Research
Office Market Overview
Q2 2023
The German office rental market is also now beginning to cool
Berlin
Worst take-up performance in Berlin since 2013
With 334 letting transactions, the first half-year performance in 2023 was around 28% below the total of 462 deals registered in the same period last year. The take-up volume of 254,200 sqm over the first six months was the lowest first half-year take-up since 2013.
59,000 sqm or around 23% of total take-up in the first six months of 2023 was attributable to the 1,000 sqm – 2,500 sqm size category. There were six large-scale transactions registered in the >5,000 sqm size category, of which two were more than 10,000 sqm. The most active submarket in the first half of 2023 was Berlin-Mitte with a share of around 14% of total take-up. The most active sector during the same period was business services with a volume of 43,500 sqm (17% of total take-up). The 57 lettings concluded in the Mitte submarket contributed approximately 17% to the total number of deals.
The second-quarter vacancy volume of 1.05 million sqm was 67,000 sqm above the previous quarter and 204,500 sqm higher year-on-year. The Mitte 1A submarket registered the lowest vacancy rate in Berlin of 1.5% in the second quarter of 2023.
Around 2.1 million sqm of office space is currently under construction in the Berlin market area. Most new-build activity is to be found in the Southern Suburb (309,000 sqm), Charlottenburg-Tiergarten (280,100 sqm) and Eastern Suburb (266,600 sqm) submarkets.
The prime rent rose by €1.00/sqm per month compared to the previous quarter to its current level of €43.00/sqm per month.
Office Market Areas with Rental Bands Berlin
Düsseldorf
Lack of large-scale lettings results in low take-up in the first half of the year
A take-up of 104,200 sqm was registered in the Düsseldorf office letting market during the first half of 2023, of which 90,500 sqm was in the Düsseldorf city area. This is 46% below the first half of last year and 47% and 48% below the five- and ten-year averages, respectively.
The three largest deals were concluded in the first quarter. These were a letting of just under 9,600 sqm in the CBD to Hengeler Müller, 5,600 sqm in Ratingen let to NGK Spark Plug Europe and 4,200 sqm at the Airport let to Züblin AG. The fourth largest transaction followed in the second quarter with the letting of 4,200 sqm in the Kennedydamm submarket to the Supreme Group’s munichfashion.company. The most active submarket on the demand side was the Airport, followed by the CBD, City Centre and Kennedydamm. These four submarkets accounted for just under 60% of total take-up with shares of 10% - 19% each. Half of all take-up was attributable to business services, manufacturing and construction, real estate with shares of 11% - 22% each.
The volume of vacancies increased slightly over the past three months to its current level of around 816,000 sqm, corresponding to a vacancy rate of 8.7%. Approximately 307,000 sqm of office space is currently under construction, two-thirds of which is still available to let.
Since the significant upswing recorded at the end of last year, the prime rent has remained stable at €38.00/sqm per month. The weighted average rent is now €20.78/sqm per month.
Office Market Areas with Rental Bands Düsseldorf
Frankfurt
High number of deals but low transaction volumes in the second quarter of 2023
There was a letting take-up of 174,900 sqm during the first half of 2023. The take-up of 91,500 sqm in the second quarter was around 11% below the ten-year average for the second quarter. The total of 261 letting deals in the first six months of 2023 was around 4% below the five-year average (2018 - 2022).
Three large-scale lettings of over 5,000 sqm of space were registered in the first half of the year, but none were above 10,000 sqm. The largest individual transaction was 9,600 sqm in the Timber Pioneer Building. The most active submarket in terms of take-up in the first six months was the Banking District with a share of approximately 21% of total volume and 20% of all transactions. The take-up volume of 11,500 sqm in the submarket was greater than in the same period last year. The banking, finance sector was the most active in the first half of the year with a take-up of 34,900 sqm (20% of total volume), while the 26 individual transactions in this sector accounted for around 10% of all deals.
The vacancy rate was 8.5% in the second quarter of 2023, a fall of 0.5%-points compared to the previous quarter but unchanged since the same quarter last year.
