Research
Office Market Overview
Q1 2023
Office letting market somewhere between tactical hiatus and high demand
Berlin
Weakest take-up performance in Berlin since 2014
The space take-up and number of letting deals in Berlin during the first quarter of 2023 were the weakest since 2014 with 140,600 sqm and 152 deals. As in 2022, the first quarter saw four large transactions in the >5,000 sqm size category, including two in the >10,000 sqm category. The most active submarket was Mediaspree (23,900 sqm), followed by the Eastern Suburb (22,400 sqm). The most active sector was Business Services which increased its share of total take-up from 15% in 2022 to 22%.
The vacancy rate rose slightly from 4.3% in 2022 to its current level of 4.5%. This is likely to rise to around 5.2% by the end of this year. The most significant growth in vacancy was in Berlin Mitte (173,000 sqm compared to 107,200 sqm in 2022), while the Berlin-Brandenburg Airport submarket heads the vacancy statistics at 38%. Just 45,400 sqm was completed during the first quarter of 2023, compared to 296,400 sqm in the same quarter in 2022. This fall may be explained by the overall difficulties being experienced by the construction sector. It is also one of the reasons why the vacancy rate remains at a moderate level.
The prime monthly rent rose from €41.50/sqm in the fourth quarter of 2022 to its current level of €42.00/sqm. The average monthly rent has risen by over €1.00/sqm year-on-year (€28.71/sqm compared to €27.59 in 2022). Over the first quarter of 2023, just 8% of lettings were concluded at rents below €20.00/sqm, down from 16% in the first quarter of 2022. By contrast, the share of lettings concluded at rents above €40.00/sqm has risen from 5% to 22%.
Office Market Areas with Rental Bands Berlin
Dusseldorf
Weak start to the year, with only the first quarter of 2021 performing worse
There was a take-up of 72,000 sqm in the Düsseldorf office letting market in the first quarter of 2023. Of this, 63,100 sqm was taken up in the city area. The total take-up is the second weakest first quarter result since 2005, with only the first quarter of 2021 performing worse. This is mainly due to the absence of large deals in the >10,000 sqm and 2,500 – 5,000 sqm size categories. The three largest transactions were the lettings of just under 10,000 sqm to Hengeler Müller in the CBD submarket, 5,600 sqm to NGK Spark Plug Europe in Ratingen and 5,300 sqm to Züblin AG in the Airport submarket. These lettings are reflected in the ranking of both submarkets and sectors. The most active submarkets were the CBD with a share of 23% and the Airport submarket with 19%. The most active sectors were Business Services with 24%, ahead of Manufacturing with 15% and Construction & Real Estate with 11%.
Over the last three months the vacancy rate has risen by 0.7%-points to its current level of 8.6%. Just under 800,000 sqm office space is available for take-up by prospective tenants in the short-term, of which almost 610,000 sqm is in the city area. Around 45,000 sqm is currently available in the sought-after CBD submarket. Over the coming years, considerable new-build space of outstanding quality will come onto the market, including in the top location along Königsallee. This supply will be targeted at high-profile companies that are willing to pay significantly higher rents than before for high-specification, ESG-compliant space.
At year-end 2022, the prime monthly rent had risen significantly to €38.00/sqm, where it remains. By contrast, the weighted average monthly rent rose by almost €2.00/sqm within three months to its current level of €21.10/sqm.
Office Market Areas with Rental Bands Dusseldorf
Frankfurt
Large numbers of small letting deals in the first quarter of 2023
The Frankfurt office letting market experienced a weak first quarter with a take-up of 83,400 sqm. This is considerably down on the same period the previous year (114,100 sqm). The result reflects the greater sensitivity amongst prospective tenants when making leasing decisions in view of the political and economic uncertainties, especially for those seeking larger premises. Most deals were in the <2,500 sqm size category with around 70% of all take-up, up from 55% from last year. The share of lettings in the >5,000 sqm size category fell to 19%, down from 38% in 2022. The largest transaction was a letting of 9,600 sqm in the Timber Pioneer Building. The Banking District, City Centre and Frankfurt West submarkets accounted for 55% of take-up (30% in 2022), which is explained by the greater market focus on the best located submarkets. The space taken-up by Business Services rose from 14,100 sqm in the fourth quarter of 2022 to 16,900 sqm in the first quarter of 2023, overtaking the Banking & Finance segment with 14,300 sqm, down from 22,900 sqm.
The vacancy rate of 7.9% in the first quarter of 2022 has now risen to 9.0% and is likely to stay at this level for the rest of the year. The year-on-year increase in vacancy was especially pronounced around the airport (from 15% to 24%) and in Kaiserlei (from 11% to 16%).
