the Big 7 – four markets with strong take-up growth
 
Getting back to the German property market: the office lettings markets experienced a strong first six months on aggregate with strong demand from users due to the good economic environment. As well as company expansions, the optimisation of space is one of the main reasons for moving. However, in some markets take-up is inhibited by space shortages. Compared to the first half of 2015, office space take-up in the German Big 7 markets increased by 9% to 1.79 million sqm, exceeding the 5-year average for first half-year periods by 17%. While Berlin and Frankfurt both registered strong take-up growth of above 50% in the first quarter, Munich and Cologne were also counted as growth markets during the first six months. In these four markets, take-up in the first half of the year increased by 22-25% year-on-year (that is, H1 2016 vs. H1 2015). Berlin registered the highest take-up volume by some margin, with almost 450,000 sqm. Take-up was lower in Hamburg, (-6%), Düsseldorf (-14%) and Stuttgart (-30%).
 
A total of 12 large deals for 10,000 sqm and above took place in the first half of the year. The lease contract signed by Zurich Versicherung in Cologne for about 60,000 sqm stood out here. This represented the largest deal in the Big 7 markets since 2010 (which at the time was ECB in Frankfurt).
 
“We upgraded the take-up forecast for 2016 as a whole to 3.5 million sqm, which would be 4% below the exceptionally high level recorded for 2015. If 3.5 million sqm were achieved, it would be 9% above the 5-year and 13% above the 10-year annual averages,” said Timo Tschammler, Member of the Management Board at JLL Germany. Tschammler added: “In view of the fact that the latter half of the year is traditionally strong for the lettings markets, we are optimistic about the remainder of the year. The extent to which the Brexit decision will affect Frankfurt and possibly other office markets remains to be seen. Should the uncertainty and worsening expectations gain the upper hand over an extended period, it cannot be ruled out that decisions on business locations will be postponed.”
 
Net absorption in the second quarter amounted to a strong 320,000 sqm. As a consequence, there was corresponding growth in occupied office stock in the assessed quarter that reflected the expansion activities of users. For 2016 as a whole, net absorption is expected to be similar to last year at around 1 million sqm.
 
 
Further reduction in vacancies
 
There has been a further decline in office space available at short notice. Vacancies across all Big 7 markets fell by almost 150,000 sqm to 5.44 million sqm on a quarterly basis. The cumulative vacancy rate is now 6.1% (-0.2 percentage points compared to the previous quarter). This represents the lowest level within the last 10 years. Vacancies declined in all markets apart from Frankfurt (with particularly strong declines of 90,000 sqm in Munich and 45,000 sqm in Berlin), which saw vacancies increase by 50,000 sqm due to speculative completions between April and the end of June. However, virtually no available space will come onto the Frankfurt market over the remainder of the year. Stuttgart continues to register the lowest vacancy rate of 4.3% and Frankfurt the highest at 9.3%. In many markets, the current values represent long-term minimum rates. In Munich, the rate has again fallen below 5% for the first time since 2002. A further slight decline of 55,000 sqm (0.1 percentage points) is expected for the Big 7 by the end of the year. Next year the vacancy rate could even fall below 6%.
 
“In the previous quarter we had already reported that users are increasingly required to extend their search radius beyond the top sub-markets as well as their respective traditional sub-markets. During the different phases of the leasing process, from initial enquiries through to property inspections and contract signings, it is now apparent that large users in particular are looking at office properties outside the top locations,” said Helge Scheunemann, Head of Research at JLL Germany. He added: “Users are again looking in areas on the outskirts of Munich and as far away as the suburban railway line in Berlin, while City South in Hamburg has become a popular back-office location.”

 
Completions reach temporary high in 2016 – will decline again in 2017
 
The diminishing supply of space - cumulative vacancies in the Big 7 have fallen continuously since the summer of 2011 - has prompted an increase in building activity. There was more office space under construction at the beginning of 2016 than at any period during the last 10 years.
 
In the first half of the year, office space completions reached just over 500,000 sqm, which is 19% above the previous year’s level. This is also the fourth-biggest half-year volume of the past five years and exceeds the 5-year average by 14%. Between 96,000 sqm (Stuttgart) and 108,000 sqm (Hamburg) were realised in each of Frankfurt, Hamburg, Munich and Stuttgart. Around a fifth of total completions is still available, although Munich is the exception here with just 6% of space still available. In Frankfurt, on the other hand, 46% of space that was completed in H1 has still not been let.
 
A further 700,000 sqm of completed office space will come onto the market by the end of the year (of which 267,000 sqm in Berlin alone). This would represent a total completions volume of 1.21 million sqm in 2016 - the highest level since 2009. However, a much lower completions volume of 870,000 sqm is expected in 2017. Around a quarter of new space arriving on the market in the second half of 2016 will still be available (185,000 sqm), while in 2017 the percentage will be 42% (370,000 sqm). Cologne promises to have the highest percentage of available space (63%) in the pipeline until the end of 2017 while Stuttgart (27%) followed by Munich (30%) will have the lowest.
 
The construction volume has increased significantly since the previous low point in building activity at the end of 2010 (1.38 million sqm). At present, 1.97 million sqm of office space is under construction in the Big 7, the majority of which is in Munich (460,000 sqm) and Berlin (442,000 sqm). Despite the high completion rate of more than 0.5 million sqm in the first six months, this building volume is only slightly below the volume in Q4 2015. Thus during this period, construction or extensive renovation work was started on 400,000 sqm of office space. “Particularly in Berlin, renovations are seen as a quicker way to bring “new” office space onto the market compared with new developments. Renovations could pay off in the capital because of the relatively low level of speculative developments,” said Scheunemann.

 
Positive rental price development is maintained 
 
The combination of a good economy, stable or strong demand for space and a fall in supply has influenced prime rents on the office markets. Prime rents increased over the quarter in four of the seven markets. The strong rise of 1.50 euros in Berlin reflects the high take-up volume and falling vacancies in recent quarters. “As well as space shortages in prime locations, there is a further reason behind the rapid growth in rental prices: some new business centres are coming onto the market with a business model that enables them to pay higher rents,” said Scheunemann. Prices also increased by 0.50 euros in Düsseldorf, Munich and Stuttgart.
 
In an annual comparison, prime rents increased in six of the seven property strongholds, rising by between 1.9% (Düsseldorf) and 10.9% (Berlin). Only in Cologne were rents unchanged. The prime rental index for the Big 7 cities therefore grew by 3.7%. By the end of the year, prime rents are expected to increase further in Berlin, Munich and Stuttgart.
 
Users are forced to pay increasingly higher rents for high-quality office properties (usually for project developments or recently constructed buildings) in prime locations because of the growing competition among tenants. On one hand, users are extending their search radius as mentioned above. On the other hand, it is apparent that some users (service providers such as consultants or lawyers) are reliant on prime spaces in top locations to attract top talent. “In future, those who are willing and able to pay higher rents will prevail,” said Tschammler.