Office Market Overview
Germany’s office rental market shows no signs of weakness in 2022
Surprisingly disappointing fourth quarter causes a weaker full-year result in Berlin
Berlin’s office rental market registered a total take-up of around 765,000 sqm in 2022. This result was 12% lower year-on year (870,800 sqm) and 2% below the 10-year average. Seven leases were concluded in the > 10,000 sqm size category (128,300 sqm) and 14 in the 5,000 - 10,000 sqm bracket (96,200 sqm in total). Around 71% of lettings were concluded for units of up to 5,000 sqm (540,500 sqm). Looking at the price segments, both the highest number of deals and highest letting volume were registered in the €25.00 - 29.99/sqm p.m. price segment (255 deals and 183,000 sqm). Business services were responsible for the highest volume of take-up (118,400 sqm in 147 deals), with IT once again firmly in second place (99,700 sqm and 103 deals).
The vacancy rate increased slightly from 4.1% to 4.4% compared to the previous year (Q4 2021) and is expected to rise further to 5.2% by the end of this year. The main reason for this is an expected market weakness in the first quarters of the year, followed by an increase in demand in the second half of the year. Berlin’s prime rent increased over the year, from €39.00 to €41.50/sqm p.m. and is expected to rise further in 2023 due to high building costs and strong demand in the high price segment.
Achievable prime rent reaches new record level after significant rise
Düsseldorf’s office rental market recorded 318,000 sqm of take-up in 2022, with around 284,000 sqm of this figure secured in the city itself. Although the result was almost on par with the previous year (-2%), it was 20% below the 5-year average. The two largest lettings had already been registered in the second quarter: Volkshochschule Düsseldorf secured around 17,600 sqm in an existing property in the North submarket and Ernst & Young rented around 14,700 sqm in a project being built in the Government District. The third deal in the > 10,000 sqm size bracket was concluded by an owner-occupier (Bau- und Liegenschaftsbetrieb des Landes NRW) which will occupy approximately 12,900 sqm in the doubleU building in the North submarket. Business services were responsible for more than a quarter of the total take-up, followed in second place by public administration with 15%.
Although almost unchanged year-on-year, the vacancy rate remains at a relatively high level of 7.9%. Approximately 733,000 sqm of office space is available in the short term, 543,000 sqm of which is in the city itself. However, the short-term supply of prime space in existing buildings in the city's best and most coveted submarket, the Central Business District, is just around 35,000 sqm. There will be a noticeable improvement in this segment over the next few years, with new buildings of outstanding quality coming onto the market in the prime location, Königsallee. This future supply pipeline will be welcomed by the renowned companies that are also willing to pay significantly higher rents than before for such high-quality, ESG-compliant space. As a result, the achievable prime rent once again increased significantly from €30.00/sqm p.m. to €38.00/sqm p.m., to reach a new record high at the end of the year. The weighted average rent also increased significantly year-on-year, to reach its highest-ever level of €19.12/sqm p.m.
Frankfurt’s office market shaped by strong demand for high-quality properties in 2022
Around 430,800 sqm of office space was taken up in Frankfurt’s office rental market in 2022. This is 8% less than the previous year and 21% below the 5-year average. The result was mainly due to weaker demand in the final quarter, with a number of high-volume deals postponed until 2023. Nonetheless, the number of deals concluded was higher than the previous year (599 sqm compared to 541), reflecting an increased average deal size (719 sqm compared to 865 sqm). High-volume deals (> 5,000 sqm) accounted for 13% of the total volume, compared to 24% in 2021. In 2022, business services were responsible for the strongest demand and accounted for 25% of the total take-up. Banking and finance followed in second place with 20%. The most popular submarket was the Banking District which accounted for almost one in every five square metres let.
Significantly less was built in 2022 than in the same period in 2021 (130,500 sqm compared to 191,800 sqm). The most important reason for this reduction was the shortage of materials and rising building costs. In relation to the market as a whole, the vacancy rate continued to rise during the year, from 7.7% to 8.5%, and the proportion of the most expensive lettings (at rents upwards of €30.00/sqm p.m.) rose from 23% in 2021 to their current level of 32%. The prime rent increased over the year, from €42.50 to €46.00/sqm p.m. (+4%), and will continue to rise in 2023 due to the unwaveringly strong demand for high-quality office space.
