Companies looking to move are thwarted by the lack of suitable spaces on the office lettings market
Press release including overview table [PDF]
FRANKFURT, 5th April 2018 - The results of numerous economic surveys at the beginning of the year indicated that expectations tend to be subdued, while President Trump’s announcement of trade tariffs is unlikely to help lighten the mood. Irrespective of this, most economic indicators continue to point upwards and support the currently very positive economic forecasts for the year as a whole. According to Consensus Economics, GDP is expected to increase by 2.4%, after rising 2.2% in 2017. The labour market is also still sending out positive signals: the unemployment rate fell to 5.5% in March and is expected to reach 5.3% by the end of the year. However, the skills shortage in many industries and companies is slowing down planned business expansions. In the most recent ifo manager survey, 73% of companies stated that the shortage of skilled workers is currently the greatest risk for the German economy, followed at some distance by "excessive wage settlements" (49%) and the "global rise in protectionism" (44%). “Although the latter has no negative effects on the economy in the short term, in the long term it threatens to create massive impediments to global trade, with correspondingly negative consequences primarily for export-oriented countries such as China or Germany,” said Timo Tschammler, CEO of JLL Germany.
Another risk is the current high capacity utilisation rate of the German economy. Interestingly, this is most apparent in the construction industry. According to estimates from the economic institutes, the economic performance in this sector is unlikely to increase further, but will remain at the (high) level of the previous year. “Nevertheless, rising building costs appear realistic as a consequence of bottlenecks that in some instances can be extreme, and could further thwart the construction of commercial real estate that is so urgently needed in some cases,” said Timo Tschammler.
Trend reversal or a forced break in take-up? Volume is 15% lower
Positive labour market developments have a direct impact on the office property market. Thus in the 12-month comparison, the working population in the service sector in Germany increased by about 230,000 people. In terms of the additional office space required, this corresponds to an expansion need of around 5.8 million sqm, of which around 2 million sqm in the Big 7 alone. Considering that office stock has grown by only just under 270,000 sqm over the same period (new builds of 820,000 sqm compared with the removal of 550,000 sqm of space from the office market), it is not surprising that vacancy rates continue to fall because of this mismatch between supply and demand. "And a further decline in vacancies will eventually have an impact on demand. In this respect, the 15% drop in take-up compared to the first quarter of 2017 is not particularly surprising and, in our view, should not be seen as the start of a general decline in demand. On the contrary, many companies that are willing to relocate are hampered by the low availability of suitable space and in effect are being forced to extend expiring leases for their existing spaces,” commented Helge Scheunemann, Head of Research at JLL Germany.
Aggregated across all seven property strongholds, almost 900,000 sqm were let or sold to owner-occupiers between January and March. This result is at least still a good 5% above the long-term average since the first quarter of 2010.
As in every quarter of last year, Munich and Berlin topped the rankings in the first three months of 2018, with 230,000 sqm and 190,000 sqm respectively. Neither market was left unscathed, however: in Munich, take-up fell by just under 12% year-on-year, while in the German capital it dropped by almost 17%.
The largest losses were sustained by Hamburg (-41%), Cologne and Düsseldorf, with the latter two dropping by around one third. In contrast, positive news came from Frankfurt and Stuttgart, where take-up improved by 31% and 21%, respectively. "Brexit has lost some of its appeal as the exit conditions still remain unclear. In addition, it seems that many banks are retreating from plans to exit London. The fact is, there is currently no clear winner in Europe, and no single office market has so far benefited significantly from Brexit. If companies do decide to leave London, then this is not taking place en bloc. It is more the case that the existing workforce is distributed among different locations, and this also means that the effect on Frankfurt so far has been limited. A recent Reuters survey of about 120 financial companies revealed that a maximum of 5,000 new jobs could be created in the Hesse capital over the next few years,” said Timo Tschammler.
Net absorption between January and the end of March was relatively modest at around 37,000 sqm, and was even negative in three strongholds. “This may come as a surprise in view of the falling vacancies. However, the strong take-up volume registered last year is now clearly evident from the relocations that are now taking place. The vacated premises are then included in the overall vacancy statistics. The fact that the rate has nevertheless fallen is because renovation work has been started in many empty office buildings, and some buildings are being used for another purpose or have even been completely demolished. It is actually the case that total aggregate office stock across all seven strongholds has fallen compared to the previous quarter. However, this cannot change the fact that the availability of good spaces in adequate locations remains a problem for users,” said Helge Scheunemann. He added: “Even if the project pipeline should pick up again with a corresponding increase in available space, in many cases such spaces are only available at very high rental prices and are therefore not suitable for all user groups. As a result, many requests for large spaces cannot be met, and it is often the case that existing leases are extended. That's exactly why the idea of flexible office space is so relevant today. Operators of this type of space are still investigating locations in the Big 7. This includes companies already based in a location that wish to expand and new operators that are looking to enter the German market.”
