Research

Office Market Overview

Q1 2024 

Office rental market registers positive momentum at the beginning of the year

April 20, 2024
Office rental market registers positive momentum at the beginning of the year

The German office rental market got off to a reasonable start in 2024. At around 625,000 sqm, there was a marginal 2.0 per cent increase in take-up compared to the previous year. Although this result is still 25 per cent below the ten-year average, JLL is observing a greater willingness among companies to conclude leases. A total take-up of around 2.7 million sqm is forecast for the year as a whole, which would correspond to an increase of 7.0 per cent compared to 2023.

The office rental market is showing signs of a positive turnaround in the first quarter, but it is far too early to draw comparisons with the period before the pandemic and the beginning of the war in Ukraine. Stability and continuity are essential for re-establishing a market over the long term, particularly one dominated by both numerous smaller lettings and high-volume deals. A prerequisite for a return to rising take-up is the sufficient availability of the required quality of space, both inside and outside the major real estate strongholds. Despite the positive signals observed at the beginning of the year, the gap between the competition for prime space in central locations and the rising volume of vacancies in peripheral areas and outdated properties is too wide.

Service providers, manufacturers and retailers more optimistic about the coming months

Despite the many negative headlines about the geopolitical turmoil and about Germany as a business location, the rise in the much-respected ifo Business Climate Index in March is a sign of hope: at 87.8 points, the index is at its highest level since June last year and is founded on a recovery in the current business situation. In particular, companies' business expectations have improved significantly since January, leading to one of the largest increases in the index's history. This should give us courage and confidence for the rest of the year, especially as the improved sentiment is based on a broad sectoral foundation. In addition to the still strong service sector, the manufacturing and retail segments stand out, while construction lags behind. The psychological effect of such sentiment indicators should not be underestimated, as this is a signal for better business planning and greater willingness to invest. However, households will have to become more willing to spend again to significantly boost Germany's gross domestic product (GDP). The current savings rate of more than 12 per cent is well above the historical average of 10 per cent. Here too, a look at the facts shows that cautious optimism is prevalent. The trend in real wages has been positive since the end of 2023, the inflation rate continued to fall in March and upcoming wage rounds for more than 12 million employees should ensure a further increase in wages over the course of the year, enabling the domestic economy to make a positive contribution towards growth once again.

In addition to the sentiment indicators, a look at the willingness of companies to employ staff is important for the office market. Here too, the picture was more favourable in March. According to the ifo Employment Barometer, companies in the service sector in Germany are looking to hire more staff. The correlation with the office rental market remains intact, meaning that an improvement in the index will be reflected in higher take-up figures around three quarters later.

Take-up growth recorded in most real estate strongholds

With the current quarterly result totalling 625,000 sqm, a look at the Top 7 markets shows greater disparity than at the end of 2023. Currently, only Cologne (31 per cent) and Hamburg (20 per cent) are still down year-on-year, while the biggest increases were observed in Stuttgart with 31 per cent and Munich with approximately 18 per cent. Although Berlin achieved the highest take-up of 145,000 sqm, the situation in the capital remains challenging. There are two principal reasons for this. The first is the fall in the volume of new lettings, with some companies preferring to remain in their existing premises. Secondly, despite the city’s size, it is difficult to find suitable space because the market is divided into several sub-centres.

The quality factor remains firmly at the top of the shopping list for companies looking for new space and sustainability is becoming ever more important. However, such space is increasingly difficult to find due to the declining pipeline of new-build space, forcing many tenants to extend their existing leases or relocate to submarkets further away from the central business district (CBD) and city centre, as long as such space is of a sufficient quality.

Gateway Gardens is an example of the flight-to-quality to locations outside the city centre

Frankfurt is a prime example of this trend. Here, we are registering a high number of enquiries for space but due to the low supply, the focus of companies is shifting to submarket locations with an adequate infrastructure and supply of high-quality properties, such as Gateway Gardens. This trend is likely to intensify if office rents in the CBDs of the major cities continue to rise, as not every occupier is willing or able to accept a sharp increase in rent compared to their existing leases. However, the mantra of focusing on quality and location will remain in place for the rest of the year.

