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News Release

Frankfurt

The gap between supply and demand continues to widen - Office lettings market in the Big 7 remains buoyant at half-year point


Press release including overview table [PDF]

Charts [PDF]

 

 

FRANKFURT, 5th July 2017 – The German economy was still in a healthy condition at the end of the second quarter and is continuing its rally. Companies still rate their current situation as very good, and the Ifo business climate index increased further from 114.6 to 115.1 points in June — exceeding the previous month’s record level. At the same time, the rate of unemployment has now fallen to half the level recorded in 2005. The mood among leading German executives has also improved again in terms of future expectations, indicating that the upturn should continue in the second half of 2017. Potential areas of disruption that were cited at the beginning of the year, such as the elections in France and the Netherlands, Brexit, populism and isolation, have at least been put into perspective by recent events.
 
“Developments in recent months clearly demonstrate that political events can cause uncertainty and upheaval in the short term, but longer term it’s the fundamental economic facts that really count. And the situation remains favourable for the domestic market, with ongoing low interest rates, falling oil prices and the undervalued euro in relation to the dollar continuing to fuel exports and consumer buying power. The economy in the eurozone has also improved, particularly in major European economies such as France and Spain, so that existing and potential risks are currently being ignored and have no opportunity to deploy,” said Timo Tschammler, CEO of JLL Germany.
 
Tschammler added: “Low interest rates coupled with positive economic growth rates - a scenario that you cannot find in any economic text book at least in this form and over such a long period of time. It would only seem natural to warn against a turnaround or even a crash. And in view of the global risks that still exist, you may be tempted to be swayed by this warning. Even though there should admittedly be corrections, recessive tendencies are currently not in sight and the situation therefore also remains positive for the German office lettings market.”

 
Strong demand on German office markets with take-up of 1.84 million sqm
 

The trends and developments that were observed at the start of the year continued into the second quarter. Most companies continue to show signs of expansion, combined with the search for improved office fixtures and fittings. “It is increasingly the case, and also of greater imperative, that decisions about office relocations are based on new workplace concepts that meet employee requirements for greater flexibility. And the current positive economic situation and favourable prospects help promote this change of perspective at a company. The working and office environment is no longer a mere cost factor, but part of a sustainable strategy to motivate and attract employees and increase productivity,” said Timo Tschammler.
 
Providers of co-working spaces reflect this transformation process in the working world. Such providers have been on an expansion drive over the past year, particularly in Hamburg and Munich. Mindspace, WeWork and others also have their sights set on numerous locations in other cities, and this user group is expected to generate strong demand in the second half of the year. However, a potential change of premises is still limited by supply, which is becoming increasingly scarce in all cities. “It has been the case for some time that not all relocation projects can be realised,” said Tschammler. Take-up in the Big 7 reached 1.84 million sqm at the end of the first six months. This was not only in line with the previous year’s high figure but also 17% above the five-year average for first half-years from 2012-2016. “The potential is actually greater if more space were available,” added Helge Scheunemann, Head of Research at JLL Germany.
 
On an equally positive note, the number of large contracts above 10,000 sqm exceeded the previous year’s figure, increasing from 12 with take-up of almost 229,000 sqm in 2016 to 16 with 375,000 sqm in 2017 and accounting for 20% of the total quarterly take-up.
 
An analysis of take-up by geography revealed only small changes compared to the first three months of the year. Munich retained its number one spot with take-up of approximately 418,000 sqm, ahead of Berlin with at least 397,000 sqm. And while the volume in Munich increased by 8% compared to the previous year, in Berlin take-up by tenants and owner-occupiers fell by almost 10%. “This should not be over-stated, however. The absolute volume remains very high and is evidence that the office market is still buoyant,” stressed Scheunemann.
 