Second-best result in ten years thanks to major lettings
In 2022, just under 598,000 sqm of office space was taken up in the Hamburg office market, an increase of 17% compared to the 10-year average (2012-2021). Five major lettings are largely responsible for this result, including those by Dataport AdöR, Haspa and HPA Hamburg Port Authority. Take-up in the > 10,000 sqm size category alone accounted for almost one fifth of the total volume. The submarkets with the highest volume of take-up were the City Centre, HafenCity and City Süd (Outer Zone), which together accounted for half of the total volume. Analysed by sector, business services was the most active at just under 15%, with IT and manufacturing following with 13% each. Despite the macro-economic climate, we continue to see strong demand, especially with a focus on prime properties in the top locations. Take-up is expected to be in the region of 450,000 sqm for the year as a whole.
The vacancy rate is currently 4.2%, corresponding to a total volume of 643,800 sqm. 535,000 sqm of new space under construction can be added to this figure, with the highest levels of new construction activity currently to be found in HafenCity, the City Centre and Airport-Groß Borstel. The prime rent is €34.00/sqm p.m., up €1.00 on the same quarter last year, whilst the weighted average rent has risen by €0.29 to its current level of €21.17/sqm p.m. over the same period.
Stable annual take-up and increase in prime rent to €28.50/sqm
Cologne's office rental market registered its third best result of the past 10 years with a take-up of around 326,000 sqm, a result which was almost on par with 2021 (-1%) and exceeded the 5-year average by 13%. An above-average initial two quarters (around 230,000 sqm) was followed by a weak second six months (just under 97,000 sqm) and slowing momentum towards the end of the year, with the fourth quarter registering the lowest quarterly result of the last 10 years with around 31,000 sqm. At just under 100,000 sqm, public administration was the most active sector in the market, concluding two of the (by far) largest lettings of the past five years: Bundesanstalt für Immobilienaufgaben (BImA, Institute for Federal Real Estate) secured around 45,000 sqm in the Friedrich und Karl project in the Ossendorf/Nippes submarket and the City of Cologne signed a lease for around 38,800 sqm in the former Kaufhof headquarters in the City submarket. Although most leases were signed by business services (21%), the sector secured just around 37,000 sqm (11%) of the total take-up.
The vacancy rate fell slightly over the course of the year and is at a very low level of 3.0%. Just 15% of the available space is of top quality specification. The low supply of such space in this segment combined with strong tenant demand led to a renewed rise in the prime rent in the fourth quarter to its highest-ever level of €28.50/sqm p.m. The weighted average rent also increased by around 5% to €17.56/sqm p.m.
Munich’s office market experiences a strong year in 2022
760,100 sqm of office space was taken up in Munich’s office rental market in 2022. The result was 15% higher than in the previous year and on par with the 10-year average. At just under 159,000 sqm, the fourth quarter was 28% weaker than the same quarter of the previous year. Nine deals in the > 10,000 sqm size category and a further 120 deals of units of 1,000 - 2,500 sqm contributed to the good annual result with 22% and 24%, respectively. Analysed by sector, business services and IT were almost on a par in 2022 with 22% each. Looking at the submarkets, the City Centre led the annual ranking with a take-up of 164,800 sqm, or 22% of the total take-up.
894,000 sqm of space is available to prospective tenants in the short term, which means that the vacancy rate remains unchanged at 4.1%. Around 1.2 million sqm of new space is currently under construction, and a total of 375,000 sqm of office space was completed in 2022. This completion volume is a rise of 12% year-on-year and 52% up on the 10-year average. The strong demand for top-quality, centrally-located space is also reflected in the slight rise in the prime rent to €44.00/sqm p.m. compared to the previous quarter. This is €2.00, or 5%, higher than in the same quarter last year. The weighted average rent increased by €0.52, or 2%, to €24.12/sqm p.m. over the same period.
Previous year's result in Stuttgart has more than doubled
Around 306,000 sqm of office space was taken up in Stuttgart's office rental market in 2022, an increase of 112% on the previous year. With increases of 43% and 23% respectively, the comparisons to the 5-year and 10-year averages were also very positive. The strong result was mainly driven by activity in the first two quarters, in which 71% of take-up was achieved and four owner-occupier deals with a total volume of around 120,000 sqm were concluded. Analysed by sector, insurance companies performed the strongest with 24% over the year, which can be attributed mainly to the Allianz deal with 65,000 sqm. Vaihingen-Möhringen was the strongest submarket in 2022, accounting for 40% of take-up, followed by the City Centre with 16%. Whilst the result for Vaihingen-Möhringen can be attributed mainly to three high-volume deals and a total of 23 deals, 85 deals were recorded in the City Centre, a number which illustrates the enormous demand for high-quality office space in city centre locations.
