Top 5 office letting markets set new record
Year-on-year take-up up rises by a good seven percent to around 2.5 million sq m
Berlin as the strongest market with take-up of over 700,000 sq m
Supply shortage in inner-city locations intensifies – vacancy rate averages at 5.5 percent
Average rents in Berlin and Frankfurt increase in the double-digit range
By year-end 2019, 60 percent of new office space pipeline already absorbed from the market
Take-up in the German office letting market in the Top 5 locations totaled almost 2.5 million sq m, reflecting an increase of 7.1 percent in a year-on-year comparison. The first three quarters of the current year therefore marked the strongest take-up since records began. This is the conclusion drawn in a current analysis prepared by the integrated commercial real estate services company CBRE.
The most important German office markets are thriving. Boosted by Germany’s dynamic economy and rising office workforce figures, we are seeing huge user demand for office space. At the same time, vacancies are declining and the property development pipeline remains modest.
Berlin was the German market with the strongest take-up which came in at 707,500 sq m, up almost 5.5 percent in a year-on-year comparison. Munich took second place with 597,900 sq m (up 5.6 percent). The largest growth compared with the year-earlier period was achieved in Frankfurt where take-up rose 19.2 percent to 425,300 sq m, followed by Hamburg where the letting performance advanced 11.4 percent to 464,000 sq m. Only Düsseldorf dropped below the previous year’s figure, posting a decline of six percent to 299,300 sq m.
TMT remains the dominant driver of take-up
With over a quarter (653,000 sq m) of the entire take-up, the TMT sector (telecommunications, media and technology) was once again the main driver of take-up in the office markets of Germany’s top locations. In Berlin, the tech sector accounted for a share of more than 35 percent (250,600 sq m), not least due to strong demand for office space from the high-growth e-commerce company Zalando. The TMT sector is also hugely significant for Munich as well with a share of 30 percent (179,000 sq m). As opposed to Germany’s start-up capital city of Berlin, conventional technology companies play the main role in the Bavarian capital of Munich. At 107,500 sq m, which is almost a quarter of the take-up, the TMT sector is a key component in Hamburg’s sector mix as well.
Coworking concepts gathering momentum
Closely linked to the tech sector is the growing importance of coworking spaces. Here young companies have the possibility of renting work spaces at flexible conditions to suit their corporate strategies and of leveraging synergy effects with other young companies. Of the 70 largest leasing and owner-occupier transactions (5,000 sq m and more) in the first nine months, the coworker share accounted for a good eight percent. Mainly in Berlin, Munich and Hamburg, but recently also in Frankfurt, coworking operators are increasingly settling in city center locations.
Other important players in the top locations included conventional financial and insurance businesses with a take-up of 279,100 sq m and a share of eleven percent. The total sum of leasing by the civil service as well as by industry and construction was about equal with a pro rata share of nine percent respectively.
Declining vacancies and the low level of construction pipeline signify a supply shortage for expansion and relocation decisions
Vacancies continue to decline across all top locations. By the end of the third quarter of the current year, aggregate vacancies stood at 3.85 million sq m, which is over 950,000 sq m less than a year ago (decrease of 20 percent). Berlin reported the biggest difference. Vacancies here declined by 36 percent over the course of the year, bringing the vacancy rate to a mere 3.5 percent. Munich also saw a significant reduction, with vacancies down a good 25 percent to a vacancy rate of currently 3.2 percent. The vacancy rate in Hamburg also continued to fall, dropping to 4.9 percent by the end of the quarter (down 0.4 percentage points). Düsseldorf and Frankfurt report higher vacancy levels, though in a downtrend, with vacancies of 7.3 percent (down 1.1 percentage points) and 10.2 percent (down 1.5 percentage points) respectively.
