Office Market Overview

Q4 2023

Office letting market weakens in uncertain economic times

January 20, 2024
2023 take-up remains 28 per cent below the previous year's level

Irrespective of which indicator you look at, or which economic experts or business associations you ask, most are entering the new year in a downcast mood. Yet we have only just come out of a year that, in retrospect, had a lot of uncertainties to consider and this baggage cannot be discarded after a period in the doldrums, as is so often the case in the history of the German economy. On the contrary, it seems as if the 2023 sentiment will be carried forward into 2024.

The fact is that 2023 was not an exhilarating year for the German office letting market, with the letting markets in the country’s Top 7 office strongholds closing the year with a total take-up of just over 2.5 million sqm. Given the challenges and uncertainties that have accompanied businesses in all sectors over the past 12 months, this result is unsurprising and confirms our October forecasts. Nonetheless, it is the weakest take-up result recorded since 2009 and, compared to 2022 which was a year with very strong demand, the decline was correspondingly large at 28 per cent.

All Top 7 real estate strongholds experience a substantial drop in take-up

Year-on-year, all of Germany’s Top 7 real estate strongholds experienced a significant decline in take-up. Despite this, the fourth quarter was the strongest of the year in four of the Top 7 office markets, Frankfurt, Cologne, Munich and Stuttgart, with Frankfurt and Düsseldorf able to contain the annual loss in the single-digit percentage range. Once again, the largest drop (of 49 per cent) was observed in Stuttgart, although this has reduced slightly since its fall of 57 per cent registered in October.

Unfortunately, the delayed impact on the office letting market of the interlinked crises since Russia's attack on Ukraine was all the more dramatic given the outstanding letting year in 2022. However, in view of the historically unprecedented combination of challenges ranging from the turnaround in interest rates and energy prices to geopolitical conflicts, it was inevitable that the office letting markets would be unable to end the year unscathed. Businesses across all sectors are too strongly affected by the diverse impacts. However, unlike the investment market, these impacts may be less severe, and with slight overall economic recovery expected in 2024, office take-up is likely to increase again. Our current forecast shows an increase of ten per cent for the coming year.

Elections and geopolitics will have a decisive impact on the office markets in 2024

The burden of geopolitical conflicts, a lack of economic impetus from outside Germany, noticeable inflation and a 'glass half empty' mindset among consumers is weighing heavily. The extent to which such negative sentiment will become entrenched globally is likely to be determined by a unique event in history: globally, over half of the world's population will be able to participate in elections in 2024. From India to Indonesia, and from the UK to the USA. Never before in history will so many citizens have elected new governments within a year, with corresponding consequences for future trade and economic relations.

Expressed in cold, hard figures, the German economy is expected to have shrunk marginally in 2023. According to Consensus research, negligible growth of 0.4 per cent is expected for 2024. Nonetheless, the opinions of economic research institutes diverge widely, ranging from -0.5 per cent to 1.3 per cent, reflecting the uncertainty that prevails among experts when it comes to assessing future economic trends. On a more positive note, the labour market is expected to remain largely stable, with the unemployment rate levelling off at 5.8 percent.

'Support' will come from a new phenomenon that is likely to become apparent next year: the demographic effect. With an ageing population, the number of people in employment is likely to fall for the first time. This presents companies with new challenges in terms of filling vacancies and will require either further investment in the 'human factor' in the form of higher wages and salaries or in digitalisation and the integration of artificial intelligence into workflows and processes to increase efficiency and productivity.

The property market is not immune to this and both of the investment options outlined above require constant adaptation and rethinking of the office space. We also see a clear focus on quality in 2024. This is likely to further drive the differentiation of the market, with further increases in prime rents for premium quality space and reductions in rents for outdated office stock expected. As long as Germany does not slide into a deep and sustained recession, which does not look likely at this stage, these office market trends should not change. Offices will remain an indispensable part of corporate culture in the future, as evidenced by the slight increase in the rates of return to the office, although hybrid working will continue to exist.

Another aspect of attractive and therefore more expensive office space is sustainability. This trend is also irreversible. However, there is a big question mark over development projects. The tension in the market continues to cause new developments to be postponed or cancelled, and normality is unlikely to be quickly resumed. The more the pipeline for new-builds and revitalisations dries up and therefore less modern office space comes onto the market, the more rents for available space in central locations will rise.

