Office space supply sinks further across the board - Continuing strong demand
Press release including overview table [PDF]
FRANKFURT, 4th July 2018 – A historic debacle at the FIFA World Cup, a sprawling trade dispute, huge disagreements within the governing coalition and the EU: these events dominated the headlines at the end of the second quarter of 2018 — a year that at the start was still brimming with economic strength and promised positive growth rates. All this has changed. Not only have companies in the recent ifo index and ZEW index, which has fallen to its lowest level since November 2012, downgraded their assessment of the current situation, but economic research institutes have also adjusted downwards, in some cases significantly, their economic expectations for Germany in the current year.
According to Consensus Economics, GDP should increase by 2.1% (down from 2.4% in the previous quarter), while the institute is now expecting growth of below 2% for 2019. The decline in export activity has the most significant impact on the reduced growth forecasts. Since an end to the trade dispute with the USA is currently not in sight, the uncertainty of companies and the market turmoil will continue throughout the rest of the year. Nevertheless, the labour market continues to send positive market signals. The unemployment rate fell further to 5.2% in May. Nothing has changed in principle in the gap between the demand for labour and supply of skilled staff. The generally positive situation on the employment market strengthens private consumption, which is increasingly becoming the mainstay of the German economy. This will not change even after the loss in revenue expected in the restaurant business following Germany’s elimination from the World Cup.
Take-up volume has clearly stabilised again – flexible office space providers expand further
“At the end of the first quarter, we asked whether we faced a turnaround or a forced hiatus in the lettings volume. Three months later, it’s clear that the answer is a ‘forced hiatus’. Take-up in the seven office strongholds has clearly stabilised again, reaching almost the same level as the previous year with 1.83 million sqm,” said Timo Tschammler, CEO of JLL Germany.
Tschammler added: “The fundamental employment market data remains intact, and despite the political turmoil and economic uncertainty companies are still desperately seeking skilled workers. This search is not always successful. Some expansion plans therefore remain on hold and a potential move is deferred as a result. Even if a move is targeted and planned, it cannot always be realised in view of the continuing shortage of suitable office space. Both factors explain why we continue to characterise the current situation as a ‘forced hiatus’.”
Munich was again responsible for the largest take-up volume in the first half of 2018 with around 468,000 sqm of rented space and a 12% increase compared to the previous year, followed by Berlin with 391,000 sqm. The shortage of space is particularly noticeable in the German capital, causing take-up to decline by more than 8% in a year-on-year comparison. However, Hamburg and Cologne suffered the sharpest decrease of almost 23% and approx. 26 % respectively.
The net absorption figure, which increased significantly in the period from April to end-June compared to the previous quarter and amounts to a volume of 232,000 sqm for the first half of the year, shows that nothing has changed in terms of the fundamental desire of many companies to expand. “When they do move, it’s often the case that larger spaces are rented than before,” said Tschammler.
“Another relevant aspect of the current rental market is the continuing demand for space by flexible office space providers to support their ambitious expansion plans especially in the seven strongholds. We also observe here that owners of office space are increasingly receptive to the expansion wishes of these operators. Thus, these new flexible workplace models compete with the ‘normal’ spaces to be rented and users, faced with the current scarcity of space, are faced with the question of which concept opens up which opportunities and advantages for them,” said Helge Scheunemann, Head of Research at JLL Germany.
In the Big 7 locations, there were around 430 established and almost 60 planned flexible office space locations operated by a total of 240 providers at the end of June. Once all locations have been opened, close to 77,000 workplaces on 764,000 sqm of office space will then be available. In the current year, the previous year’s volume is likely to be significantly exceeded with a total area of 120,000 sqm. This also increases the share of the overall volume. After around 250,000 sqm was let to flexible office space operators in 2017, take-up in the first six months of 2018 already amounts to almost 116,000 sqm. This corresponds to a 6% share of the total take-up volume in the Big 7. The operators are particularly active in Frankfurt and Munich at present. These two strongholds alone account for almost 70,000 sqm of the take-up volume. The biggest deals in this segment were registered by Design Offices with 14,000 sqm in Munich and a further 8,600 sqm in Hamburg, as well as by WeWork in Munich with 11,600 sqm.