"As a consequence of the good economy and the booming labour market, we expect the strong demand to continue in the coming quarters. More than ever, however, inquiries for space will no longer be reflected by specific letting transactions on a one-to-one basis. The insufficient supply plays too strong a role in preventing the signing of lease contracts that are relevant to take-up figures. In this respect, we are not expecting the previous year’s volume to be achieved again this year, with take-up falling well below 4 million sqm,” emphasised Timo Tschammler.
Vacancies fall further and head towards the 4% mark
Again, the vacancy rate is heading in only one direction: downwards. By the end of March, the vacancy rate in the Big 7 stood at 4.5%, which was a further 20 basis points below the rate three months previously. In absolute terms, only 4.18 million sqm are available across the Big 7 at short notice — 15% less than a year ago. In six of the seven strongholds, vacancies fell by more than 10%, with only Düsseldorf showing almost no change. “It cannot be repeated often enough: this is a dramatic situation that is neither conducive to the economic performance of a city, nor to the further development of rents. The rise in rents is no longer based solely on demand, but is increasingly a result of the lack of available space,” said Timo Tschammler.
An end to the current situation is currently not in sight. The vacancy rate is expected to fall to 4.3% in the coming nine months. “If we believe the economic forecasts, the positive company data will continue at least into 2019 and exert further pressure on the office markets. At the same time, as already mentioned, the construction industry has reached fully capacity utilisation. However, this does not seem to include the construction of new office buildings: in the past quarter alone, only just under 161,000 sqm was completed, which was 20% below the volume in the same period of the previous year,” continued Tschammler. Scheunemann added: “Users who, due to their size and market position, have the opportunity to sign contracts in project developments will continue to do so. In this respect, forward renting will continue to be a theme in 2018. On the other hand, users with smaller space requirements that want or need to change their location will be more geared towards flexible office providers/co-working operators.”
New construction volume not as strong as expected
After significantly fewer spaces were completed in the first quarter than originally expected, the fear is that further delays will also restrict new construction volumes for the current year. From today’s perspective, another 900,000 sqm should be completed by the end of the year, so that in 2018 the volume would be higher than in 2017. However, the 1.3 million sqm that was targeted three months ago no longer seems to be feasible. “The full capacity utilisation within the construction industry is clearly causing delays to specific projects. And the other bad news for users willing to relocate is that of the 900,000 sqm expected this year, only 274,000 sqm or around 30% is currently still available. Thus, the small ray of hope with regard to supply that we identified in the last quarter has already been crushed in the first three months. The lack of choice in terms of available space will continue to be the main problem on the German office market,” said Tschammler.
Rents continue to rise with strong momentum in Berlin and Stuttgart
Despite the decline in take-up at the beginning of the year, rental prices continue to rise. “This is not reflected everywhere by an increase in prime rents, but can be found in sub-markets where there are or will be new building developments or where the supply of available space is extremely low,” said Scheunemann. In general, rents seem to be dictated more by the level of supply than demand. For example, take-up in Berlin fell by almost 17% in the first quarter, but the prime rent rose by another euro to €31/sqm/month — a clear reaction to the further decline in the vacancy rate. At the same time, prime rents also rose in nine of the 16 Berlin sub-markets in the last three months. A similar development is also evident in Stuttgart, the market with the lowest vacancy rate at present, with rent increases in numerous sub-markets of the city. In the 12-month review, these two markets also registered the strongest rental growth among the Big 7 cities, with an increase of almost 11% in Berlin and 7% in Stuttgart.
At the end of March 2018, the JLL Prime Rental Price Index for the Big 7 reached 196.1 points, which was 4.3% higher compared to a year previously and also represented the highest level since the third quarter of 2001. “By the end of the year, we expect to see a further increase in the index to 200.7 points, corresponding to a year-on-year increase of 3.2%,” said Scheunemann.
Timo Tschammler concluded: “2018 will again be a year of strong user demand. It is therefore vital that the new construction projects planned for the coming years are actually realised, and that the projects already under construction keep to their schedules. The office market urgently needs the newly created space. It would be detrimental to activities if the scarcity of space became even more acute.”