Wolfgang Speer, Head of Office & Occupier Services at Colliers International Deutschland, says, “2019 was another exceptional year on the German office leasing market. The result fell just shy of the 4-million-sqm mark with some markets even recording new records in office take-up. The somewhat gloomy outlook for the global economy has only had an impact on particular sectors such as the automotive and manufacturing industries. The leasing activity of other industries such as the IT sector remains unaffected by the current economic trend. What’s more, the ifo Business Climate Index and business expectations picked up again in Q4. As such, the German office leasing market remains quite robust despite the current economic downturn.”

Experts are anticipating economic recovery going forward. While economic growth is expected to slow to 0.5% for the end of 2019, joint forecasts predict higher growth rates of between 0.8% and 1.4% in 2020. “We can expect businesses to start investing more actively in the near future. Until then, demand should ease up slightly after years of steady growth,” continues Wolfgang Speer.

Trends in top 7 cities vary with all-time highs for Berlin and Düsseldorf

The Berlin office leasing market posted a record result with 1,030,000 sqm in take-up, up 30% y/y. This is the first time that the German capital has exceeded the 1-million-sqm mark. This feat was last achieved by Munich in 2000. 50 large-scale leases signed for over 5,000 sqm, companies from the public administration, IT, retail and gastronomy sectors, contributed to this exceptional result.

Munich came in second with 770,400 sqm in take-up, down 21% compared to a strong 2018. Tenants proved hesitant due to the economic slowdown, particularly in the second half of the year. Nevertheless, total take-up still managed to slightly exceed the long-term average.

The Frankfurt office leasing market picked up speed following a slow start to the year. With 550,000 sqm in total take-up at year-end, the city again took third place, exceeding the 10-year average by 13%. However, Frankfurt’s annual result is still 11% shy of previous-year results due to a lack of major deals. Demand was primarily fueled by banks and public administration. 

Hamburg fell just short of third place but managed to exceed the 10-year average by 5% with of 535,400 sqm in take-up. The 5% y/y drop can be attributed to limited supply and to a corresponding drop in large-scale leases. Similar to previous years, demand in Hamburg was broadly diversified.

The Düsseldorf office leasing market experienced an exceptionally strong year, topping 2007’s record result at 475,000 sqm. This reflects a 41% y/y increase and an impressive 51% above the 10-year average. These results can primarily be attributed to large-scale deals with nine leases exceeding the 10,000-sqm mark. Consulting firms and public administration played a significant role in these deals.

Stuttgart managed to top previous year results by 44% with take-up of 312,100 sqm. This marks the second time Stuttgart has exceeded the 300,000-sqm mark since 2000. The office leasing market benefited from around a dozen large-scale deals, with public administration claiming first place ahead of manufacturing in terms of demand.

Annual take-up on the Cologne office leasing market came to 275,000 sqm, down 5% y/y due to a severe shortage in supply. Stock properties accounted for only two large-scale leases. Large, adjoining space was almost exclusively available in property developments. Demand had its roots in a range of industries despite the lack of supply, with the IT sector and coworking providers at the fore.

Vacancy rate in Big 7 down to 2.9%

Vacancy continued to drop in 2019, albeit at a slower pace. Vacancy in many of Germany’s top seven markets is limited to outdated, barely marketable office space and has begun to bottom out. Just under 2.7 million sqm of office space was available for immediate tenancy in Germany’s Big 7 cities at the end of Q3. The vacancy rate finished out the year at 2.9%, down 20 bps y/y. 

Berlin recorded the lowest vacancy rate at 1.2% followed by Stuttgart (1.9%) and Cologne (2.2%). Absolute vacancy in all three cities dropped by more than 20% in 2019. Vacancy in Munich was up y/y 40 bps to 2.2%. Supply, however, remains scarce and the number of property developments in the pipeline is still too low to expect a trend reversal towards significantly higher vacancy anytime soon.

The vacancy rate in Cologne fell another 60 bps y/y to a level similar to that posted in Munich. Hamburg followed at 2.5% with vacancy down 110 bps. Düsseldorf fell short of the 6% mark at 5.9% due to a strong office leasing market, while Frankfurt exceeded the same threshold by one percentage point at 6.9%. Large-scale space available for immediate tenancy in the city outskirts is keeping vacancy rates stable for the moment.

Development pipeline well-stocked with 5.5 million sqm, pre-leasing rates remain high

Almost 1.4 million sqm of new office space hit Germany’s top 7 markets in 2019, reflecting an increase of 62% compared to 0.8 million sqm in 2018. At the moment, 5.5 million sqm is scheduled for completion by 2021 with Berlin and Munich experiencing particularly high construction activity.

“Property developments are a significant source of supply serving the high demand in many of the Big 7 markets. Property developments accounted for 25% of leasing activity in Germany’s top 7 office hubs in 2019. As such, pre-leasing rates remain high and strong construction activity is in line with anticipated excess demand on the market going forward. 91% of the space completed in 2019 was leased by year-end and 72% of space currently under construction has already been leased as of early 2020. Markets continue to quickly absorb new space,” comments Wolfgang Speer. 

Rents continue to rise due to lack of space and property development activity

Average rents showed continued strong growth this past year with many of the country’s top 7 cities recording an increase in prime rents. Frankfurt ranked first in terms of prime rents at €45.50 per sqm. Berlin and Munich followed in the ranks, swapping places over the course of the year at €39.90 per sqm and €39.50 per sqm, respectively, with both cities bottoming out just below the €40 mark. Berlin posted an increase of 13% and Munich reported a 10% increase.

Hamburg and Düsseldorf both came in just shy of the €30 mark with prime rents at €29.00 and €28.50 per sqm, respectively. Cologne (€25.50 per sqm) and Stuttgart (€24.00 per sqm) brought up the back of the pack.

Average rents also reached new heights in 2019, with Berlin posting a 21% y/y increase to €26.30 per sqm. Stuttgart was the only market to experience similar activity with average rent up 19% to €16.60 per sqm. Frankfurt and Munich followed in the ranks with average rents of €21.30 per sqm and €20.10 per sqm, respectively. Hamburg and Düsseldorf came in neck-and-neck at €17.30 per sqm, the former registering more dynamic growth (10%) than the latter (7%). Average rent in Cologne also increased 10% to €15.20 per sqm.

Outlook: 3.5 million sqm in take-up expected for 2020 despite economic slowdown

“Our forecast for 2020 assumes that office leasing markets will remain mostly unaffected by external risks such as Brexit, trade conflicts and public debt in the eurozone thanks to robust economic growth, ongoing low unemployment and record employment. The ifo Business Climate Index began to climb again in Q4, which supports this outlook. In structural terms, the growing importance of ICT for businesses will increase the number of office jobs,” says Wolfgang Speer, adding, “Although we do expect to see lower demand in certain locations and sectors, this will only have an impact on take-up results and not on rent levels. In view of these factors and the well-stocked development pipeline, we expect 2020 take-up to come in at 3.5 million sqm. In any case, 2020 results are sure to exceed the 10-year average of 3.3 million sqm.”