The strong demand is also reflected in the sharp rise in the prime rent in the fourth quarter to €33.00/sqm p.m., which corresponded to an increase of €7.50/sqm p.m., or 29%, compared to the same quarter last year. 235,700 sqm of space is currently available to prospective tenants, which signifies a slight rise in the vacancy rate to 2.6% compared to the previous quarter. 195,700 sqm of office space is also currently under construction.
Germany’s office rental market shows no signs of weakness in 2022
The current situation is causing a downturn in sentiment. This describes the past year in terms of economic trends and Germany’s office rental market. 2022 ended with an office take-up of 3.5 million sqm in the country’s seven major real estate strongholds, exceeding the same period last year by 6.5%. Few had expected such a robust growth in the market in the face of numerous challenges. The market has become more differentiated than ever before and a decoupling of prime office rents and vacancy rates was observed in the major cities. Today, it is no longer a paradox that both are rising in parallel. Whilst fierce competition for ultra-modern and ESG-compliant space is driving up rents in prime locations, it is proving increasingly difficult to find occupiers for peripheral locations with lower quality space, which is leading to a rise in availability. Both must be kept in mind when evaluating the market.
All the indicators that regularly survey the mood of consumers and companies show a rather gloomy picture at the end of the year. Nonetheless and to the surprise of most experts, some facts have turned out much better than expected. These include economic growth, which has not declined in the last two quarters but still registered a slight increase. Among the other positive surprises are the developments on the labour market: here, despite the energy crisis, high inflation and supply bottlenecks, the number of people in employment in Germany rose last year to a record level. Employment increased by 589,000 or 1.3% to around 45.6 million. Not since 1990 have so many people been in gainful employment.
This was due to the influx of foreign workers and an increase in the labour force participation of the domestic population. Almost the entire increase in employment, around 548,000 people, can be attributed to the service sector which, in purely arithmetical terms, created a need for additional office space (whether in the office, at home or in a co-working space) of around eight million sqm, if we assume 15 sqm per person. For the German economy and therefore also for the office market, attention is focused in particular on the following factors for 2023:
- Slightly negative economic growth is expected in the first two quarters of 2023. The strength of this decline, or whether a recession can be avoided altogether, will depend on developments in the USA and especially in China. Here, it will depend on whether the current Covid wave can be brought under control. Otherwise, there could be renewed supply chain disruptions, supply bottlenecks, and new impetus for inflation as a result.
- Energy supplies and savings, both in households and industry, remain a key issue, especially in terms of Winter 2023/24.
- Companies in Germany are under immense cost pressure. Alongside energy costs, these include investment in sustainability goals and investment in employees and jobs.
In the office rental markets in Germany, cost pressure from companies is leading to a decline in expansive-driven demand, and an increased focus on lease extensions in an effort to avoid cost-intensive relocations. Some companies are also likely to seek to sublet any of their own space that is surplus to requirements.
Demand is robust, but the picture is mixed
These trends are not yet reflected in the current figures for the end of 2022. Although the office space take-up of 3.5 million sqm exceeds the previous year’s result, there are variations evident within the Big 7 office markets: whilst take-up in Stuttgart more than doubled to 305,000 sqm compared to 2021, the rental volume in Berlin fell by 12% to 765,000 sqm. In the capital in particular, companies from the technology sector, which were partly responsible for the boom in demand in recent years, have been less active. But across all cities the following considerations are generally applicable to users’ search criteria:
- The property must be well connected to public transport;
- The surrounding area must have good infrastructure and amenities;
- The office space must have a very good fit-out specification; and
- Sustainability requirements must be met.
These aspects are increasing significantly in importance. They include not only energy consumption and carbon emissions, but also social components such as a feel-good atmosphere, and flexible working hours and workplace models. Offices have to be attractive to be used.
All this can be attributed to the ‘Flight to Quality’ trend. In 2022, Grade A space accounted for around 70% of new lettings; with a rental take-up of 3.5 million sqm in the Big 7, that is still almost 2.5 million sqm of top-quality space that has found an occupier.
For 2023, JLL anticipates a decline in demand of around 10% over the year as a whole due to the imminent economic downturn. However, the market must be seen in the context of the different sectors. Office rentals are traditionally dominated by the service sector. Business service companies alone have accounted for more than 17% of rental take-up on average over the past ten years. The situation is different for industrial companies which also require office space, often on a larger scale, and which are in second place over the long term, with an average share of almost 13% of take-up. However, the extent to which the current crises surrounding supply chains, inflation and energy are having an impact on the overall corporate cost balance is evident from the noticeable slump in their share of take-up to 8% in 2022. This year, especially in manufacturing, we will see a dichotomy emerge between energy-intensive sectors such as the chemicals and steel production companies, and less energy-intensive segments such pharmaceuticals. This is likely to be reflected in the number of employees and therefore in the demand for office space.
