Wolfgang Speer, Head of Office & Occupier Services at Colliers International, comments, “Growing concerns about an economic slowdown in Germany have yet to be felt on the office leasing markets. On the contrary, businesses were especially keen to invest in H1, signing leases for a record amount of office space. This means that the effects of the current global economic forecast on the German office leasing market are limited for the moment. However, headwinds have increased, particularly due to intensifying global trade conflicts and the ongoing Brexit crisis.”
 
The current GDP growth hiccup, with economic research institutes estimating an economic growth rate between 0.5% and 0.8% in a joint forecast for 2019, will slightly ease the pressure on the office leasing markets after years of upturn and very low vacancy rates. Wolfgang Speer continues, “As such, we should not worry too much about the increase in vacancy expected from 2020 onwards. Despite lively construction activity, the market is currently crisis-resilient due to the relationship between high demand and low vacancy. We do not expect to see any structural vacancy.”

Take-up results approach record levels in many cities, new records in Hamburg and Düsseldorf

Munich took the lead in H1 with take-up of 422,900 sqm. The city managed to exceed the 400,000-sqm mark for the third time in a row particularly thanks to large-scale owner-occupier deals, most notably ProSiebenSat1 and Bayerischer Rundfunk with property developments of around 25,000 sqm each. As a result, tenants from the ICT sector took first place in terms of market activity, followed by the manufacturing industry. The overall market came in 23% above the 10-year average.

Berlin followed closely in the ranks with 391,000 sqm, the second-best result ever recorded. Market activity was driven by large-scale deals for more than 5,000 sqm. Moreover, the IT sector and public administration played a significant role in putting results up year-on-year by 4%.

Fueled by a particularly strong leasing market, Hamburg climbed to third place in the first half of the year. Not only did the city’s take-up result of 316,900 sqm exceed the previous year’s result by 41%, it also set a new record. The start of construction on Otto’s headquarters, which encompasses 40,000 sqm in total, and the University’s decision to lease 31,000 sqm at the Altes Fernmeldeamt building, were behind this impressive result as were the large-scale deals signed by Vattenfall and Xing in Q1.

The Frankfurt leasing market managed to gain significant ground following a calm start to the year with take-up at 256,400 sqm by mid-year. Deka’s large-scale property development in Niederrad helped the market experience a seamless continuation of the previous year’s trend, marking a 10-year-record high 17% above the 10-year-average.

The Düsseldorf market also posted new record results with take-up of 211,000 sqm, up 18% compared to 2018’s already strong mid-year results. The most notable transaction this year to date was the deal signed by British advertising company WPP for a property development at Medienhafen encompassing 34,000 sqm.

Activity on the Stuttgart office leasing market was lively but fell short of its potential. Supply could not meet demand from tenants on the lookout for space due to a considerable shortage of supply and almost fully let property developments. Nevertheless, Stuttgart’s H1 take-up result of 141,700 sqm is still only slightly below record levels and 33% above the 10-year average.

Cologne is experiencing a similar trend. Although market activity was curbed by an acute shortage of supply, the market still managed to match relatively low previous year results. As such, the take-up result of 130,500 sqm is not an indication of low demand but rather of a significant lack of space, particularly large-scale adjoining space. Demand was diversified with business centers, the IT sector and consulting firms at the helm.

Vacancy rate in Big 7 drops to new low of 3.0%

Vacancy continued to fall during the first half of the year, with only 2.75 million sqm available for immediate tenancy in Germany’s Big 7. The vacancy rate dropped by 70 basis points within the span of one year to a current all-time low of 3%.

The basic vacancy rate continued to fall as well even in those markets under the most pressure. The vacancy rate dropped to 1.4% in Berlin and to 1.7% in Munich. Stuttgart (2.1%) and Cologne (2.4%) followed in the ranks with vacancy rates close to the 2% mark.

Hamburg saw a particularly steep decrease in vacancy. The 398,000 sqm of space still vacant in the city also gives us a vacancy rate of below 3% at 2.9%. Düsseldorf and Frankfurt posted the highest vacancy rates among the Big 7 with 6.4% and 7.2%, respectively. While vacancy dropped below 500,000 sqm in Düsseldorf, available space at new large-scale properties led to a slight increase in the vacancy rate in Frankfurt. This trend should prove only temporary, however, due to strong demand from banks and consulting firms.

Development pipeline gains momentum – 1.6 million sqm scheduled for completion in the Big 7 in 2019

The development pipeline is well stocked in most cities in response to current high demand and low vacancy rates. “There is 1.6 million sqm of office space scheduled for completion in the Big 7 with 5.3 million sqm scheduled to hit the market by 2021. However, this much-needed new space will only temporarily relax the situation on the country’s overstressed office leasing markets,” says Wolfgang Speer. Berlin and Munich currently boast the strongest pipelines with almost 2.1 million sqm (Berlin) and 1.0 million sqm (Munich) of office space expected to hit the market by 2021.

One out of every three square meters of take-up generated by property developments in H1 2019

“High pre-leasing rates show that the market is quickly absorbing new space. 87% of the 1.6 million sqm set to hit Germany’s top 7 markets in 2019 have already been let along with 43% of the space scheduled for completion in 2021. Tenants are under increasing pressure to get their hands on new space as early as possible,” comments Wolfgang Speer, adding, “Pre-leasing space at property developments is becoming increasingly important on the office leasing markets. Property developments accounted for almost 40% of take-up in Germany’s top 7 office hubs in H1 2019. The high number of large-scale leases being signed for space at property developments confirms this trend.”

Prime and average rents continue to rise, Berlin displaces Munich 

Rents are still experiencing an upward trend with average rents increasing on a broader scale than prime rents. Nevertheless, prime rents still posted some increases. Frankfurt claimed pole position with €43.00 per sqm, up 5% yoy, while other rankings experienced a shift. Prime rents in Berlin once again increased significantly to a current €36.50 per sqm, relegating Munich to third place. Munich posted prime rents of €36.20 per sqm at mid-year. Prime rents remained stable yoy in Hamburg (€28.00), Düsseldorf (€28.00) and Cologne (€25.00). Stuttgart recorded an increase of 2% yoy, coming in last among Germany’s top 7 with €24.00 per sqm.

Prime rents increased at a slightly slower pace than during the previous year, a trend that can be attributed to the shortage of prime assets required for these levels. Landlords can therefore expect to achieve even higher rents for properties of this quality going forward.

Berlin also continued strengthen its top market position in terms of average rent, posting a yoy increase of 16% to €24.10 per sqm. Frankfurt followed in the ranks with a 2% yoy increase to €20.50 per sqm. Average rents also rose yoy in Munich (€19.20), Hamburg (€16.50), Stuttgart (€15.00) and Cologne (€14.50). Average rents in Düsseldorf remained stable at €16.10 per sqm.

Outlook: Strong H1 2019 points to 3.7 million sqm for 2019

“Despite potential economic risks, activity on the German office leasing market remained strong in the face of the global economic forecast, slightly outperforming previous year results with a new record high. We are upping the annual take-up forecast we made in March to 3.7 million sqm due to the high results posted at the end of H1 2019. Demand for space remains strong, which means new-build space will be quickly absorbed by the market,” concludes Wolfgang Speer.