German office lettings market starts almost at the previous year’s level

FRANKFURT, 9th April 2021 – Three things are necessary to combat the pandemic that has now been raging for more than a year: vaccination, testing, and digitalisation. “Putting aside any assessments of federal and state government crisis policies, it has to be said that there are no discernible signals that raise the prospect of a speedy end to the coronavirus pandemic for citizens, society and the economy. On the contrary, Germany is heading for another lockdown, which is again likely to stifle the first hesitant shoots of economic recovery with corresponding negative consequences for many companies in those industries that are most affected,” said Helge Scheunemann, Head of Research at JLL Germany. Scheunemann added: “The path to recovery will be far more arduous than originally thought, and numerous economic research institutes are correcting downwards their forecasts for the year as a whole. In addition to the unpredictability of the virus and its mutants in itself, the government’s zigzag course is currently a factor of uncertainty that makes a reliable forecast much more difficult. Nevertheless, on the positive side it can also be said that the economic recovery has at least begun, and that companies are looking ahead with confidence to the rest of the year.”

The ifo business climate index increased significantly in March, reaching its highest level since June 2019. This optimism is mainly underpinned by exports, which have picked up momentum again owing to the global powerhouses of the United States and China. Industry is as optimistic as it was in 2010, and there are signs of an upswing in all industrial sectors. Satisfaction with the current situation has increased even among service providers, and optimism about the next six months has also improved. This is supported by the labour market, which has again proved to be very robust in the second lockdown.

The Institute for Employment Research (IAB) anticipates a drop in unemployment by 110,000 people on average in 2021, while employment is expected to increase noticeably. The trade, transport and hospitality sector, which has been particularly hard hit by the pandemic, will cut a total of 30,000 jobs in 2021 (excluding the self-employed). In contrast, 190,000 additional jobs will be created in the areas of public service providers, education and health. In total, there will be an increase of 160,000 jobs in the sectors that are most relevant for the office lettings markets (services, IT, real estate, finance).

“Under ‘normal’ pandemic-free circumstances, this would yield an additional office space requirement of 2.6 million to 3.2 million sqm in Germany. Even though the strong need to return to the office is being discussed within the wider debate about the future of the office, new ways of working and the importance of the home office, and there is a clear trend that the office will remain important for companies in the post-pandemic era, caution still has to be exercised when considering such scenarios,” explained Dr Konstantin Kortmann, Head of Leasing & Agency at JLL Germany.

Demand for office space picks up again

Is the crisis already over on the German office market? Given the take-up volume of 715,000 sqm in the first three months of the year, the spontaneous answer to this question is “yes”. That’s because almost the same level of take-up was recorded in the first – and so far last virus-free –quarter of 2020 (-1%). “We can at least say that the dip in demand seems to have been overcome for now, and the abundant optimism that was evident from the latest market sentiment indicators also seems to have ensured that companies are a little more willing to rent new office space in the Big 7 cities. In view of the large number of lease contracts that are due to expire this year, many companies were and are under a certain amount of pressure to take action. If the option to renew a lease does not come into effect, the only remaining choice is to move to new premises,” said Kortmann.

An analysis of the individual markets reveals that take-up increased in four of the seven strongholds compared to the first quarter of 2020. Cologne experienced particularly noticeable growth of over 130%. Growth was also registered in Hamburg (+31%), Frankfurt (+22%) and Berlin (+20%). Lettings were unchanged in Stuttgart at around 33,000 sqm, and only Munich (-44%) and Düsseldorf (-52%) suffered further significant losses. In the Bavarian capital, there was a complete absence of owner-occupier deals that are usually so typical of this market, especially in the surrounding area. However, the mood on the office markets cannot yet be described as exactly euphoric. Although companies are more active than last year in terms of searching for space, there is still considerable uncertainty about future business development. On the other hand, there has been an unusually large number of contract signings by public sector users (for example, local authorities were responsible for the two largest lettings in Cologne).

Personal and business-related service providers that usually dominate the markets are still exercising restraint. “Based on the active searches in the market, we assume that activity will pick up over the year especially with regard to larger deals, and we expect take-up to reach around 2.9 million sqm, which would be equivalent to an increase of 10% compared to 2020,” said Stephan Leimbach, Head of Office Leasing at JLL Germany.