Very little vacant office space poses an ever-greater challenge for office users requiring large amounts of space. Especially in the office centers of Berlin and Munich with their very low vacancy levels, the leasing of large, contiguous areas is only possible with a prior notice of at least two years and through property developments. With requests at short notice, alternatives tend to be sought in peripheral locations or in non-contiguous interim solutions.
Office pipeline dwindling
In the first three quarters, a total of around half a million square meters of either new or totally renovated, and therefore updated, office space came onto the market, marking a decline of 35 percent compared with the year-earlier period. The majority of the space of almost 150,000 sq m (decline of 40 percent) was completed in Berlin, with only 24 percent still available on the completion date. In the three office markets of Hamburg (112,000 sq m), Munich (105,200 sq m) and Frankfurt (90,700 sq m) a relatively large amount of office space was completed. Of the top locations, only Düsseldorf recorded an increase of six percent (47,900 sq m) compared with the year-earlier period. In view of the low completion figures and dynamic demand, no trend reversal in the supply situation is foreseeable.
In the last quarter, new office space of an estimated 350,000 sq m is anticipated in the top markets, with not even 18 percent still available at the end of the third quarter. The year 2018 will only see a slight change in this scenario, with only 36 percent of the 1.14 million sq m forecast still on offer by the end of the coming year. Of the 1.38 million sq m whose completion will take place before the end of 2019, only around half is still available for pre-letting. “Especially in the inner-city locations of Berlin and Munich vacancies have already fallen below the vacancy rates actually necessary for fluctuation,” Ape explains. “The remaining vacancies partly consist of older properties no longer attractive to the market, which goes for Frankfurt in particular.”
Pressure on prime office rents – average rents in Berlin quickly catching up with Frankfurt
Scarce office space and sustained strong demand for contemporary office space against the backdrop of the excellent economic environment are driving up the rents.
As before, the most expensive office premises with an unchanged, sustainably achievable prime rent of €39.50 per sq m and month are located in the prime location of the banking metropolis of Frankfurt, followed by €35.50 per sq m (up three percent) in Munich. Berlin reported the sharpest increase of more than seven percent to €29.00 per sq m and month compared with the year-earlier period. Prime rent in Düsseldorf remained unchanged at €26.50 per sq m, as opposed to Hamburg where it increased two percent to €26.00 per sq m.
Rental growth is reflected not only by the increase in the prime rent achievable, but also by the weighted average rent. Berlin once again reported the most dynamic development, with a growth of almost 19 percent within a year to €18.33 sq m and month. “The huge increase in Berlin is primarily attributable to extremely large-scale, expensive lettings in property development,” Ape explains. Frankfurt recorded a similarly large increase of 10 percent in the weighted average rent which stood at €19.86 per sq m by the end of the third quarter. Munich and Düsseldorf saw moderate growth of 1.4 percent to €16.53 per sq m and €14.74 per sq m (up three percent) respectively. Hamburg remained virtually stable at €15.06 per sq m.
Forecast: new record on the cards for the full year as well
Following on from the sensational first three quarters over the year to date, leasing activity can be expected to hold steady on the office market in the top locations in Germany during the remaining fourth quarter. “In view of the record result of the first three quarters, a year-end result of 3.4 million sq m seems realistic. Bolstered by Berlin’s stellar performance, achieving the one million sq m mark is now within reach. Letting performance is only constrained by the limited supply, which will continue to push rental prices up,” Ape predicts. “We anticipate a very dynamic trend in Munich and Hamburg as well, and Hamburg could even set a new record of 600,000 sq m.
Thanks to the robust fundamental data, the German office property markets are likely to continue to perform very well – this applies to letting and investment markets alike,” Linsin comments.
Top 5 office letting markets
Source: CBRE Research, Q3 2017
Source: CBRE Research, Q3 2017
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide.
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Since 1973, CBRE Germany has been represented by its head office in Frankfurt am Main; there are further branch offices in Berlin, Düsseldorf, Essen, Hamburg, Cologne, Munich, Nuremberg and Stuttgart.