Around 335,300 sqm are currently under construction, with the greatest share of 98,100 sqm in the Banking District. The average monthly rent rose to €25.75/sqm from €22.73/sqm in the previous year. The prime monthly rent remained at €46.00/sqm but could rise to €47.00/sqm by the end of the year.
Office Market Areas with Rental Bands Frankfurt
Hamburg
Space take-up starts year at low level
There was a take-up of almost 98,000 sqm in the Hamburg office letting market in the first quarter of 2023. This corresponds to a fall of 29% compared to the same quarter the previous year. There were no large-scale lettings in the >10,000 sqm size category. The largest transactions were lettings of 6,800 sqm to the Internationale Hochschule in the Eppendorf-Harvestehude-Rotherbaum submarket, 6,700 sqm to Telefónica Germany in the City Centre and 5,300 sqm in the Harburg - South of River Elbe submarket. The submarket ranking reflects these three deals: the City Centre heads the letting statistics with a share of 25%, followed by Harburg - South of River Elbe with 13% and Eppendorf-Harvestehude-Rotherbaum with 11%. The most active sectors in terms of demand are Business Services with 17%, followed by Education, Health & Social and Transport & Storage with 14% and 9%, respectively.
We estimate a potential full-year take-up of 450,000 sqm in the event that currently ongoing large-scale enquiries materialise. The majority of enquiries are directed at prime properties in the best locations.
The vacancy rate has risen by 0.2%-points to 4.4% over the last three months. There is 687,000 sqm of space available in the short-term and 581,000 sqm of new space currently under construction. The highest level of construction activity is currently in the HafenCity and Airport Groß Borstel submarkets and in the City Centre. The prime monthly rent rose to its current level of €34.00/sqm in the third quarter of 2022. The weighted average monthly rent is now €21.08/sqm.
Office Market Areas with Rental Bands Hamburg
Cologne
Significant hike in prime rents in the first quarter
There was a space take-up of 51,200 sqm in the Cologne office letting market in the first quarter of 2023, corresponding to a 35% fall compared to the same quarter the previous year. This is 30% below both the 5-year and 10-year averages. Over the last 10 years, only 2020 started with a weaker letting performance. The most active sector was Business Services with 12,800 sqm, followed by Banking & Finance with 11,100 sqm. The Cologne office letting market has a diverse sector mix. The two largest deals were the letting of 9,200 sqm to the Kirchliche Zusatzversorgungskasse des Verbands der Diözesen Deutschlands and 7,300 sqm to the Boston Consulting Group. With a take-up of 22,600 sqm and a share of 44%, the City Centre submarket reconfirmed its significant contribution to Cologne as an office location.
The vacancy rate has remained at the very low level of 3.0%, as in the previous quarter. The lack of supply combined with the increased demand for space with a top-quality fit-out resulted in a significant increase in prime monthly rent at the beginning of the year. This has risen by €3.50/sqm or 12% compared to the previous quarter to its current level of €32.00/sqm. It is also an increase of €5.50/sqm or 21% compared to the same quarter the previous year. The weighted average monthly rent has also risen by around 13% to €18.55/sqm over the same period.
Office Market Areas with Rental Bands Cologne
Munich
Large number of small deals in the office letting market in the first quarter
There was a space take-up of 119,900 sqm in the Munich office letting market in the first three months of 2023. This is 34% below the 5-year average and 36% below the 10-year average. The last time the city experienced such a weak start to the year was in 2004. The first quarter of 2023 was characterised by a large number of small to medium-sized lettings, which is reflected by the relatively small average area of 753 sqm. There were just two deals with areas in the >5,000 sqm size category registered in the first quarter, both in peripheral submarkets. The most active sector in the first three months was Business Services with 23,600 sqm and a share of 20%, just ahead of Manufacturing with 22,700 sqm and a share of 19%. The most active submarket over the first quarter was Periphery North with a share of 20%, followed by the City Centre with 17%.
952,400 sqm office space is available for take-up by prospective tenants in the short-term. The vacancy rate has risen to 4.4%, a rise of 0.3%-points compared to the previous quarter. 1.14 million sqm is currently under construction, so there is a healthy project pipeline.
The prime monthly rent in the Munich office letting market is now €44.50/sqm, €2.50/sqm or 6% above the same quarter the previous year. The weighted average monthly rent has risen by €1.15/sqm or 5% over the same period to its current level of €24.50/sqm.
