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News Release

Frankfurt

Brexit? Trump? – Businesses defy political risks - German office lettings markets make positive start to the year


Press release including overview table [PDF]

Charts [PDF]

 

FRANKFURT, 5th April 2017 - The moment has finally arrived: just before the end of the first quarter, the British Prime Minister triggered article 50 of the European treaty, formally starting the process that will see the United Kingdom leave the European Union. The clock is now ticking. The negotiating partners have only two years to establish new trade agreements between the UK and the EU. And how have the markets reacted? Regardless of the Brexit discussions, the newly emerging Greek financial crisis, and President Trump’s rough-and-tumble politics, the DAX climbed sharply again and headed towards its all-time high. Investors appear to be making investment decisions based on economic conditions rather than political issues. Certainly, the economic situation remains positive and in an even better state than was expected at the start of the year.
 
The German economy is booming. In March, the Ifo business climate barometer increased to 112.3 points, which is close to a 10-year high. This improvement from what was already a high level is being fuelled mainly by the construction and manufacturing industries — two sectors that have benefited from lower interest rates because of their capital-intensive businesses. While construction is primarily driven by domestic demand, manufacturing has once again been boosted by exports. Protectionism or not, there is no sign of it as yet, and German manufacturing companies in particular are prospering from the recovery in world trade. As a result, the employment market is breaking one record after another. In 2017, the number of people in active employment is expected to increase by 670,000 and the rate of unemployment should fall to its lowest level since 1990.

 
Office markets start the year with a slight increase in take-up  – Munich demonstrates the strongest performance

“This still very positive situation also applies to the German office markets. Good corporate earnings figures and a generally optimistic view about the future make it simpler to decide on office moves and easier to implement personnel expansion plans — when a suitable option is available. But supplies of well-equipped and flexible office space and the availability of highly qualified staff are both very limited. These two factors inhibit growth and could explain why the lettings performances in the German office property strongholds are not better still,” said Timo Tschammler, CEO of JLL Deutschland. He added: “But take-up in the first quarter of the year was also very respectable. From January to March, a total of almost 1 million sqm was either let to tenants or sold to owner-occupiers in Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart, representing an increase of more than 7% year-on-year and as much as 31% compared to the five-year average for first quarters from 2012-2016.”
 
There was also an increase in the number of deals larger than 10,000 sqm compared to the previous year, when seven deals in this category accounted for total take-up of 115,000 sqm in the first quarter of 2016. In the recent quarter, 10 deals took place in this category, generating total take-up of 237,000 sqm and accounting for almost a quarter of the overall quarterly take-up.
 
There was a change in the ranking of locations by take-up. Berlin was the most dynamic office market throughout the whole of last year, but Munich has now been able to reclaim the number one position. The Bavarian state capital registered a 39% increase year-on-year to 260,000 sqm. Berlin’s take-up volume fell by 13% to a still significant volume of almost 216,000 sqm. On the other hand, Hamburg recorded the best performance on a 12-month basis. Take-up on the banks of the Elbe and Alster rivers grew by almost 48% to 160,000 sqm. Stuttgart also registered an increase of 18%. But it must not be forgotten here that the largest individual deal in Stuttgart during the recent quarter concerned the start of construction work on a further owner-occupier project for Daimler AG, accounting for 50,000 sqm alone. The other three strongholds, Cologne, Düsseldorf and Frankfurt, registered a fall in take-up with rates of decline ranging from almost 2% in Düsseldorf to 26% in Cologne. For its part, Frankfurt recorded 116,000 sqm, which is not particularly inspiring and also around 10% below the volume registered in the first quarter of 2016. Thus there are still no signs of a possible Brexit effect. 
 
“We also do not expect a major exodus of banks from London to take place once the UK’s exit from the EU has been formally completed. Certainly, numerous banks and financial institutions are seriously investigating the relocation of their operations, and these plans will become more concrete as details of the timetable and exit negotiations emerge. As well as Frankfurt, Dublin, Amsterdam, Paris and Luxembourg are on the list of potential options for new company headquarters,” said Tschammler. Tschammler added: “It is still not possible to provide any concrete figures. Each company will ultimately make its own decision and weigh up the advantages and disadvantages of individual locations. With that in mind, we do not expect to see migration flows to follow a single track to only one destination. It is probable that each of the cities in question will get a slice of the “Brexit pie”. When considering risks at European level, a geographic distribution of banks and financial institutions would be desirable for the property markets. In its attempts to woo new employees from the financial sector, Frankfurt is leveraging the fact that it is also the seat of the European Central Bank — which plays a leading role in the supervision of banks within the eurozone. Yet is this a more of a disadvantage than an advantage? After all, it should not be forgotten that in the so-called war for talents, particularly in the risk management field, the ECB competes with commercial and investment banks.”
 
