Economy gets a thumbs down, while the office market shines

Office space take-up in the Big 7 reaches 2 million sqm

July 04, 2019

FRANKFURT, 4th July 2019 – The economic situation continued to show little change in the period from April to June. According to Consensus Economics, economic growth will amount to only 0.8% in 2019, whereby private consumption will again function as the main pillar with a predicted growth rate of 1.5%. Trade wars and the prevailing uncertainty everywhere are also forcing companies to be more cautious about recruitment planning. Thus the rate of unemployment increased again in May for the first time in five years, albeit only slightly, to 5.0%. Even though the domestic economy, service companies, trade and construction remain as strong as before, they are unable to fully offset the losses in production and trade. A serious sign of this is the Ifo employment barometer, which signals a decline in the willingness of companies not only in the industry sector but also now in the service sector to recruit new staff. Demand for office space, measured by take-up volume, shows a strong correlation to the employment barometer, but with a delay of about six months.

“This may explain why the office lettings market in the seven strongholds in Germany continues to perform strongly, and there are still no indications of the property industry being in crisis mode, at least based on the raw data,” said Timo Tschammler, CEO of JLL Germany.

The environment for companies seeking office space remains challenging

The office lettings market in the seven strongholds reported a very good result at the midway point of the year. In the first half of 2019, around 2 million sqm was either let to tenants or bought by owner-occupiers, representing year-on-year growth of 5.4%. “However, as far as the full-year take-up forecast is concerned we are sticking to our projection of around 3.8 million sqm, as we already communicated in the first quarter. This outcome assumes a somewhat weaker performance in the second half of the year as a consequence of:

a) the developments in the economy and employment as described above;

b) the severe shortage of space in some locations that will not be resolved in the coming months. In this respect, the fundamental market situation also did not change in the second quarter,” said Tschammler.

What does this mean for office users? “At least under the aspect of space shortages, they are sometimes forced to rent space off plan. In 2019, we expect that every fifth rented square metre in Germany’s Big 7 will be in a project development. Thus there is a willingness to secure attractive spaces at an early stage. On average for the last three years, 60% of all pre-lettings have been agreed with a lead time of one to three years to the full completion of the building,” said Helge Scheunemann, Head of Research at JLL Germany.

“It remains to be seen to what extent the deterioration of the economic environment will affect the services sector, which dominates the office market. As things stand, we detect no reluctance among companies to realise their relocation plans. The property market will not be completely immune to economic downturns, but the current cycle features a severe supply shortage so that vacancies are unlikely to balloon even in the case of falling demand or negative space absorption. This should also prevent a collapse in rental prices in the event of a possible downturn,” said Tschammler.

While the seven property strongholds presented a very heterogeneous picture at the end of the first quarter, they have become more equal over the course of the year. Strong increases in take-up have been registered at times in all Big 7 markets except Munich. Stuttgart experienced the sharpest rise of almost 21%, followed by Hamburg with almost 15%. Frankfurt and Cologne each recorded an increase of around 8%. Although Munich and Berlin again shared top position in the take-up rankings (each with approx. 418,000 sqm), the Bavarian capital suffered a decline of 11%. “From our point of view, this take-up result is even more remarkable since apart from in Berlin and Frankfurt, there were no standout rentals by flexible office space providers in the past three months. These providers have apparently taken something of a breather. They still plan to expand their premises further, although they will now not focus exclusively on the Big 7,” said Scheunemann.

Like ice in the sun: the short-term rental supply melts away

Nothing has changed when it comes to vacancies: the supply of space that is available at short notice is shrinking, and still by a significant amount. In the Big 7, companies seeking new office space only have access to an aggregated volume of just over 3 million sqm, which is around 1 million sqm (24%) less than 12 months previously.

“In relation to the take-up volume of almost 2 million sqm, this results in a vacancy to take-up ratio of 1.5. That is, if demand remains the same, provided that each take-up deal is a move or an expansion, all current vacancies would be let in nine quarters,” said Scheunemann, providing a theoretical calculation of the situation. The aggregated vacancy rate for the Big 7 is almost 3.3% and has thus fallen by a further one percentage point compared to the previous year.

Apart from Stuttgart, the vacancy rate fell in each Big 7 city by a double-digit percentage rate compared to the previous year. The declines ranged from -16% in Frankfurt to -42% in Berlin. The vacancy rate in the German capital has therefore fallen to 1.8%. Can it go even lower? Yes, it can. By the end of the year the vacancy rate for all seven strongholds is expected to drop to 3.1%. “Any real easing of the situation is not in sight considering that construction is still at a moderate level, with all the positive (including further rental growth for property owners) and negative (such as insufficient choice of modern new space for companies) implications,” said Tschammler.

Completions increase only in Berlin and Stuttgart

In the first half of 2019, around 435,000 sqm was completed in the Big 7 overall. That’s about 30% more than in the same period last year. However, a more detailed look shows how deceptive this picture is:

1.    The increase in new buildings focuses exclusively on two of the seven cities, namely Berlin and Stuttgart. In the Germany capital, the completions volume increased by almost 60% to almost 120,000 sqm while in Stuttgart it rose by 169% to almost 171,000 sqm. In all other strongholds, the completion figures continued to fall by between 21% in Cologne and 96% in Frankfurt.

2.    Despite the increase in new buildings in Berlin and Stuttgart, vacancy rates continued to fall in these two locations. This indicates that too little new space is still being built to satisfy the existing demand for modern office space.

Nevertheless, construction work is on the rise. Around 4.4 million sqm is currently under construction and will come onto the markets by 2022. A particular focus is on Berlin with around 1.5 million sqm and Munich with just under 0.87 million sqm. However, the degree to which new space is required in the current cycle is evident from the fact that only 2 million sqm or about 45% of all space that is currently under construction is still available. All other spaces have already been snapped up by users prior to completion. “In other words: in each of the Big 7 cities, an average of only 285,000 sqm of vacant space will be available by 2022. This is clearly too little to accommodate every need or significantly reduce pressure on rental price development,” said Tschammler.

Rental prices continue to rise – increases are also evident in secondary locations

The persistent imbalance between supply and demand continues to fuel rental price growth. The JLL prime rental price index has increased by a further 7.6% year-on-year, reaching its highest level since 1992 at just under 213 points. “By the end of the year, an increase to around 218 points is expected, which would represent a rise of 5.4% compared to the end of 2018,” predicted Tschammler. Scheunemann added: “While there is growth in the prime city locations, in relative terms the secondary locations or other office sub-markets demonstrate even higher increases than the respective top locations. These include Mediaspree and Kreuzberg in Berlin, the Olympia and Arabellapark in Munich and Dusseldorf port.”

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