- The Colliers forecasting model takes into account the impact on individual sectors, the impact of working from home and expected vacancy in new-builds and stock properties
- Vacancy rates to remain relatively unaffected by crisis
- Vacancy rates in Germany’s Top 7 cities could experience a slight increase in 2021 from a very low 2.9% to between 3.9% and 5.5%
- Return to peaks seen during the dot-com crisis and financial crisis not expected
- Take-up: minimum take-up levels remain stable even during times of crisis
- Stabilizing effect on rent trend
Munich, 6 May 2020 – The corona pandemic is rapidly changing our daily routines, the economy and society as a whole. Following strict lockdown measures, restrictions are now being gradually lifted in Germany. Billions in aid and reduced hours compensation have been granted to help companies avoid liquidity bottlenecks and limit economic fallout. At the same time, millions of employees are gaining experience in working from home as well as with strict hygiene and distancing regulations. How is the corona pandemic impacting the office markets?
According to Wolfgang Speer, Head of Office & Occupier Services at Colliers International Deutschland, “It is difficult at the moment to gauge the long-term impact of the coronavirus crisis on the office markets. In contrast to previous crises, we are seeing an external shock of unprecedented cause, scale and effect. We can nevertheless learn from past crises, identify patterns and trends and come up with different scenarios for anticipated vacancy levels using a forecasting model.”
Forecasting model: predicting the vacancy trend during the coronavirus crisis
We analyzed different scenarios to illustrate the possible impact of the corona pandemic on the Germany’s Top 7 cities. Vacancy rate as one of the primary performance indicators for office leasing markets proved an effective gauge. We applied the amount of office space currently taken up in each segment as a basis for estimating future space requirements. In the analysis, impacts on the economy are differentiated by industry. Our forecasting model takes into account the specific industry mix in each of Germany’s Top 7 markets.
The sectors most affected by the lockdown include tourism, sports and recreation, the manufacturing industry and business center and coworking providers. In contrast, health and social services as well as public administration appear relatively unscathed by the pandemic.
Our forecasting model takes into account three factors currently impacting office take-up. The impact on economic development indicates how strongly each sector is being affected by the economic downturn. Development pipelines in the Top 7 markets (including pre-leasing activity) for 2020 and 2021 are also taken into account to reflect vacancy in new-builds. The third factor is the impact of working from home, which points to future office space requirements in consideration of increased numbers of employees working from home. This factor is based on the findings of our home office survey conducted in April, in which we asked 480 participants about their experiences with remote working.
We came up with three possible scenarios based on this anticipated demand for office space, each depending on the extent of the recession and the speed of recovery. These three scenarios account for fast, medium and slow recovery.
Vacancy forecast: vacancy rates to remain relatively unaffected by crisis
Vacancy has been dropping steadily since 2010, down from 10% to a current 2.9%. In absolute terms, vacancy dropped from over 8.7 million sqm to 2.7 million sqm.
“Based on the results of our vacancy forecasting model, we expect to see a moderate increase in vacancy. Depending on the scenario, the vacancy rate in Germany’s Top 7 markets could rise from 2.9% in Q1 2020 to between 3.9% and 5.5% in 2021. With vacancy extremely low, it will be possible to reduce the shortage of space in many locations. Even in the most pessimistic scenario, vacancy will remain below a ‘healthy’ threshold of 5%. We do not expect vacancy to return to the record highs seen in the wake of the dot-com and financial crises,” assesses Wolfgang Speer.
The local industry mix and differences in construction activity carry the most weight when it comes to forecasting vacancy rates. What’s more, pre-leasing rates remain very high. 77% of space scheduled to hit the market in 2020 is already pre-let with pre-leasing rates for 2021 at 66%. “Thanks to these robust general conditions, expected vacancy rates in the fast recovery scenario range between 2.5% in Berlin and 8.0% in Frankfurt and between 4.5% in Berlin and 10.0% in Frankfurt in the slow recovery scenario,” says Wolfgang Speer.
Take-up: minimum take-up levels remain stable even during times of crisis
“The office markets always continue to see minimum take-up levels, even during times of crisis,” comments Wolfgang Speer. When the dot-com bubble burst in 2002/2003, take-up in the Germany’s Top 7 markets was recorded at just below 2.3 million sqm and slightly above that number during the financial crisis of 2009. During times of crisis, take-up is also limited by an increase in the number of leases being renewed, which are not included in final results pursuant to gif guidelines. Scarce supply and high rents have already led to an increase in the number of leases being renewed in some locations in recent years. “We expect to see more leases being renewed compared to new leases being signed as a result of the wait-and-see stance being taken by many companies and the impact of the recession,” Wolfgang Speer continues.
Subleases could take on greater significance
“We anticipate a potential increase in vacancy not only at new-builds but also at stock properties,” says Wolfgang Speer. Some leases set to expire relatively soon may not be renewed and new tenants could be difficult to find. Companies that have been highly expansive in the past may also decide to sublet some of their space. “At the moment, subletting only plays a minor role in the Top 7 markets, but we expect to see a stronger increase in this area,” Wolfgang Speer comments and continues, “In some cases, businesses interested in subletting may even accept rents below market level in order to ensure liquidity.”
Rent trend: increased pressure on prime rents with slight drop in average rents
Historical data shows that rent levels tend to recover from downward trends relatively fast. While prime and average rents in Germany’s Top 7 markets shrank by 16% and 15%, respectively, between the years 2002 to 2004 after the burst of the dot-com bubble, the financial crisis had a far less severe impact on office rents. Prime rents in the Big 7 fell by 7% in 2008 and 2009, and average rents by just 1%. Prime rents in Germany’s Top 7 markets have since increased by 41% to €35.50 per sqm and average rents by 58% to €21.50 per sqm. “We expect so see a slight adjustment from current levels. At the same time, prime rents could experience greater pressure than average rents,” Wolfgang Speer explains, adding, “The extent to which subletting takes place and the conditions involved could have a significant impact on office rents.”
Opinions among market participants vary when it comes to rent levels. In a recent survey conducted among top-level real estate decision-makers by Colliers International Deutschland in late April, 51% of those surveyed said they expected office rents to remain stable, particularly for core assets. 47% said they expected office rents to fall.
Outlook: Corona pandemic will affect office markets until 2021
“In light of the fact that a number of lease signings have been put on hold, we will have to wait on the transactions to come in the next few weeks before we are able to gauge the market trend going forward. The impact of the corona pandemic on the office markets will nevertheless be felt until 2021 in the form of limited take-up and moderate increases vacancy rates. However, with pre-leasing rates high and vacancy currently very low, we have the advantage of starting from a completely different baseline compared to the burst of the dot-com bubble and the financial crisis. The speed of overall economic recovery in the coming months will determine how severely office markets will be impacted by the corona pandemic,” concludes Wolfgang Speer.