Space take-up declines in the office property markets of the Big 7 cities – rents rise further
FRANKFURT, 7th January 2019 – Business sentiment deteriorated towards the end of 2018. The ifo business climate index fell for the third time in succession at the end of November, albeit from a high level. Companies were more pessimistic both about their current position and future expectations. Yet leading economic and financial institutions are still forecasting a sustained upward trend for 2019. As things stand, not a single institution anticipates the onset of a recession this year, even though economic growth may not be as strong as before because of increasing risk factors and cooling effects.
“At the same time, export-oriented companies in particular are following developments closely, and with a certain degree of nervousness, on the other side of the Channel in London and across the pond in Washington DC. A no-deal Brexit scenario and an increase in import duties following a further deterioration in the trade dispute between the USA and China represent the two most dangerous flashpoints for the German economy,” said Timo Tschammler, CEO of JLL Germany.
According to Consensus Forecast estimates, the gross domestic product grew by 1.8% in real terms during 2018, which is slightly lower than in the previous two years. A marginally reduced growth rate of 1.6% is also expected for 2019. However, the employment market continues to send out positive signals in defiance of the sluggish economic situation. In 2018, 44.8 million people were in active employment in Germany, meaning that the number of people with a job reached the record level that was achieved in 1991 following Germany’s reunification. According to preliminary figures, this positive development is owing to higher employment levels among the domestic population as well as the inflow of foreign workers. Compared to 2017, employee figures increased by 562,000 people or 1.3%. Overall, the 13-year rise in employment continues unabated, with the service sector proving to be particularly effective at creating new jobs.
Office space-take up decreases, but remains at a high level
Demand by companies for office space also remains at a high level because of the rising employment figures. In 2018 as a whole, office space take-up in the Big 7 reached close to 4 million sqm. This puts 2018 in second place behind 2017 in the all-time statistics, although take-up last year fell by only a moderate level of 6.5%. It’s also important to put this into perspective: “Given the fact that employment levels are rising, the decrease in take-up is not to be attributed to flagging expansion efforts or a lack of enthusiasm on the part of companies to relocate. It’s more the case that some planned relocations were not possible to realise because of the unavailability of suitable office space. This correlation is also evident from the increased net absorption, which last year amounted to 1.2 million sqm in aggregate for the Big 7. As well as being 10% higher than in the previous year, this figure also represents the highest level of the last five years — which isdespite the more efficient use of space in new lettings with correspondingly less space per workplace,” said Tschammler.
Tschammler added: “Looking ahead to 2019, a further reduction in office space take-up can be expected, again primarily because of the short supply of available space. However, an additional fall in demand may occur over the year as a consequence of a further economic slowdown. We can only talk about this in the conditional tense given the current unstable and uncertain economic outlook. However, we are certain that take-up by the end of 2019 will remain at a high level in a historical context."
With regard to the individual markets, take-up fell in six of the seven property strongholds. Düsseldorf was the only market to register an increase compared to 2017, with take-up rising 6% to 415,000 sqm. However, Munich and Berlin again generated the highest take-up volumes in 2018. The Bavarian capital once again only just failed to reach the 1-million-sqm mark in 2018, recording a fairly moderate decline of 2% to 975,000 sqm compared to 2017. Berlin registered a somewhat heftier decline, with take-up falling almost 11% year-on-year to almost 842,000 sqm. However, Stuttgart recorded the sharpest decrease of almost 16%. “It is certainly no coincidence that Stuttgart and Berlin have the lowest vacancy rates. Thus it must be stressed that the decline in take-up is not attributable to sluggish interest by companies in rental opportunities, but to the short supply of space,” said Helge Scheunemann, Head of Research at JLL Germany.
Increased market significance of flexible office space providers, but falling vacancies prevent stronger expansion
As was already evident in the previous year, providers of flexible office work spaces have themselves become major consumers of office space, and continued to expand their presence in 2018. This sector again accounted for a 6% share of total space take-up, although in prime locations (CBD) its share was as much as 16%. “However, the lack of space in top locations also hampers the expansion plans of such providers. If the supply of space had been greater, take-up would have been much higher,” said Scheunemann.
Needless to say, the problem of diminishing vacancies affected all companies and industries last year and was a recurring theme throughout the year. The vacancy rate in the Big 7 stood at 3.6% by the end of the year and was 1.1 percentage points lower than at the end of 2017. In each of the Big 7 cities, the volume of vacancies fell by a double-digit rate in a 12-month comparison, with Berlin and Cologne registering the most substantial declines. In Berlin, the vacancy rate was at just 2% by the end of December, while the rate in Stuttgart was only marginally higher at 2.2%. Meanwhile the vacancy rate has fallen below 3% in Munich and below 4% in Hamburg. “The shortage of space in some sub-markets has for some time acted as a major obstacle to business development. In six sub-markets in Munich and three in each of Berlin and Stuttgart, the vacancy rates are now well below 1% in some areas,” said Helge Scheunemann.
Scheunemann added: “There have already been severe shortages in some instances, and this raises the question as to whether vacancies can fall any further. Taking into account current completion figures for 2019, we predict that the rates will decrease slightly again in the current year, falling to 3.5% on aggregate. However, there are signs of a change of direction in the medium term, and we even expect to see a slight increase in vacancies in Stuttgart and Munich.”
Completions increase only moderately and planned developments are delayed
Office completions in 2018 increased by almost 8% to 927,000 sqm compared to 2017. Munich and Berlin accounted for the highest volumes of almost 300,000 sqm and 147,000 sqm respectively. The new-building volume should by rights increase significantly again in the next two years, but latest evaluations show that projects will once more be significantly delayed. Thus only 1.68 million sqm of newly built space is expected for 2019 (instead of the 1.8 million sqm that was still being predicted in the autumn), and the projected volume for 2020 has also fallen by around 200,000 sqm to almost 2.1 million sqm.
“Considering the low vacancy rates, this should be the time for project developers to act. But the high capacity utilisation of the construction industry and the relentless increase in development and construction costs prevent planned projects from being realised. And when new spaces are completed, it is often the case that they have already been snapped up by future tenants,” said Timo Tschammler.
For example, of the 1.68 million sqm expected to be completed this year, only 481,000 sqm (29%) is still available. For 2020, around 60% is currently still available to potential tenants. Tschammler continued: “Should the strong demand continue in the coming weeks and months, it is nevertheless likely that this proportion of available space will be quickly reduced.”
Rental prices have risen sharply, and are expected to grow further
The long-standing imbalance between demand and the supply of space, whereby demand considerably outweighs supply, has been driving up rental prices in the Big 7 since 2010. In 2018 alone, the increase in the aggregated rent across the Big 7 cities amounted to 6.4%, and all seven German property strongholds experienced rental growth. In a 12-month comparison, the strongest increases took place in Berlin (+13.3%) and Cologne (+6.8%). Rents will continue to grow in 2019, albeit at a slower rate (3.5%). “And by the end of the year, it could be that Munich will have replaced Frankfurt as the most expensive office market in terms of rents,” surmised Timo Tschammler.
Rental rises in secondary locations even outpaced growth in the more central areas of the cities, where prime rents are traditionally generated. In the last five years, much stronger growth of 23% and 26% was generated in secondary and tertiary locations respectively compared to the prime locations, although this was from a much lower starting point. Nonetheless, this analysis shows that sub-markets outside the prime sites provide attractive alternatives for office users.