The volume of vacancies of 1.07 million sqm is 57,000 sqm below the previous quarter but 15,000 sqm higher year-on-year and the lowest vacancy rate in Frankfurt during the second quarter of 2023 was recorded in the Westend submarket with 1.6%. The prime rent rose by €2.50/sqm per month, or 5.7%, compared to the same quarter last year to its current level of €46.00/sqm per month.
Office Market Areas with Rental Bands Frankfurt
Hamburg
Large-scale lettings return in the second quarter of 2023
Around 233,100 sqm of space was taken up in the Hamburg office letting market in the first half of 2023. This equates to a fall of 27% compared to the same quarter last year and is 12% and 10% below the five- and ten-year averages, respectively. By far, the largest deal was 17,200 sqm in HafenCity, let to RTL Nord, followed by a letting of just under 10,000 sqm in the City Centre to the city council.
The most active sectors on the demand side were business services and media, publishing with 14% each, whereby the former accounted for more than double the number of new leases compared to the latter. The City Centre was again the most active submarket, followed by HafenCity. Half of all letting volume was achieved in these submarkets, together with City Süd (Core Area). Despite the overall economic situation, there are still several large-scale enquiries in the Hamburg office letting market, which tend to be focused on premium properties in prime locations.
Around 71,000 sqm of new space was completed during the first half of the year, of which approximately one fifth was still available in the market at the point of completion. The total volume of vacancies rose to just under 692,000 sqm (4.5%) over the last three months. There is also 43% of the 653,000 sqm of space still available, but still under construction.
After an upswing in the third quarter of 2022, the prime rent remained stable at €34.00/sqm per month. The weighted average rent is now €20.91/sqm per month.
Office Market Areas with Rental Bands Hamburg
Cologne
Space take-up at a very low level at the mid-point of the year
A take-up of 84,400 sqm was registered in the Cologne office letting market during the first half of 2023, 63% below the volume recorded during the same period in 2022. It is also extremely low at 48% below the ten-year average.
The largest individual transactions in the first six months were the lettings of 9,200 sqm to the Kirchliche Zusatzversorgungskasse des Verbands der Diözesen Deutschlands and 7,300 sqm to the Boston Consulting Group. The largest deal in the second quarter was a letting of 2,700 sqm in the Leskan Park to Emons Service GmbH. The most active sectors on the demand side in the period under review were business services with a share of 22% of total take-up, followed by banking, finance with 13% and media, publishing with 12%. The most active submarkets were (once again) the City Centre with one-third of total take-up, followed by Kalk / Mülheim with 15% and Ehrenfeld / Braunsfeld with 11%.
The vacancy rate of 3.1% in the Cologne office market remains the lowest of Germany’s Big 7 office strongholds. Around 244,000 sqm of office space is currently available to prospective occupiers.
Following a significant rise over the first quarter of the year, the prime rent remained stable at the mid-point of the year at €32.00/sqm per month. This is €5.00/sqm per month or 18.5% above the same quarter last year.
Office Market Areas with Rental Bands Cologne
Munich
Significant hike in prime rent at mid-year
There was a take-up of 248,100 sqm in the Munich office letting market during the first half of 2023. This below-average performance equates to a fall of 37% compared to the same quarter last year and is 33% and 31% below the five- and ten-year averages, respectively.
While there were few large-scale transactions, market letting activity was concentrated on the smaller size categories. Just one owner-occupier deal was concluded in the first six months of 2023 with a take-up of 10,400 sqm by the Deutscher Gewerkschaftsbund (German TUC) for Bavaria. The most active sector at the mid-point of the year was business services with a share of 20%, ahead of manufacturing with 15% and IT with 13%. By far, the most active submarket during the first half of the year was the City Centre with 25% of total take-up, followed by Periphery North with 16% and Westend with 11%.
