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News Release

Frankfurt

German office lettings market heads for a new record – significant rise in space take-up and rental prices


​Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 4th October 2016 – The German economy is in a stronger position as it heads into autumn. The ifo business climate index increased significantly in September following declines in July and August, reaching its highest level since May 2014. The companies that took part in the survey estimate the current situation as good, and also raised their expectations for the coming months.
 
Economic growth remains robust, while the jobs market is also in good shape. The increase in employment is primarily due to the expansion of the service sector, also illustrated by the further rise in the ifo business climate index for service companies. The early indicators from the jobs market (ifo employment barometer, IAB labour marker barometer, job index of the Federal Labour Office (BfA)) are sending out positive signals, with above average and even record levels being attained.
 
“The Brexit vote has so far had little impact on the German economy as a whole. It is also hoped that some companies will relocate to Germany. However, there is still considerable uncertainty about the further course of events. The start of the exit process is now in the hands of the UK government,” said Dr. Frank Pörschke, member of the EMEA management board and CEO JLL Germany. Many institutions have lowered their growth estimates for 2017 because of the Brexit vote. For example, Consensus Economics is now predicting 1.2% growth for Germany in 2017 compared to 1.8% for 2016.
 
“The solid economic growth, the healthy jobs market and the positive outlook of companies for the coming months all give us reason to maintain a positive view for the office property markets. Many service companies, which form the biggest user group on the office lettings market, are currently facing a number of challenges. They must find suitable personnel and offer them attractive office locations and spaces while also keeping a close eye on space efficiency and property costs. Each office space has to address these challenges, with the added complication that the supply of suitable spaces is decreasing. Thus it is extremely important to remain flexible with regard to spaces and contracts,” stressed Timo Tschammler, member of the management board at JLL Germany.

 
Strong quarterly result in the Big 7 – 1-million mark is exceeded
 
There is no question that the German office lettings market is benefiting from the strong economic situation. “Demand from users is at a high level. They cite expansion projects and site consolidation in view of space optimisation as the main reasons for relocating. At the same time, service companies are focusing on new workplace models that require smaller overall office spaces. In spite of this development, larger spaces are required on balance because of rising employee numbers and more extensive communal areas,” said Tschammler. Net absorption is a clear indication of this trend: it reached around 190,000 sqm in the third quarter and reflects the expansion activities of users.
 
In the first three quarters of the year the take-up volume in the Big 7 increased by 12.5% to 2.86 million sqm compared to the previous year. In the third quarter alone, the volume exceeded 1 million sqm - a situation that is normally reserved for the last quarter (as in 2000, 2006, 2007 and 2015). The largest growth in take-up (Q1-Q3) took place in Stuttgart (+36%) and Cologne (+33%) - due to very large deals in both cities. Berlin (+19%) and Frankfurt (+17%) were almost neck and neck in terms of percentage growth, but the volume in the German capital was almost twice that of the banking metropolis. Berlin tops the ranking of the Big 7 cities with take-up of 700,000 sqm, and exceeded its own five-year average by 60%. Only Düsseldorf registered a decline in take-up (-23%).
 
“The office property markets in the Big 7 particularly benefited from large deals this year,” said Tschammler. The 22 deals with 10,000 sqm or more that were realised in the first three quarters contributed a total of around 490,000 sqm or 47% of the overall result. The largest deal relates to the start of an owner-occupier project in the third quarter: Daimler AG began work on a 90,000-sqm development for 4,000 employees in Stuttgart-Vaihingen.
“Based on the strong quarterly result and the positive outlook for the rest of the year, we have increased our take-up forecast to 3.74 million sqm. This would be 25% above the previous year’s level and would represent the highest ever result calculated for the Big 7. The 5- and 10-year averages would be exceeded by 16% and 21% respectively. Berlin is expected to achieve a take-up volume of 950,000 sqm for 2016 as a whole, and this would represent an all-time high,” said Tschammler.
 