At the end of the first half, Hamburg again demonstrated the best performance in a 12-month comparison. Take-up here increased by 19% to 300,000 sqm. Growth was also registered in Düsseldorf at 9% and Stuttgart at 7%. Cologne is the other city in addition to Berlin that has seen a drop in the lettings volume. Take-up here fell by as much as 29% year-on-year. As for Frankfurt, the lettings market in the banking metropolis is slowly picking up pace again. After a drop in the first quarter, the volume increased by almost 8% between April and June. “Genuine Brexit-effects in terms of new lease contracts also failed to materialise in the second quarter,” said Scheunemann. The situation therefore continues to be dominated by speculation, uncertainty and hopes.
 
“The German office market is expected to maintain its current momentum in the second half of 2017. We expect take-up in the seven German property strongholds to receive a further positive boost. Based on the current take-up volume and the firm inquiries still pending on the market, we have raised our forecast for the year as a whole. From today’s perspective, take-up of 3.5 million-3.7 million sqm seems achievable,” said Timo Tschammler. He added: “The good economy, and the number of 10-year lease contracts that were signed in the boom year of 2007 and are now about to expire, will certainly help push up the volume. However, the shortage of supply is forcing many companies to accept contract renewals for their existing premises or extend the overall search process, which in turn delays the signing of new lease contracts.

 


Vacancies continue to decrease sharply – lack of new building space still a significant factor
 
Office vacancies fell further in all Big 7 markets in the second quarter and now stand at 4.7 million sqm. This equates to a vacancy rate of 5.1%. “The reduction in short-term rental options for companies is continuing at a faster pace. Within the last 12 months, the supply of space available at short notice decreased by a further almost 777,000 sqm. If this tempo is sustained, the vacancy rate will soon drop below the 5% threshold,” said Scheunemann. Stuttgart again demonstrates the most obvious shortage of space. Here, vacancies fell by 29% in the last 12 months and the vacancy rate dropped further to 3.1%. New building space is virtually non-existent at present. “Stuttgart stands only as an example to the other strongholds. Steady take-up growth and a decreasing new building volume are simply not compatible in the long run and at times can create serious disadvantages for the economic performance of a city,” said Tschammler.
 
In the first half of the year, just over 400,000 sqm was completed in all seven strongholds, which was 20% less than in the first half of 2016. A closer look at the individual cities reveals considerable differences at regional level. In Berlin, the new building volume increased fourfold, while in Düsseldorf it increased by 70%. However, vacancies also fell in these two cities. In the first six months, only 69,000 sqm (17% of the completions volume) was still available in the Big 7; the rest of the space was either built for owner-occupiers or was already let at completion. By the end of 2017, a further 602,000 sqm of new or fully renovated office space is expected to come onto the market. Around 203,000 sqm (about a third) of this is still available. “We also expect the pipeline in 2018 to be of a similar magnitude to 2016 and 2017. Companies that are prepared to move can only respond to the acute shortage of supply by securing space in project developments in good time. These pre-lettings now already extend into 2020,” said Helge Scheunemann.

 
Prime and average rents remain under pressure

Compared to the first quarter of 2017, prime rents increased slightly again by €0.05 in each of Hamburg, Munich and Stuttgart in the April-June period. In the other four strongholds, prime rents remained unchanged. In a 12-month comparison, the prime rent in Berlin increased by almost 10%. Stuttgart registered an increase of more than 7% while Hamburg and Munich each recorded a 4% rise. The prime rents in Cologne and Düsseldorf remained at the previous year’s level. Overall, we expect to see a further increase in rents by the end of 2017.
 
The JLL prime rental price index for the Big 7 reached 192.4 points after the first six months and thus attained its highest value since the first quarter of 2002. In the first half of the year, it increased by 1.4%. The further reduction in vacancies resulted in an increase in net absorption over the year to 900,000 sqm. As a consequence, office rents across all strongholds could rise by a further 2.7% by the end of the year. The increase in rents in 2017 as a whole would then amount to 4.1% compared to 2016.
 
We also expect to see the same increase in average rents in the year as a whole.