Around 1.02 million sqm of space is available to prospective tenants at short notice, which means that the vacancy rate has risen slightly over the past year to its current level of 4.7%; this was 4.2% last year. There is currently around 1.15 million sqm of office space under construction and the overall supply pipeline remains stable despite several postponed projects.
There has been a significant increase in the prime rent recorded over the second quarter. This rose by €3.50/sqm per month compared to the previous quarter to its current level of €48.00/sqm per month. Even in a challenging economic climate, the number of lettings concluded with expensive rents in prime locations continues to increase, with several deals at rents around or even higher than €50.00/sqm per month registered in the second quarter.
Office Market Areas with Rental Bands Munich
Stuttgart
Poor take-up performance but a parallel rise in prime rent
There was a take-up of 64,500 sqm in the Stuttgart office letting market in the first half of 2023. This equates to a fall of 70% compared to the first half of 2022, 47% and 45% below the five- and ten-year averages, respectively. The second quarter was weaker with a take-up of just 22,100 sqm. While two large-scale lettings were registered during the first quarter, there were none in the second quarter, and all 45 individual deals were for units in the <2,500 sqm size category.
The most active sectors on the demand side in the first half of the year were business services, media, publishing and public administration with 21%, 20% and 19% of total take-up, respectively. The most active submarkets over the first six months were the City Centre with a share of 18% and Feuerbach with 16%. The continual high demand for high specification centrally located space is reflected in the 27 deals in the City Centre submarket, which is over a quarter of all transactions concluded in the first half of the year.
A combination of continued low vacancy of just under 334,000 sqm, equating to a vacancy rate of 3.6%, and a manageable future supply pipeline continues to put pressure on rents. The prime rent rose by €2.00/sqm per month compared to the previous quarter to its current level of €35.00/sqm per month.
Office Market Areas with Rental Bands Stuttgart
The German office rental market is also now beginning to cool
The continuing rise in interest rates by central banks is having a noticeable effect in the market, whereby the fall in inflation is being accompanied by weakening demand for space. While the decline in inflation is a good sign, the effects of an economic slowdown are now becoming more pronounced - and all the more so because some of the interest rate rises have not yet fully impacted on the economic cycle.
As a consequence, market sentiment in the office letting market has weakened in the second quarter with a total half-year take-up volume of 1.16 million sqm recorded in Germany’s seven real estate strongholds, down 40 percent on the result from the same period last year.
One of the current main risk factors is stress in the banking sector. This is increasingly spilling over into the real economy and tighter lending conditions are likely to impact on economic activity over a longer period of time. It is also causing a further spreading of the market: while competition for quality is high, demand in second-tier locations is weakening. At the same time, companies are looking for less space than before and are no longer willing to conclude leases at just any price.
Gloomy mood in the overall economy affects office demand
This leaves a risky trade-off between fighting inflation and a weakening economy, a situation which is reflected in the further deterioration in business sentiment in June. The ifo Index fell again, adding to the gloomy picture following the decline in May, and the Expectations sub-index slumped significantly for the second successive month. Overall, there will be little growth in the German economy this year. Uncertainty about future economic trends and the development of interest rates, which have a significant impact on corporate financing, is also having an effect on the real estate markets, causing users of office properties to behave more cautiously.
Conversely, the labour market remains extremely robust. For the central banks, however, the strength of the labour markets is a cause for concern because it can develop into a wage-price spiral with lasting effects. For Germany, several rounds of collective bargaining with strong wage increases have already been agreed, and further decisions are pending. These pay deals mean significantly higher labour costs for companies and this raises the question of whether they can and will pass these costs on to customers. Because profit margins remain relatively high, the European Central Bank expects that companies will not pass on price rises at the expense of profits. This will determine discussions about further interest rate rises.