“During the rest of 2017, we expect to see growing demand in the seven German property strongholds given that underlying economic data remains robust and the employment market is growing strongly — especially in the service sector, which is important for the office market. From today’s standpoint, we expect to see a take-up volume of more than 3.5 million sqm,” said Helge Scheunemann, Head of Research at JLL Germany. Scheunemann added: “While this represents a decline from 2016, it certainly does not equate to the end of the current cycle. On the contrary: companies still find it difficult to find new offices in the strongholds, and the supply of space is not keeping pace with the strong expansion drive of businesses.”

 
Vacancies continue to fall – new building volume fails to keep pace
 
Office space vacancies fell further in all Big 7 markets, dropping below the 5-million-sqm mark at the end of the first quarter. A total of 4.9 million sqm of office space currently lies vacant, and corresponds to a vacancy rate of 5.3%. Thus the supply of space that is available at short notice has fallen by almost 670,000 sqm within the last 12 months.
 
Vacancy rates that are well above this level exist only in Frankfurt (9%) and Düsseldorf (8%). In the other five strongholds, vacancy rates are well below 5% in some cases. Stuttgart has the lowest rate of only 3.4%, for example. Within the last 12 months, Stuttgart and Munich witnessed the sharpest reductions in vacancies by 25% and 20% respectively. “We are slowly but surely reaching full occupancy levels in the office markets. However, a certain fluctuation reserve of around 5% is necessary to serve short-term requests. Rates much below that level can inhibit the economic performance of a city. In order to avoid running that risk in the first place, stronger growth is required in the building volume — including full renovations — than is currently the case. However, this seems to be increasingly difficult to achieve given the heightened competition with other types of property for land, particularly for residential developments,” said Tschammler. In the recent quarter, the completions volume virtually stagnated compared to the first quarter of 2016. Just over 200,000 sqm was completed in the seven strongholds, although almost 150,000 sqm of this volume had been let or was occupied by owners at the time of completion.
 
“This high pre-letting quota confirms our observation that an increasing number of office users are contemplating project developments as an alternative option for office space if the existing supply does not meet company-specific requirements and needs. By the end of 2017, we expect new building space to reach a volume of 738,000 sqm, of which the majority will be realised in Hamburg and Munich. These are also the two cities that have registered the strongest increases in take-up,” said Scheunemann.
 
The situation with regard to supply and demand is expected to remain problematic in Stuttgart and Berlin. In these two cities, the lowest new building volumes are coming onto the market at around 60,000 sqm and 53,000 sqm respectively. “If you then subtract the amount that has already been pre-let, this leaves just 15,000 sqm of available space in Berlin and 25,000 sqm in Stuttgart — a limiting factor considering the strong demand in both markets and a clear signal that vacancies are set to fall further still,” said Scheunemann.

The total percentage of available space in all seven strongholds is only around 30% (229,000 sqm), which is 10 percentage points below the 2017 forecast of the last quarter. By the end of 2017, we expect the vacancy rate to fall by a further 0.2 percentage points.

 
Prime and average rents continue to rise

Despite the good take-up figures, office rents took a little breather compared to the last quarter of 2016. Only Berlin registered a quarterly increase, with rental prices rising by €1 to €28/sqm/month. On an annual basis, the German capital registered a 17% rise. Within the current period of assessment, Stuttgart was next with a 7.5% increase, followed by Munich with 4.4%. On a 12-month basis, only Cologne registered no change in the prime rent.
 
“However, we expect to see a further increase in rents by the end of the year. The JLL prime rental price index reached almost 188 points for the Big 7 by the end of the first quarter and thus attained its highest value since the first quarter of 2002,” said Scheunemann. The 4.8% increase compared to the first quarter of 2016 also represents the second-strongest rise since 2007. The expected further decrease in vacancies will cause net absorption to exceed 700,000 sqm over the year. Office rents across all strongholds will subsequently experience a further rise of 3.1%, equivalent to a nominal increase of 3.6% over the year as a whole.
 
Average rents are also set to increase again. The corresponding index, which already grew by 4.5% in 2016, will probably slightly outperform the prime rent in percentage terms.