Office lettings market stagnates at a high level
Office space take-up reaches 4 million sqm by end-2019; political risks increasingly difficult to predict in 2020
FRANKFURT, 7th January 2020 – The economic downturn even left its mark on the employment market towards the end of 2019. In December, the number of unemployed people in Germany increased on a monthly basis for the first time in six years. That means 47,000 more unemployment people were registered in December compared to November 2019, while the rate of unemployment grew by 0.1 percentage point to 4.9%. Although this represents only a marginal increase and still demonstrates the continuing healthy state of the German employment market, it nevertheless reflects less willingness among companies to recruit new staff and may even herald a turning point.
The German economy is currently sending out mixed messages. On the one hand, industry is in crisis and jobs are being cut. On the other hand, we still have a shortage of skilled workers while a somewhat healthier Ifo-index indicates that companies are more optimistic at the start of 2020. However, recent tensions between the United States and Iran have not yet been factored in to these statistics. The ball is now in the political court, and we will have to live with maximum volatility and fragile times in 2020. In any case, the risks develop a momentum of their own and appear increasingly difficult to predict.
The conflict in Germany’s economic affairs is also evident in the primary fundamental data, the future sustainability of which has yet to be proven against the backdrop of the US-Iran conflict. According to consensus economics, the economy is expected to have grown slightly by 0.5% in 2019, while growth of 0.9% is currently predicted for 2020. Private consumption remains a key pillar of the economy and is also expected to increase by 1.3% this year. However, the manufacturing sector is unlikely to generate much in the way of growth.
What does this all mean for the office lettings market? “The willingness of companies, particularly those in the service sector, to recruit new staff is of course an essential factor. This remains at a high level, although the trend for 2020 is pointing downwards. Thus it would come as no surprise if lettings take-up decreases in the Big 7 this year. However, net absorption remains positive and above average compared to recent years. We are certainly a long way from seeing a significant decline in demand,” said Timo Tschammler, CEO at JLL Germany.
Take-up volume slightly above previous year – but Big 7 presents very mixed picture
Office space take-up in the Big 7 slightly exceeded the 4 million sqm-mark by the end of 2019 (4.03 million sqm, an increase of 1.6% compared to 2018). Excepting 2017, this means that 2019 recorded the strongest take-up result of recent years — even though the traditionally strongest quarter of a year (from October to December) contributed less than a quarter of the overall volume. “It remains to be seen whether this is the beginning of a downward trend. Given the political risks and the general economic conditions outlined above, it would at least come as no surprise,” said Tschammler.
Developments within the individual markets proved to be somewhat variable, however. Stuttgart (+48% to 319,000 sqm), Düsseldorf (+33% to 550,000 sqm) and Berlin (+19% to almost 1 million sqm) registered take-up growth, while Frankfurt (-8%), Cologne (-5%), Hamburg (- 9%) and even Munich all failed to reach the previous year’s figures. Munich even sustained a sharp decline in take-up of more than 22%. “However, the latter result is still above the ten-year average, and it is also worth mentioning that companies such as Apple and Google have expanded their presence significantly in Munich. Together with the announcement from Tesla in Berlin, Germany is proving to be an internationally competitive location for the tech industry,” said Helge Scheunemann, Head of Research at JLL Germany.
Scheunemann added: “In 2020, we expect take-up in most of the seven large markets to decline by an average of 4% compared to 2019, to reach just under 3.9 million sqm. On the supply side it is still the case that little space is available in central locations. In terms of demand, the weakening economy will likely affect the office lettings markets with a corresponding time lag. In the medium term, extraordinary effects could become more noticeable on individual markets. For example, the automotive industry is of particular importance for the Stuttgart office market. Around 15% of take-up in the past five years was generated by this industry, including suppliers. This means that take-up by the automotive industry and its suppliers over the past five years in Stuttgart is equivalent to take-up by all industries in 2017.”