Office Market Areas with Rental Bands Munich
Stuttgart
Restrained start to 2023 in the Stuttgart letting market
There was a take-up of 42,400 sqm in the Stuttgart office letting market in the first quarter of 2023. This corresponds to a fall of 53% compared to the same quarter the previous year and is 36% and 32% below the 5-year and 10-year averages, respectively, which is a very poor performance. The owner-occupier transaction of 7,000 sqm by the Deutscher Apotheker Verlag contributed significantly to the quarterly performance. There was just one large-scale deal, the letting of over 5,600 sqm to the Bundesanstalt für Immobilienaufgaben in Leinfelden-Echterdingen. The most active sectors were therefore Media & Publishing and Public Administration with shares of 21% and 20%, respectively. The most active submarkets are Feuerbach with a share of 20% and Leinfelden-Echterdingen with 19%, followed by the City Centre in third place with 16%. The highest demand is for well-appointed space close to the CBD. Around 27% of all deals were completed in the City Centre submarket. The fact that the leased area lags behind other submarkets is mainly due to the lack of availability of larger areas of contiguous space in the CBD.
There has been a rise in the vacancy rate in Stuttgart for the first time since 2017. This is now at 3.5%, which corresponds to a volume of around 322,000 sqm. Approx. 217,000 sqm office space is currently under construction.
The prime monthly rent rose significantly in the fourth quarter of 2022 to its current level of €33.00/sqm. This is an increase of 12% compared to the same period the previous year.
Office Market Areas with Rental Bands Stuttgart
Office letting market somewhere between tactical hiatus and high demand
There was a subdued start to 2023 in the office letting markets of the Big 7 German real estate strongholds, with almost no lettings above 5,000 sqm. Total market take-up was 607,000 sqm, which corresponds to a fall of around 30 percent compared to the first quarter of 2022. Where letting volumes in 2022 were something of a pleasant surprise, the dip in the first quarter of 2023 was only to be expected, but it could also be interpreted as a temporary lull. While potential demand remains robust and companies are benefiting from a slightly improved economic environment, costs and uncertainties are impacting corporate decision-making processes.
The office letting market has experienced a rough ride since New Year and momentum has declined noticeably after the exceptionally strong year in 2022. In the medium term, we continue to see strong demand and a healthy pipeline. While deals are getting smaller, building quality, ESG criteria and central locations are playing an increasingly important role, so competition and rental price development remain dynamic. The various business sectors are also behaving highly divergently.
The developments in the individual sectors must be seen in the context of the differentiation between the economy and the labour market. Increased energy and personnel costs do not affect all sectors equally, and even if gas and electricity costs have settled back to a significantly lower level, concerns about additional wage costs remain and are not only impacting companies but also the European Central Bank. The bank sees the danger of a wage price spiral due to the continually high core inflation rate. The latest wage settlements negotiated between employers and trade unions are well over 10 percent in some cases and agreements have not yet been reached for all employees. Assuming there is an average wage hike of 10 percent for all 11 million unionised workers, this would bring additional costs of over €3 billion for the companies concerned. It remains to be seen whether and to what extent this additional cost burden will be passed on to customers and suppliers.
By contrast, staff and therefore consumers benefit from wage increases, which has already been reflected in the brighter sentiment during March. The relevant GfK indicator rose to its highest level in 10 months. Sentiment is also continuing to brighten in company boardrooms. Despite the recent banking tremors, the Ifo business climate index rose to 93.3 points from 91.1 points in the previous month. This was the fifth successive increase. Expectations for the next six months have improved significantly, including in the construction sector which has been badly hit by the interest rate turnaround.
The underlying conditions supporting moderate optimism in the office market are now in place. Better business prospects appear to compensate for higher costs and an expected slowdown in bank lending. Based on all factors in our evaluation, we expect that the total letting volume will be up to 10 percent lower than in 2022. At 3.1 million sqm, this would nevertheless be a result which would only be 10 percent below both the previous year's performance and the 10-year average.
Downturn in space take-up in the first quarter due to the lack of large-scale lettings
With a take-up of 607,000 sqm, the Big 7 real estate strongholds have been anything but consistent. Although no city was able to escape a downturn, it was more moderate in Düsseldorf (-20 percent) and Berlin (-22 percent) than in Stuttgart (-53 percent) and Munich (-39 percent).
Large-scale deals in the >5,000 sqm size category were barely in evidence in January to March. This is particularly evident in Munich where just two large deals over 5,000 sqm were registered and the average area per letting was just 753 sqm. However, some large lettings are still in the pipeline and could be completed during the year, which will have an impact on total take-up. We see good marketing opportunities, especially for larger units with new space concepts. There is a chance of another very good year because the current enquiry situation is as strong as it was back in early 2020. The question is how much of this can be completed this year.
The aftermath of the COVID-19 pandemic has not entirely dissipated and many companies are repositioning themselves or reviewing their workplace concepts. The pressure to change in the office segment remains high and often requires fundamental realignments to enable companies to survive in the labour market over the next few years. Sustainable properties with clear ESG criteria are in particular demand, including a contemporary and high-specification technical fit-out concept. This will also tend to shape demand this year. Even in the first quarter, the proportion of space take-up attributable to Grade A space was almost 70 percent. The maxim is: it does not always have to be a larger area than before, but better quality and therefore more expensive space. According to a JLL survey, more than 60 percent of companies are pursuing a hybrid working strategy involving both office work and working from home. Offices, especially in central locations, remain part of this strategy.
