Top 5 office letting markets deliver strongest first half year for a decade
- Take-up up rises 2.5 percent to around 1.56 million sq m year on year
- Munich and Berlin still the markets with the strongest take-up
- Hamburg with best half-year result since records began (2002)
- Vacancy rates fall regionally below the fluctuation reserve
- Half the new office space pipeline until year-end 2019 already absorbed from the market
A total of 1.56 million sq m have been taken up in the German letting market in the Top 5 locations, which corresponds to a growth of 2.5 percent in a year-on-year comparison and marks the first half of 2017 as the strongest for ten years. This is the conclusion drawn in a current analysis prepared by the integrated commercial real estate services company CBRE.
With 416,900 sq m, Munich was the market which witnessed the greatest activity (up 5 percent), closely followed by Berlin with 403,700 sq m. Hamburg reported the sharpest increase year-on-year, up 22 percent to 301,000 sq m, the highest take-up ever registered in the city until now. Frankfurt with 220,400 sq m and Düsseldorf with 215,200 sq m both registered similar take-up volumes.
In the first half year, the office letting market in the Top 5 locations achieved the strongest take-up ever recorded. The German economy continues to excel with very robust fundamental data and growth in its working population in the service and public sector, which has a direct impact on office users’ decisions on leasing and location. The demand for modern and contiguous office space is correspondingly high but can no longer be serviced in some inner-city locations due to the shortage of suitable properties, which makes relocations even more difficult, also in view of winning best talent and employees for a company.
TMT sector remains the driver of take-up on Germany’s office markets
With a share of 25 percent, the TMT sector (telecommunications, media and technology) had generated a major part of the take-up by mid-year. Berlin, where the fast-growing tech sector accounted for a share of 40 percent and was the strongest driver of take-up by a long way, contributed 162,100 sq m to the overall result. Similar to Munich with 25 percent, Düsseldorf with 20 percent and Frankfurt with 17 percent, the TMT sector was a key determinant of take-up. The financial and insurance sector also played an important role in Düsseldorf and Frankfurt, accounting for 19 and 15 percent respectively.
In the first half year, no leases had yet been registered in the financial center of Frankfurt as a result of Brexit-induced negotiations relocations which would have led to a corresponding take-up result.
It is, however, increasingly the case that a number of relocations involving parts of various major international banks are taking shape, so we can expect the first leases by banks and financial service providers from London as from the second half of 2017.
As regards the top locations as a whole, companies from industry at large as well as retail and the public sector were - alongside the agglomeration of the TMT sector - the most important players with 11 percent each.
Decline in vacancy ongoing – modern and efficient office space is scarce
The absolute volume of vacant office space has fallen across the board in all Top 5 locations in a year-on-year comparison and stood at 4.1 million sq m at the end of the first six months, which equates to a vacancy rate of 5.5 percent. Although the completion pipeline is recovering, with more space being realized, it is juxtaposed to huge excess demand for modern office space. The majority of projected space has already been occupied. Moreover, a significant proportion of office space is converted, in particular for residential and hotel purposes. However, this mainly applies to the so-called base vacancy which has not really been in a saleable condition before.
The steepest decline in absolute figures was recorded in Berlin. The vacancy volume in the capital city dropped by 35 percent in comparison with mid-year 2016. The vacancy rate here came in at a mere 3.8 percent and has therefore virtually halved within the space of a year. In Munich as well, the volume of vacant office space fell significantly by 19 percent and, at 3.6 percent, the city reports the lowest vacancy rate of Germany’s top locations. The proportion of vacant space in Munich’s inner-city sub-markets has already fallen below one percent, which poses a problem, above all for users requiring a great deal of space or space at short notice. In the case of pre-letting in property developments, decisions on locations must be made with a correspondingly long lead time as the office space is not ready for immediate occupancy. Furthermore, building sites in the inner cities are in short supply, which means that the surrounding submarkets are becoming increasingly important.
Half the office space pipeline until year-end 2019 already absorbed from the market
In the first two quarters, a total of 450,900 sq m was freshly introduced into the market, either in form of new builds or as completely refurbished and updated office space. This reflects a decline of almost 17 percent compared with the year earlier period. Above all, Munich and Berlin as Germany’s largest office markets in terms of office stock registered significant increases in office space of 95,000 sq m and 140,000 sq m respectively. Upon completion, however, a mere 26 percent of this space was still available in Berlin and only 27 percent in Munich. Since the lowest vacancy rates – at the level of the market as a whole – were registered in these two markets, no easing of the supply shortage can be expected in the near future. Compared to the first six months of 2016, less office space was completed in the other top locations as well – with the exception of Düsseldorf (up 44 percent) where, among others, large office properties such as the Andreas Quartier in the city center and two, almost fully occupied, new buildings in Ratingen were completed. Of the space anticipated over the remainder of the year, just about 27 percent is still available in the Top 5 locations. In 2018, this proportion will rise to only 29 percent in Berlin and Düsseldorf respectively and to 40 percent across the Top 5 locations. The situation can generally be expected to ease slightly in 2019 at the earliest. In relation to the top locations, 65 percent of the office space due for completion in 2019 is still free. Experience has shown, however, that this proportion is likely to have shrunk considerably by the completion date as users are placing growing importance on modern working space and fitouts to take account of the latest office concepts and technical requirements, and new builds are therefore extremely sought after.
Office rents continue to rise - with peak levels of eight percent in Berlin over the course of the year
Scarce office space and sustained strong demand for modern office space against the backdrop of the excellent economic environment are driving rents up.
With achievable prime rent unchanged at €39.50 per sq m and month, the most expensive office space is situated in Frankfurt. In a year-on-year comparison, Munich reports slight rental growth of 1.4 percent to €35.00 per sq m and month. The prime rent commanded in Hamburg has also increased again to €26 per sq m and month (up two percent). The process of catching up in Berlin’s market has not yet come to an end, and prime rent rose by almost eight percent to €28.00 per sq m and month. Prime rent in Düsseldorf remained stable at €26.50 per sq m and month.
Rental growth is reflected not only in the increase in the achievable prime rent, but also by the weighted average rent. Here Berlin reported the most dynamic development with an increase of almost 11 percent within the space of a year to €17.01 per sq m and month, followed by Frankfurt (up 5.4 percent: €19.10 per sq m and month). Munich and Düsseldorf remained virtually unchanged, up 0.2 percent and 0.7 percent respectively. Hamburg alone witnessed a decline of almost two percent in the weighted average rent as the largest deals in terms of space were concluded at lower rental prices in the period under review (12 months).
Outlook: supply shortage and rising rents drive the market
“The letting market will continue to benefit from the current economic upswing in Germany. Overall, we assume that office take-up in the Top 5 locations can generally be expected to settle around the level of the long-term average. Rising rents accompanied by shortage in supply are causing users to focus on optimizing space and using it more efficiently in the context of workplace strategies which help to avoid expanding office premises despite the rising number of employees,” Linsin explains.
Top 5 office letting markets
Source: CBRE Research, Q2 2017
Source: CBRE Research, Q2 2017
About CBRE Group, Inc.:
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. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.