“For the second half of the year, we expect to see a continuation of the booming market for office space with sustained strong demand and a high potential willingness of companies to relocate, as well as an increasingly precarious supply side. We have slightly increased our take-up forecast for the full year to just under 3.9 million sqm, but it is unlikely that the previous year’s volume will be achieved,” said Timo Tschammler.
Vacancies continue to fall rapidly
The vacancy rate for the Big 7 fell by a further 20 basis points to 4.3% within the last three months. “If this pace is maintained, all vacancies in the Big 7 would disappear in around five years’ time. That’s certainly unrealistic. But considering how long it takes to build new projects from design to realisation, it is clear that we are still dealing with a significant lack of good space. The short-term supply of office space can only be described as sufficient in Düsseldorf and in Frankfurt, with vacancy rates of over 7%. In all other strongholds the vacancy rates are between 4.6% in Hamburg and 2.3% in Stuttgart,” said Scheunemann.
A turnaround would be realistic only with an increase in newly built space. However, this is not the case, because the full order books at construction companies leave little room for new orders. “This means that a pick-up in investments is further delayed, combined with maximum uncertainty as to when construction work can start on planned projects,” said Tschammler. Scheunemann added: “By the end of the year, we expect to see a further drop in the vacancy rate to 4.2%. For users that want to move or expand, the choice of existing spaces continues to be limited. They have the option of renting a space in a project development or a making a temporary move into a co-working or business centre space.”
New construction volume of 1 million sqm in 2018 only 5% above the five-year average
In the first half of 2018, almost 329,000 sqm of office space was completed across all seven strongholds. That's almost 20% less than a year ago. New building space only increased in two cities: in Dusseldorf by almost 18% and in Munich by almost 57%. The example of the Bavarian property stronghold clearly indicates that the strong relative increase is deceptive and the imbalance between supply and demand continues to exist. Only 63,500 sqm of new space ultimately came onto the market, but the vacancy volume fell by 11% in the same period.
In the second half of 2018, a further 674,000 sqm of new building space is likely to be added in the Big 7. Compared to previous expectations, this would slightly reduce the annual volume to just over 1 million sqm. “All in all, far too little, especially since around 38% of the space that will be completed in 2018 will be in Munich alone,” said Helge Scheunemann. Even more significant for the overall assessment is the fact that only 141,000 sqm (21%) is still available.
“As things stand at present, the postponement of projects has the effect that the number of completions should rise significantly next year. Currently, more than 1.9 million sqm is in the pipeline for 2019. That would be the largest volume in the past 10 years. Whether these spaces will actually be realised next year remains to be seen, and depends not least on the resources and capacities of the construction companies,” emphasised Timo Tschammler.
Rental price growth is broadening to more areas
The imbalance between supply and demand provides the ideal breeding ground for further rental price growth in almost all office strongholds. The growth is strongest in the two cities with the fewest vacancies: the prime rent in Berlin increased by almost 13% in a 12-month comparison, ahead of Stuttgart with an increase of almost 7%.
The JLL prime rental price index for the Big 7 reached 197.9 points at the end of June 2018, its highest level since the third quarter of 2001. In a one-year comparison, this represents an increase of 4.4%. By the end of the year, we expect to see a further increase in the index to 201.7 points, corresponding to a rise of 3.7% over the year. “In addition to the top locations, there is also corresponding demand in other sub-markets within the strongholds that leads to higher rental prices. In some instances, the higher rents in city centres and CBDs are forcing office users to turn to peripheral locations, particularly as space availability is also greater there. For the office markets, a broader distribution of demand is undoubtedly beneficial, even if such a move is not an option for all user groups,” stressed Tschammler.