At the same time, the debate about hybrid working is dying down. Remote working is impacting less on letting behaviour. Companies now have certainty and in many cases a strategy as to how often and when employees should be in the office. Although we are observing a shift in new letting behaviour towards downsizing, often in favour of higher-quality space, the adjustment of existing leases is now a rarity.

New-build projects continue to be postponed or cancelled

Construction is still the sector of the German economy affected most severely by the current crisis. While other sectors are showing slight signs of recovery, construction (and particularly building construction) is lagging behind, leading to the cancellation of new development plans or bankruptcies. According to a study by Alvarez & Marsal, around 15 per cent of all companies in Germany are in financial difficulties or fear this. In the construction sector, the share is significantly higher at 25 per cent. According to research by JLL and Thomas Daily, more than 280 properties across Germany with more than 4.2 million sqm are affected by insolvencies of the developer undertaking the development. Residential property accounted for almost half of this is and office property accounted for a further 32 per cent.

The consequences of this can be seen in the current pipeline figures for the seven real estate strongholds. Around 5 million sqm are currently under construction or in the advanced stages of planning, up to and including 2026. This means that in the past three months alone, more than 830,000 sqm have disappeared from the pipeline, i.e. they have either been stopped completely or postponed to a later date. As long as the difficulties in the construction sector go unresolved, projects may continue to be postponed. Moreover, significantly fewer new projects are being initiated than in previous years. We therefore expect the volume of new construction to reduce further in the short to medium term. By contrast, the proportion of the pipeline accounted for by refurbishments is increasing significantly. For 2024, we expect a share of 27 per cent and for 2025 this should rise to as much as 30 per cent.

A total of around 409,000 sqm of new space came onto the market in the first quarter of 2024, up 87 per cent on the previous year. At 85 per cent, most of the completions were in Berlin and Munich. Nevertheless, 65 per cent of the space was already occupied at the time of completion (in Berlin, it was 86 per cent). The pre-letting rate for all space still under construction for 2024 is also above average at 56 per cent. This is as a direct consequence of the requirements of banks seeking to secure project financing primarily through higher pre-letting rates.

Vacancy rates continue to increase moderately, but remain below 10 per cent

The current increase in vacancies is still more likely to be due to the weak demand caused by the economic crisis. Furthermore, in the current market climate and as a consequence of the above-mentioned remote working guidelines, companies are tending to downsize, often leaving their previously larger premises vacant.

At the end of the first quarter of the year, 5.9 million sqm was available to companies looking to secure space in the seven strongholds in the short term. This corresponds to a vacancy rate of 6.0 per cent, 0.2 percentage points higher than three months ago.

Vacancy rates in the Top 7 office markets are all below 10 per cent, ranging from 3.4 per cent in Cologne and 4.8 per cent in Hamburg (where there is still a shortage of available space), to 8.6 per cent in Frankfurt and 9.9 per cent in Düsseldorf. The volume of space available for sub-letting is also largely stable at 889,000 sqm, accounting for an unchanged 15 per cent share of the total volume of vacancies. Ultimately, the same market laws apply to sub-let space: the better the location and the better the fit-out specification, the greater the likelihood of a successful letting deal.

Rents for prime office continue to rise

The gap between good and bad is widening. While rents for the latter are stagnating at best, the shortage of new-build and well-appointed existing space is driving rents in this segment even higher. This is unlikely to change over the remainder of the year.

The JLL Prime Rent Index continues to rise, climbing by 6.6 per cent year-on-year to a new high of 280 points. This trend can be observed in all cities, although the dynamics and current willingness to conclude leases in the high-price segment vary, especially among business services providers. Monthly prime rents rose most significantly in Munich and have now reached €52.00/sqm, 17 per cent above the previous year's figure. Rents in Düsseldorf have also seen double-digit growth of 11 per cent to €42.00/sqm. Rental growth in Hamburg and Cologne is much more subdued at less than 2.0 per cent.

We anticipate a further rise in rents by the end of the year, resulting in a total increase of around 6.0 per cent across all seven real estate strongholds by 2024. Competition for premium space in central locations will remain fierce, continuing to drive up prime rents, a trend which even high vacancy rates such as in Düsseldorf will be unable to prevent.

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

Research:
Helge Scheunemann, Head of Research Germany

 

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