The topic of flexible office space remained one of the relevant market trends in 2019. For the third time in succession, take-up by flexible office space operators in the Big 7 exceeded the 200,000 sqm-mark. However, the 2019 take-up figure of 220,000 sqm was a good 18% below the previous year, and the fourth quarter was the weakest quarter of the year. A primary reason for this decline is the shortage of space in prime locations (especially in the Berlin and Munich markets). “Many operators are still on an expansionary drive, but landlords are looking more closely at the sustainability of the concept, particularly following the turbulence caused by the cancelled WeWork IPO. In our estimation, the take-up volume of this user group in 2020 will no longer exceed 200,000 sqm,” said Scheunemann.
Space remains in short supply – vacancy rate reaches the 3% threshold
There is nothing new to report on the supply side, at least with regard to space available at short notice. At the end of 2019, only 2.85 million sqm was available to companies seeking premises in the Big 7, confirming the slowdown in decline that was observed in the third quarter. While vacancies fell by an average 250,000 sqm per quarter in recent quarters, they declined by only 15,000 sqm in October to December. This trend is also evident in an annual comparison: while total vacancies in the Big 7 fell by 21% in 2018, a lower decline of 16% was registered for 2019.
Nevertheless, five of the seven strongholds show a double-digit percentage decrease in vacancies in a 12-month comparison, with values of between 12% in Frankfurt and 33% in Cologne. In Berlin, vacancies fell by “only” around 6%, but the German capital has the lowest vacancy rate in Germany at 1.8%. Only in Stuttgart did the vacancy rate increase year on year, albeit moderately by 0.1 percentage points to 2.3%. This was owing to the removal of tenants from around 20,000 sqm of office space, which has not yet been re-let. “Companies have for some time been seeking office spaces beyond sub-market borders and at times in secondary locations or even in surrounding areas, but increasingly without success. As a consequence, tenants are staying put, and are restructuring and renovating their existing premises,” said Scheunemann.
Scheunemann added: “The aggregate vacancy rate for the Big 7 stood at exactly 3% by the end of December, and was 0.6 percentage points below the previous year’s level. Even the increase in construction activity in 2020 will not be enough to prevent vacancies from falling again. On the contrary: we expect the average vacancy rate to hit the bottom this year at 2.9%.”
Completions reach highest volume since 2010
Office completions increased significantly last year, not only exceeding the 1 million sqm-mark with 1.12 million sqm but also attaining the highest completions volume since 2010. Compared to 2018, completions aggregated across all strongholds grew by 21%. However, the continuing decline in vacancies only serves to illustrate the degree to which newly built space has dried up, and it will still take a while to reduce the backlog in demand. And construction work is continuing: some 1.9 million sqm (currently a third of which is still available) is expected in 2020, followed by 2.6 million sqm a year later.
Despite the high capacity utilisation in the construction industry, in terms of the volume of space more projects were also started in the fourth quarter than office space completed within the same period. Currently, more than 4.4 million sqm are under construction in the Big 7, and this many cranes have not been in service since 2001. The biggest share of building activity is still concentrated on Berlin and Munich. Around 1.5 million sqm is under construction in Berlin (53% still available) and 858,000 sqm in Munich (37% available). From 2021, the increase in supply will also have a noticeable impact on the vacancy rates in these markets.
Rents rise in each Big 7 city for the second consecutive year
The strong demand for space combined with a further decline in supply has caused office rents to rise in the Big 7 since 2010. In 2019, the aggregate prime rent increased by 5.4%. The JLL prime rental price index (as the average value of the prime rents in the Big 7) is currently listed at 218 points, the highest value since 1992.
The market leaders are Cologne (+11%) and Berlin (+9%). “In 2020, prime rents will continue to rise, albeit at a weaker rate. The aggregate prime rental price growth for the Big 7 is expected to reach 3.9%. Higher growth rates can be expected in other sub-markets, although starting from a lower level than in the CBD,” said Tschammler.
Rising rents mean much higher costs for users. Those who still have contractually secured options can count themselves lucky and make use of them. The substantial increase in personnel in recent years means that some offices are now bursting at the seams. A move then becomes inevitable, and higher rents can only be avoided by moving to secondary locations (not an option for all companies) or through the adoption of modern workplace concepts to make better use of existing spaces.
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