 
Lowest level of vacancies since 2002
 
For several years, office vacancies have been moving in only one direction: steadily downward. Since the last peak in vacancies in the fourth quarter of 2012 (9.12 million sqm), vacancies have been reduced by 3.8 million sqm. During the same period, the aggregated vacancy rate has fallen from 10.4% to 6.0%. Vacancies available at short notice fell again in the third quarter: aggregated vacancies for the Big 7 markets reached 5.33 million sqm and were 800,000 sqm lower compared to a year previously. It last fell below this level at the end of 2002. The biggest decreases took place in Munich (-306,000 sqm) and Berlin (-218,000 sqm), while Stuttgart continued to register the lowest vacancy rate (4.0%). In an annual comparison, only Frankfurt registered an increase in the vacancy rate (by 0.2 percentage points). During 2016, the vacancy rate in three markets dropped below 6% (Berlin, Cologne and Munich), while in Cologne and Munich it even dipped below 5%.
 
“A further slight decline of 50,000 sqm is expected in the Big 7 by the end of the year, thereby causing the vacancy rate to drop below 6%. The trend will also be slightly downwards next year. One further aspect of the positive vacancy trend is the observation that office spaces are increasingly being converted into residential space or hotels in some markets. Even where former office properties are torn down and redeveloped, mixed-used buildings are built in their place. Although this is generally a more favourable situation, it does bring about a reduction in net office space,” stressed Helge Scheunemann, head of research at JLL Germany.

 
High volume of completions
 
The volume of completions remains at a high level. In the first three quarters of the year, a total of 834,000 sqm of new office space was completed - that was almost 50% more than in the previous year. Similarly high or higher completion volumes were last recorded in 2009 (820,000 sqm) and 2003 (991,000 sqm). The largest number of completions took place in Berlin, Hamburg and Munich (each between 160,000 sqm and 186,000 sqm). The proportion of unlet spaces within completions in the Big 7 markets is only around 16% and illustrates the strong demand from users for new office spaces. The lowest level of speculative building activity took place in Berlin and Munich, where around 5% of projects are of a speculative nature. These are the two most dynamic office property markets in Germany at present. “In view of these high pre-letting quotas, it is particularly challenging for large users to find suitable new spaces. As a consequence, contract renewals in existing properties continue to play an important role,” said Tschammler. A further 380,000 sqm of office space will be realised by the end of 2016, of which Berlin will account for the biggest share.
 
The volumes described above would correspond to a total completions volume of 1.22 million sqm in the Big 7 this year - the highest level since 2009.
 
 
Strong demand and falling supply drive up rental prices
 
The strong demand in the Big 7, combined with a diminishing supply of space, has also driven up both prime and average rental prices. In a 12-month comparison, the prime rent increased in six of the seven property strongholds; it remained unchanged only in Cologne. The increases ranged from 2% in Düsseldorf and Hamburg and 15% in Berlin. As a result, the prime rental price index for the Big 7 increased by 4.8% compared to the previous year to reach the highest level since Q2 2002.
Berlin is currently experiencing the biggest hikes in rents, which have risen 3.9% on a quarterly basis and 15% annually. However, the strongest growth in prime rents is expected to take place in Munich in the coming months. “The rent could be 2.00 Euro/m²/month by the end of 2017, reflecting the extreme shortage of high-quality space in top locations in the city centre,” said Scheunemann.
 
This situation is not limited to the top locations, however. In recent quarters, considerable price increases have also taken place in Munich’s secondary locations. JLL has observed a growing number of deals in the luxury segment in Munich, while this is also evident in Frankfurt.
 
Timo Tschammler concluded: “The steady increase in demand for high-quality office space and rising (prime) rents have spurred project developers into action, encouraging the strong increase in the building volume as described above. Project developers that are now implementing their exit strategies are benefiting from increased rental prices as well as from higher sales factors.”