Vacancy rates and space available for subletting continue to rise, albeit moderately
In the past year, rising demand was matched by an overall increase in supply in space available at short notice (vacancies) and completed new-build space. As a result, the vacancy rate across the Big 7 increased by just under 9% year-on-year to 4.7 million sqm, with the vacancy rate rising accordingly from 4.5 to 4.9%. The trend of only moderately increasing vacancy rates observed since the beginning of the year continued in the final quarter of 2022. JLL expects the volume of vacancies to rise more sharply, especially for poorer quality office space: With occupiers focusing on prime space, when a move is completed, the space released rarely meets the requirements of new tenants and becomes vacant. Such space can only be placed on the market with corresponding rent reductions or after a comprehensive refurbishment. This situation ultimately means that the volume of vacancy is no longer the sole indicator for rental trends. With companies adopting new workplace models, more space is expected to be released than additionally rented. JLL therefore expects the vacancy rate to increase by 60 basis points over the year, to reach 5.5%. As a consequence, some companies are breaking new ground. In times of crisis, subletting to reduce space and costs is always an option. Currently we have recorded a volume of 735,000 sqm on offer on the market in this form. It makes up just under 16% of total vacancies, which is only a slight increase of 2 percentage points compared to 2021. Although the volume of space available for subletting is likely to increase during 2023, we do not anticipate a sharp rise in this indicator. If space is not currently needed, many companies see it as a strategic reserve, either to implement new workplace concepts or to continue offering attractive office workplaces to new employees. Alongside general economic trends, much will depend on the extent to which new or refurbished space is completed on time and ready for occupancy. Survey data from the construction industry published by the European Commission signals some improvement here. Only around 30% of the developers surveyed report materials and supply bottlenecks that hinder their construction activities, compared to over 50% in May 2022.
Slight easing in building prices – project pipeline stabilizes
Building prices also improved towards the end of the year. The Federal Statistical Office’s Building Price Index rose by just 2.8% for office buildings at the end of the third quarter, down from 6.8% in the second quarter and 4.7% in the first quarter of 2022. However, the situation will remain volatile in 2023, as global material and commodity prices continue to normalise in the absence of further military escalations and, above all, new lockdowns or disruptions to manufacturing in China. A further 500,000 sqm of office space was completed in the final quarter of 2022, bringing the year’s new construction volume to 1.76 million sqm, around 10% more than in 2021. Over 70% of this space was already let at the time of completion. Over the past three months, the completion of almost 200,000 sqm more, planned for 2022, has been delayed until 2023. As things stand, around 1.8 million sqm of space is currently in the pipeline for this year, most of which is already under construction. Currently occupied or pre-let space makes up 55% of this, but this share is likely to rise further over the course of the year.
Prime rents rise year-on-year at their highest rate since 1992
The current growth in prime rents could hardly have been expected with the momentum which has now been registered. In the fourth quarter, JLL’s Prime Rental Price Index rose at its highest rate since 1992, reaching over 257 points, an increase of 13% compared to the previous year.
Across the Big 7, the prime rent has moved upwards, in some cases significantly, by between just under 5% in Munich (to €44.00/sqm) and more than 33% in Düsseldorf (to €38.00/sqm). Rental increases were to be expected, but not to this extent. The prime rent in Stuttgart also continued to rise and, with an increase of 29% to €33.00/sqm, achieved a similar rise to that of North-Rhein-Westphalia’s state capital. This was due not only to individual and small deals, but also to the letting of thousands of square meters in some cases. Düsseldorf and Stuttgart are representative of a trend that can be observed in all major cities: the early securing of high-quality space in the best locations, especially by service companies in fierce competition for skilled workers and talent. Combined with increased building and fit-out costs, such lettings lead to correspondingly high-priced deals.
JLL expects demand to remain strong and persistently high for prime properties in the best locations in 2023. Companies, especially in business services, are willing to increase their investments in space. There are also signs of a slight easing in the service charge burden (especially in terms of electricity and gas charges) and JLL expects prime rents to continue to rise as a result.
Our Office Market contacts:
Stephan Leimbach, Head of Office Leasing Germany
Jan Eckert, Head of Capital Markets DACH & Office Investment Germany
Helge Scheunemann, Head of Research Germany
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