Office lettings market exceeds all expectations - Take-up volume reaches record level of 4 million sqm
Press release including overview table [PDF]
FRANKFURT, 4th January 2018 – Just before Christmas, German companies were in an excellent mood, even if they were no longer quite as euphoric as in the previous month. The Ifo business climate index fell in December to 117.2 points from 117.6 in November. However, this did not in any sense dampen the current economic situation. Compared to the less optimistic expectations of manufacturing, wholesale and retail companies, firms in the mainstream construction industry made upward adjustments both to their assessments of the current situation and their future expectations. Capacity utilisation levels in this industry are extremely high, and for many companies it is almost impossible to take on any more orders, let alone process them.
The economy continually improved throughout 2017. According to latest forecasts, the gross domestic product increased by around 2.3% in real terms in 2017 and therefore outperformed the rate of the previous three years. Consensus Forecasts also predicts GDP growth of roughly 2.2% in 2018.
The strong growth in the economy was accompanied by an increase in employee figures. According to preliminary figures from the Federal Statistical Office, around 44.3 million people with a place of residence in Germany were employed in 2017 (+1.5% compared to the previous year). This positive momentum is also reflected by the Ifo employment monitor. This is based on approximately 9,500 monthly reports from companies in the manufacturing industry, the construction industry, wholesale and retail, and the service sector – an ideal type of leading indicator for demand in the office sector. The effects of the barometer are felt on the lettings markets around three months after the respective assessment.
Office lettings take-up exceeds 4 million sqm – space shortage curbs further demand
The increase in corporate employment creates the requirement for additional office space, and in the service sector this has a direct impact on the office lettings markets. In 2017, the space take-up volume in the Big 7 reached around 4.2 million sqm and therefore surpassed the previous year’s record volume by almost 7%. It also far exceeded the take-up volume that was predicted for 2017 at the start of last year. Two markets registered take-up of above 900,000 sqm: Berlin (955,000 sqm) and Munich (995,000 sqm) competed head to head here and were by far the strongest markets in terms of take-up among the Big 7.
Contract signings above 10,000 sqm continued to rise, and this segment even improved its positive performance over the year. While the 29 deals signed in the first nine months accounted for take-up of almost 607,000 sqm, a dozen deals completed in the fourth quarter generated a volume of 358,000 sqm. This segment was therefore able to increase its share of total annual take-up to more than 23%.
“The lettings volume could have been higher still, but many companies seeking new spaces were unsuccessful because of the tight market situation. There is a significant shortage of space, particularly in central city locations. Unlike in previous cycles, completions and supply have not kept pace with the positive demand and are only now starting to react. The increase in building activity therefore falls within a strong economic phase, and even the pick-up in speculative building activity is currently given a positive spin,” said Timo Tschammler, CEO of JLL Germany.
Helge Scheunemann, Head of Research at JLL Germany, added: “The strong demand is also reflected in continued positive net absorption in the Big 7. This figure is quoted at more than 1 million sqm for 2017, which refers to the amount by which occupied office space has increased, and is again around 8% above the five-year average.”
Strong demand from providers of flexible office workspaces also became apparent during 2017. As well as traditional business centres, providers of co-working spaces were particularly active in leasing new offices. These “flex workspace” providers still only account for less that 1% of office stock overall, but in 2017 they reached a 5% share or 212,000 sqm of space take-up and are expected to increase their share further to around 7% in 2018.
“In 2018, we expect to see further strong momentum on the lettings markets as a consequence of economic growth, although take-up is likely to fall short of the 2017 result due to insufficient availability of new and modern space,” said Tschammler.
Vacancies reach alarmingly low levels in some instances
The take-up of large areas of space by companies has brought about a further decline in the available supply. The vacancy rate in the Big 7 stood at 4.7% by end-2017 and has therefore fallen to the lowest level in 15 years. “As demand will remain high, we expect the vacancy rate to remain stable at a low level despite the increase in building activity. In absolute terms, only 4.3 million sqm of space was available at short notice in the Big at the end of 2017. Thus, vacancies now almost match the take-up volume. The last time that the two figures came this close was in 2001. In contrast to the current situation, the event at the time marked the beginning of a four-year downturn,” said Scheunemann.
Space shortages have already fallen to an alarming level in some sub-markets in the Big 7 cities. Locations in high demand such as the city centre, Schwabing-North and Westend in Munich, the “Mitte 1A” (prime city centre) sub-market in Berlin and the centre of Stuttgart currently show vacancy rates with a “1” before the decimal space. “We observe that negotiations with users for spaces in new building developments take place at an early stage, and projects under construction generally have good pre-let quotas. This practice of “forward renting” spaces in buildings that are not yet completed was a characteristic of last year, and is a clear sign that companies are confident about the future of their respective business activities,” said Tschammler.
New building volume declines further in 2017– increase to 1.3 million sqm expected in 2018
Around 860,000 sqm of newly built office space was recorded for 2017 as a whole. Based on this figure, the building volume was about 22% below the value of the previous year and three times lower than in 2002. Only approximately 123,000 sqm or 14% of the total volume was still available at the time of completion. Apart from Düsseldorf, completions fell in every city in the Big 7 compared to 2016 with rates of decline ranging from 13% in Munich and 53% in Berlin. “Golden times for project developers? You would think so, but a shortage of land and the high capacity utilisation in the building industry thwart some new building plans and are among the main reasons for the low building volume,” said Tschammler.
Tschammler added: “In contrast to last year, we expect to see a strong increase in 2018. This also appears to be a necessary development considering the supply shortage. Almost 1.3 million sqm should either be newly built or extensively renovated.”
Building activity in 2018 will be focused primarily on Berlin (approx. 230,000 sqm) and Munich (approx. 293,000 sqm). About 62% of the entire volume for the Big 7 has already been (pre-) let or will be owner-occupied. This means that 38% or 490,000 sqm of new space is still available to companies that require it. “This is at least a small ray of hope, as in recent quarters the share of available space in projects was generally much lower,” said Scheunemann.
Rental prices rise particularly in sub-markets with very low vacancies
Strong demand combined with a decline in the availability of space inevitably leads to rising prices. By end-2017, the prime rent had increased in all cities in the Big 7 apart from Düsseldorf. The biggest rises were registered in Berlin (+11%), Stuttgart (+5%), Munich and Hamburg (+4% each). The prime rental price index increased by an average 4.1% last year, but in 2018 should rise by a lower rate (+2%). The trend towards higher rental prices in sub-markets outside the city centres should also continue. Provided that micro locations are suitable for users in terms of transport connections and infrastructure, they will increasingly become an option for new company locations.
The JLL prime rental price index for the Big 7 reached 194.5 points by end-2017 and thus attained its highest level since the fourth quarter of 2001. Compared to 2016, the index increased by 4.1%.
“On the whole, we are also positive for 2018. Given the strong economic data, companies remain on an expansion course. Unlike comparable cycles in the past, the increase in new building supply this time coincides with continued growth in user demand. It is certainly an exceptional case, which is reminiscent of the economic development. Here, we are also again experiencing an extremely rare scenario: better economic conditions at a time of low interest rates. Normally, interest rates are only low when the economy slows down. When the economy picks up, interest rates usually follow soon after. It seems that what was the exceptional case has turned into an enduring situation, and this also applies to the lettings cycle on the office property market,” said Timo Tschammler.