Volume of new construction falls by around 27 per cent in 2023 compared to the previous year

In the construction industry, developers were faced with enormous challenges in 2023, namely high building costs and shortages of skilled labour and materials. While there is at least a slight easing on the cost side with building costs falling (albeit remaining at a historically high level), the bottlenecks in financing, a lack of demand and the sustained shortage of skilled labour are continuing to cause the industry concern. This means that numerous construction sites are at a standstill, delays are occurring with considerable consequences for all those involved and some planned projects are being cancelled altogether. A total of around 1.3 million sqm of new space came onto the market in 2023, down 27 per cent on the previous year. Only Frankfurt observed the completion of slightly more office space in the same period; all other markets recorded a decline.

Higher volumes are expected for 2024 (1.9 million sqm) and 2025 (1.7 million sqm), but these are significantly lower than anticipated a year ago. It is also possible that these forecasts may reduce further over the course of the year, given the current economic climate. On a positive note, almost half of this space (49 per cent) is currently let or occupied by owner-occupiers. Pre-letting and occupancy rates range from 43 per cent in the capital, Berlin, and in Düsseldorf to 60 per cent in Stuttgart. JLL is observing the strongest construction activity in the two largest office markets, Berlin and Munich, which account for 57 per cent of the currently expected construction volume for 2024 and 2025. 

Vacancy increases, but remains in the single-digit range everywhere

The reduction in the volume of new construction is easing pressure slightly on the supply side, but newly constructed space directly impacts on the volume of vacancies where it is not yet let at the time of completion. In the months from October to December 2023, this amounted to over 150,000 sqm in the Top 7 office markets. The weak economy also means that some companies are leaving more space behind than they are moving into when they relocate, making a total of 5.64 million sqm available to companies looking for short-term space in the seven strongholds at the end of the year. This corresponds to a vacancy rate of 5.8 per cent, 0.3 percentage points higher than three months ago.

Vacancy rates in the Top 7 office markets are all in the single-digit percentage range, ranging from 3.3 per cent in Cologne and 4.0 per cent in Stuttgart (where there is still a shortage of available space), to 8.8 per cent in Frankfurt and 9.7 per cent in Düsseldorf.

The fall in the volume of space offered for subletting has had a positive effect. While three months ago, the statistics showed 835,000 sqm, this figure had fallen to 808,000 sqm by the end of the year. Some units have been let and only a few are being added to the market. This reflects the progress in the hybridisation of workplace models and therefore it would appear that the considerable reduction in floor space due to the introduction of hybrid working environments is complete. This trend also shows that most users are focusing on well-appointed space when planning to lease new premises and therefore to relocate. However, for owners of vacant lower quality B and C grade buildings, it will become increasingly difficult to market the space without upgrading it.

Prime rent in Munich reached €50.00 per sqm; rental incentives expected to rise

In the meantime, prime office rents have only been going one way for the past 13 years: upwards. This was evident in 2023, with the JLL Prime Rent Index climbing by 6.8 per cent to a new high of 275 points in the last twelve months. Rent rises are being observed in all seven cities, although the upward trend has partially come to a halt in the last three months. The exceptions are Berlin and Munich where prime rents have risen by a further €1.00 per sqm. In Munich, the €50.00 per sqm mark was reached at the end of the year, bringing the annual increase in the Bavarian capital to 14 per cent. Rents in Cologne have also risen at the same rate to their current level of €32.50 per sqm, while Frankfurt remains the straggler in terms of growth, with a rise of just over one per cent in the year-end balance sheet.

We expect this trend to continue in 2024, at least for prime rents in the best locations. However, the pressure will increase in the near future in peripheral locations and in properties with only average or below-average fit-out specifications. This may lead to further falls in average rents, increasingly prompting owners to offer incentives to their tenants. Nominal prime rents have already risen more sharply than effective rents, demonstrating that landlords are prepared to offer more incentives than in previous years. Rental incentives converted into rent-free periods are likely to increase to up to 15 per cent over the course of the year. 

Contact us

Our Office Market contacts:

Office Leasing:
Miguel Rodriguez Thielen, Head of Office Leasing Germany

Office Investment:
Stephan Leimbach, Head of Office Investment Germany

Helge Scheunemann, Head of Research Germany


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