Office lettings cycle remains intact
Take-up in the Big 7 cities well above 900,000 sqm
FRANKFURT, 3rd April 2019 – The framework conditions for the German office lettings markets remained unchanged at the end of the first quarter of 2019. More sobering news reports again tended to dominate the headlines, and virulent topics such as trade conflicts and Brexit are still far from being resolved. This in turn had an impact on business sentiment. Owing to the difficult environment for exporters, the economic institutes are now forecasting economic growth of only 1.0% on average for the current year. “The domestic economy has been strong to date and should continue to be a mainstay of growth. Even the recent slight improvement in sentiment among c-level executives of German companies in March cannot yet be interpreted as a signal for a turnaround. Nevertheless, service providers, trade and construction are responsible for the upward trend, while export-oriented industry remains a problem child. Here, not only is the current situation rated more negatively, but expectations for the future seem to be at the worst level since November 2012,” said Timo Tschammler, CEO of JLL Germany.
Against this background, the willingness of companies to create new jobs has also deteriorated. In March the ifo employment barometer fell to its lowest level in two years. However, it should also be stated here that employment growth has merely slowed down, which in no way signals a decline in recruitment levels. But caution prevails, and even flexible office space operators that have expanded rapidly in recent years must accept that growth has its limits. “However, in the overall flexible office space industry we continue to see a high level of market activity owing to requests for space by the operators as well as considerable potential on the part of corporates that have ultimately decided to make use of such flexible space offers,” said Timo Tschammler.
Bigger challenge for companies seeking office space
At the end of Q1 2019, user demand was still met by a continuing decline in available space. In the period from January to end-March, the take-up volume in the Big 7 cities amounted to about 922,000 sqm, which is around 4% lower than in the previous year. Compared to the five-year average, take-up was 3% higher. “The cycle is intact. Companies generally still seek new, flexible spaces with the option to expand, and the fact that such options are difficult to find in the current market situation where there is sometimes a dramatic shortage of space is nothing new. However, companies seeking office spaces find it increasingly challenging to realise solutions that meet their specific requirements,” said Timo Tschammler. Tschammler added: “The alternatives are: remain in the current office space without the option to expand; move to a less central sub-market with a possible deterioration in accessibility for employees, or lease a space in a project development with a relocation date in one to three years. All options mean cuts or a significant financial burden for companies.”
Tschammler added: “It remains to be seen whether or not the economic downturn and a consolidation of employment growth will also have an impact on demand for office space over the course of the year. Although the lights are still on green for the services sector, some question marks hang over the industrial sector. For the DAX-30 companies alone, around 100,000 jobs are expected to go in the coming years. It’s true that these job cuts will not only affect Germany, and will also not only apply to desk workers. However, these plans signal the high level of uncertainty at executive level, especially among large industrial companies. Above all, recent developments in the Brexit debate and the possibility of the UK’s disorderly exit from the European Union threaten to have a negative impact primarily on export-oriented industrial sectors in Germany, with significant consequences for their workforces as well.”
The seven German property strongholds provided a mixed picture at the end of the first quarter. A decline in take-up was registered in three of the Big 7 markets (Frankfurt -31%, Munich -16% and Stuttgart -4%). In contrast, the two cities on the Rhine registered a strong increase: Cologne with +23% to 76,400 sqm and Düsseldorf by 22% to almost 110,000 sqm. Berlin boasted the highest office take-up volume at 217,500 sqm, and was also slightly up on recent years. That was somewhat surprising given that the vacancy rate fell further to below 2%.
“We are maintaining our forecast made at the beginning of the year for 2019 as a whole. We expect to see a take-up volume of approx. 3.8 million sqm, which would be almost 5% below the 2018 result,” said Timo Tschammler.
Flexible office space operators remain on an expansion drive
Flexible office space operators again accounted for a noticeable share of take-up in the first quarter of 2019. In total, 17 new locations were rented in five of the Big 7 markets with a total area of about 52,000 sqm. This corresponds to about 6% of the overall take-up volume, which is in line with 2017 and 2018. Berlin remains in the lead with 23,000 sqm, followed by Munich and Cologne, each with about 10,000 sqm. Four contracts took place in the 5,000-sqm-plus category, of which two were in Berlin. The largest deal with almost 10,000 sqm was signed by Design Offices in Bavaria Towers in Munich. The tenant was supported here by JLL.
“Operators of flexible office solutions are still pursuing expansion measures. New operators are also seeking suitable spaces in the Big 7. Berlin, Frankfurt and Munich are often at the top of the wish lists of international operators seeking a market entry. The markets are particularly suitable in Berlin and Munich, but larger office spaces are not available. For this reason, and as was already the case at the end of 2018, such operators are increasingly competing for space in project developments,” said Timo Tschammler.
Knotel (from the USA) and The Instant Group (from England) are two new entrants on the German market that also offer flexible office spaces. “However, the design and development of the spaces as well as other services are better adapted to specific customer requirements. This trend is already well advanced in the USA, London and Paris, and we also see great potential here in Germany,” said Helge Scheunemann, Head of Research at JLL Germany.
Low vacancy rate influences business development
The short-term supply of available office space in the Big 7 continues to decline. The aggregated vacancy rate for the Big 7 currently stands at 3.5%, which is one percentage point below the first quarter of last year. “The strongest declines in vacancy rates were registered in Berlin, Düsseldorf and Hamburg. Berlin was the first market in the Big 7 to fall below the 2% mark — a level last seen in Munich in 2002. By the end of the year, we expect the majority of the markets to see a further decline in vacancies. In central sub-markets, vacancy rates of even less than one percent are evident,” said Scheunemann.
Completions increase significantly in 2019 – only a quarter of the space is still available
Against the backdrop of strong demand for space and rising rents, the decline in vacancies over the years has led to increased activity by project developers and a higher construction volume. Around 4.1 million sqm of office space is currently under construction — most of which in Berlin (1.3 million sqm) and Munich (0.85 million sqm). Approximately 1.5 million sqm will be completed by end-2019, which is around two thirds more than in 2018. However, only 25% of the space planned for 2019 is still currently available, which is four percentage points below the level of the previous quarter. “This clearly shows that spaces in project developments are well received by users. They not only offer alternatives for space in a tight market, but also enable users to implement modern office work environments,” said Helge Scheunemann.
In the first quarter, however, this increase in supply is not yet evident. In Düsseldorf, Frankfurt, Cologne and Munich, no office spaces of a relevant size came on to the market between January and the end of March. The total cumulated completions in the seven property strongholds only amounts to 160,000 sqm.
Rents continue to rise in all markets
The current relationship between supply and demand continues to fuel rental price growth. The JLL prime rental price index has increased for the ninth consecutive year, rising by 6.4% year-on-year and reaching its highest level since 1992 at around 215 points. Compared to the first quarter of 2018, prime rents rose in all Big 7 markets, with the strongest increases in Berlin (+9.7%) and Cologne (+9.1%). Further increases are expected by the end of the year with the exception of Cologne, with leaders Berlin and Munich each registering an increase of €2.00/sqm/month to €36.00/sqm/month and €41.50/sqm/month respectively.