In terms of tenant mix, it is evident that the globally weakening tech sector is behaving more cautiously on the German office market. This applies to both further expansion plans and the current space requirement. Price sensitivity has increased across the board, and JLL has observed that more space in this sector is being marketed for subletting. By contrast, management consultants, tax advisors and law firms continue to grow, and their willingness to pay for premium space in central locations is still evident.
Vacancy is above 5 million sqm in the Big 7 cities for the first time since 2016
The vacancy level in the Big 7 cities rose to over 5 million sqm for the first time since the end of 2016. This corresponds to an increase of 12 percent compared to the same quarter the previous year. The vacancy rate therefore rose to 5.2 percent. The period of almost seven years of scarce supply on the office market is now “unofficially” over with a vacancy rate of over 5 percent. Nonetheless, JLL still does not see an excess of supply, and this confirms the forecast of a further moderate increase in vacancy rate to 5.8 percent by the end of 2023. While plenty of space is available in Frankfurt and more construction is under way, elsewhere space is already in much shorter supply and developments are slowing down. Those cities will be heading for a supply bottleneck in around two years’ time, which is already becoming apparent, and this will tend to increase the pressure in the respective markets.
The differentiation between top space in high demand and poorer quality offices continues. That part of the office market which can no longer meet requirements in terms of location and quality will fall out of the market, be converted or demolished. The future will tend to lie in the refurbishment and optimisation of existing buildings. Older space will only be successfully marketed in future with appropriate investment in refurbishment. This also applies to space offered for subletting if the space no longer fits a company’s profile or the company is looking at downsizing.
We are currently registering a volume of 827,000 sqm offered for subletting on the market. This is almost 13 percent more than in the previous quarter. The proportion of total vacancy remains unchanged at 16 percent.
Even if the overall situation in the construction industry has recovered somewhat, it is still far from normal. The building price index is still rising (+2.5 percent in Q4 2022 compared to Q3 2022), and as long as interest rates also remain high, the market for project developments will remain tight. Combined with the persistent materials and personnel bottlenecks, this continues to weigh heavily on many companies. The pull on the handbrake is also reflected in the completion figures for the past quarter. Around 218,000 sqm were completed in the Big 7 cities, which is not even half the volume from the final quarter of 2022, and the supply of new-build space fell by 52 percent year-on-year. In Berlin, the completion volume fell by 85 percent to just 45,000 sqm. It is clear that projects that have pushed ahead are still being completed, but new projects are often postponed due to incalculable costs and uncertain scheduling. Banks are also taking a more critical look at financing commitments and now demand a much higher pre-letting rate before construction begins than they did in the past. We are currently registering over 100 office projects under construction in the Big 7 real estate strongholds, more than half of which are already pre-let (excluding owner-occupier properties). This correlates with the letting situation of projects completed in the first quarter, when pre-lets accounted for around 50 percent.
So where do we go from here? For the remainder of 2023, 1.4 million sqm is still under construction, and so the divergence compared to 2022 should disappear by the end of the year and a similar volume of new-build completions can be expected. In the current market situation, this consistency can be interpreted as a positive sign. Even if the expected completion date for some projects has been pushed back, simply abandoning projects which have already commenced would certainly be a very bad signal. Equally positive is the fact that pre-letting for 2023 is already at almost 60 percent, so there is no significant pressure being exerted on the vacancy level by the new-build sector.
Prime rents continue to rise but at a slower pace
After the rental momentum over the last year, growth in prime rents will flatten out during the course of 2023 due to the causal effect. However, at the moment, JLL’s prime rent index is at 264 points which is 13 percent up on the previous year’s figure. Nonetheless, the only big hike in prime rents compared to the last quarter of 2022 was in Cologne, with a moderate rise in Berlin and Munich. For the year as a whole, JLL expects an average increase of just under 6 percent across the Big 7 markets. The focus on high-quality offices will continue. At the same time, inflation will remain at a comparatively high level over the next year. As the majority of leases are index-linked to reflect inflation, pressure on rents will remain, even outside the narrow premium band. However, owners are increasingly accepting other rent adjustment clauses in new lease contracts, such as stepped rental increases.
Contact us
Our Office Market contacts:
Office Leasing:
Stephan Leimbach, Head of Office Leasing Germany
Office Investment:
Jan Eckert, Head of Capital Markets DACH & Office Investment Germany
Research:
Helge Scheunemann, Head of Research Germany
Do you have any questions or suggestions regarding the Office Market Overview? Contact us:
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