Significant fall in office space take-up while the focus on quality remains
Demand weakened in each of the seven office strongholds, ranging from 15 percent in Frankfurt to 70 percent in Stuttgart. The decision-making processes for a potential move still take a long time, particularly when they involve space in the medium to large size categories. Companies are exploring the market and possible options carefully, and the trend towards renting higher-quality space remains. ‘Better but less’ is the current motto. This is because, while the requirement for quality has increased, the size of office space required is smaller. Energy efficiency, sustainability and a feel-good factor for employees are the main drivers of demand. These aspects must be satisfied at a new location. Staffing requirements are not reducing. A well-appointed office, as the communicative hub of the corporate culture, is essential for attracting new talent. There are currently around 820,000 office job vacancies in Germany, creating demand for up to 20 million sqm of additional space. A theoretical figure, to be sure, because redensification is taking place, not all jobs are being created one-to-one in the physical office and existing vacancies are being filled. Nevertheless, the calculation shows that a significant volume of required space will remain. There is some pressure building up among companies, which is another reason why we remain quite optimistic for the year as a whole and still expect a take-up volume of around 2.8 million sqm, which would be 20 percent below the 2022 result.
Volume of vacancies and space available to sublet remain stable - supply pipeline of new space is narrowing
Despite declining take-up volumes, vacancy rates in the seven office strongholds have not risen further. Currently, around 5.17 million sqm of space is available to companies looking for a short-term space solution, corresponding to a year-on-year increase of almost 15 percent and a vacancy rate of 5.3 percent. The volume of space available to sublet, an indicator of crisis, is also unchanged at 834,000 sqm at the end of the second quarter. This is equivalent to 16 percent of the overall vacancy rate.
The apparent differentiation of the market in terms of demand is also reflected in vacant space. Significantly more than half of the volume of vacancies is accounted for by offices that are no longer able to satisfy current requirements or are only of an average fit-out specification. Therefore, and in view of the current low volume of completions, we expect to see bottlenecks and shortages in some areas. New space in the form of entirely new buildings, but even more so upgraded space in the existing stock, are still essential.
But there has been a considerable deterioration of the mood in the construction industry in particular. In addition to the continuing high, albeit somewhat easing cost levels, the issues of challenging project financing and a declining order situation are increasingly acute. And although building costs seem to have peaked, they remain at an extremely high level with projects being suspended as a result. This situation is also affecting the commercial sector with the project pipeline currently being revised downwards every quarter. A total of just under 660,000 sqm of office space was completed in the first six months of 2023, a decline of 31 percent compared to the same period in 2022.
1.5 million sqm of office space is scheduled for completion this year
We currently expect a completion volume of 825,000 sqm in the second half of 2023, bringing the total completion volume for the year as a whole to just under 1.5 million sqm. This is around 300,000 sqm below the 2022 level. It should rise significantly in 2024: almost two million sqm of space is already under construction and scheduled for completion over the coming year. Some of this space was scheduled for release this year but has been delayed. This year-on-year increase must be put into perspective because Berlin alone accounts for over 40 percent with more than 800,000 sqm. Moreover, more than half of this space is already let or earmarked for owner-occupiers.
If the demand trend for top-quality space continues in conjunction with rising rents, which we assume will be the case, pre-letting rates for projected space will increase. Conversely, construction of projects that were originally planned on a speculative basis will only commence if pre-letting takes place.
Prime rents continue to rise - rental incentives increase slightly
The stabilising or only slightly rising vacancy rate is not exerting any pressure on rents on the supply side. Quite the reverse: the current decline in completions is causing prime rents to continue to rise, in some cases significantly. The JLL Prime Rental Index showed a value of 268.9 at the end of the second quarter, almost 14 percent above the previous year's value.
We are observing year-on-year rental growth in all cities, ranging from 5 percent in Berlin to almost 27 percent in Düsseldorf. In the last few months, too, several “exceptional deals” in excess of the reported prime rent have been concluded. The €50.00/sqm p.m. mark has been exceeded in Berlin, Frankfurt and Munich. Nevertheless, it is important to also consider the rental subsidies agreed by landlords as JLL expects these to increase slightly over the coming year. In the case of a 5-year fixed-term lease, JLL expects the rental incentives - converted into rent-free periods - to settle at between 5 and 15 percent.
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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