Leimbach added: “Even that may sound optimistic given the flood of information and discussions about the home office and the resulting reduction in office space requirements. However, we are not joining the rush to consign to history the office as the central workplace. On the contrary, offices could in fact become even more important. Indeed, the initial enthusiasm about working from home has already given way to a certain disillusionment at some companies. Communication, employee loyalty and a sense of belonging are just a few of the aspects that employees miss outside of the office.”

Vacancies continue to rise significantly

Vacancies increased by almost 32% year-on-year in the first quarter of the year. In absolute terms, this amounts to almost 900,000 sqm. Does that sound like a lot? In fact, it isn’t, at least not yet, because the average vacancy rate for the Big 7 is still well below the crucial 5% threshold at only 3.9%. The supply of space available at short notice rose particularly sharply in Berlin. Here, vacancies increased by 81% and the rate now stands at 3.4%. Munich also registered an above-average increase of 60%, to a rate of 3.8%. However, the rates in both cities are still very low. Stuttgart is the only Big 7 city to have managed to reduce its vacancies even further. Here, the vacancy rate is strikingly low at just 2.0%.

As in the last quarter, around 12% (about 455,000 sqm) of total vacancies are currently being sublet in the Big 7 cities, meaning that a disproportionate increase is not evident here. “However, depending on how severely users are affected by the pandemic, there may be an increase in available sublet spaces over the year because of financial emergencies,” said Leimbach. Leimbach continued: “We still anticipate a further moderate increase in vacancies to an average of 4.5% by the end of the year. The vacancy risk falls significantly in the case of new, flexible and well-appointed spaces that meet the user’s wish for a more agreeable atmosphere, and also comply with relevant sustainability requirements.”

Over 4m sqm of space is under construction, but around half has already been let

As well as the demand for space, what takes place on the supply side is essential for further market development. In addition to the supply of office space that is available at short notice, or vacancies, offices currently under construction are also relevant here. Too high a construction volume could trigger a drop in rental prices in the event of weak demand. In the first three months of 2021, just under 594,000 sqm was completed in the Big 7, almost three times as much as in the first quarter of 2020 (+170%). “Almost 1.3 million sqm is expected over the next three quarters, meaning that the total volume of new space in 2021 will be around 1.9 million sqm. That is almost 300,000 sqm less than was expected at the end of 2020 and shows that projects are still being pushed back where it is still possible,” said Leimbach. For 2022, a further 2.2 million sqm is currently under construction or in the planning stage, which is also slightly less than was expected three months ago. Scheunemann added: “All in all, regardless of the year of completion, around 4.2 million sqm of office property is currently under construction in the Big 7, which corresponds to just under 4.4% of total stock (almost 96 million sqm). In both a European and historical comparison, these indicators are not yet a cause for concern. Only a little more than half of this space (2.2 million sqm) is currently still available to companies looking for new space. Nevertheless, it is important to keep an eye on the new construction volume. Only if demand picks up again in the further course of the year will it not have any negative implications for the markets.”

Prime rents unchanged – growth only still registered in Berlin

The JLL prime rental price index remained at 222.4 points at the end of the quarter and was therefore unchanged compared to the final quarter of 2020. Compared to the previous year, an increase of 2.0% can still be noted. In terms of the Big 7, the biggest growth rates in a 12-month comparison were recorded in Stuttgart (4.1%) and Hamburg (6.9%). “As 2021 progresses, growth in the rental price index is likely to cease. In the year as a whole, rents are expected to increase only in Berlin, at around 2.6%. All the other markets will remain at their current levels. Overall, this will be reflected by a marginal increase in the index of 0.4%. But next year we are assuming there will be a two in front of the decimal point,” said Scheunemann. And Leimbach added: “So we are not expecting to see a dynamic performance. That would be unrealistic given the severity of the current crisis and the longer recovery phase than expected by many. Companies, too, have to take small and carefully considered steps because of the radical effect of future change management processes in relation to remote working, office occupancy rates and space allocation.”