Q2 | July 2021 Research Germany Office Market Overview Positive expectations outshine the current situation Recovery expected in the second half of the year We are now halfway through 2021, and the coronavirus ten years. On the other hand, in June the Labour Market pandemic is still taking its toll on the German property Barometer of the Institute for Employment Research market. A fourth wave of COVID-19 infections could arri- (IAB) in Nuremburg reached its highest level since its ve in the second half of the year, but is likely to be much first measurement in 2008. This leading indicator ref- weaker than its three predecessors, with varying effects lects the willingness of companies to recruit over the on property markets. The economy and its various parti- coming few months, supported by the further recovery cipants are at least only factoring in a relative risk from of the global economy but primarily on the basis the pandemic. Some economic research institutes have of a dynamic domestic economy. revised their 2021 forecasts upwards in recent weeks. According to Consensus Economics, the gross domestic Of course, risks must not be ignored. In addition to the product (GDP) is expected to rise by 3.3% this year. The infection rate, other aspects that could slow the econo- signs are also pointing to growth next year, with 4.2% mic upswing are rapidly rising prices and supply bottle- currently forecast. It’s a sign not only of the current posi- necks especially for building materials and electronics. tive sentiment but also the positive expectations for fur- For the German office lettings market in particular, the ther business growth. This is fed by two indicators that end of the obligation to work from home is an enor- are also essential for lettings markets: the absence of a mous challenge. On the one hand, we will now see how wave of insolvencies and the situation on the labour serious companies are about implementing flexible re- market. On the one hand, the number of corporate mote working strategies. On the other hand, it remains bankruptcies has continued to decline even though in- to be seen to what extent office workers can, must or solvency applications are now mandatory again in Ger- want to return to their workplaces in city offices. many: only 8,800 companies filed for insolvency in the first half of 2021, according to figures from credit agency The picture is still unclear because of these issues. Com- Creditreform. That equates to 1.7% fewer insolvencies panies will probably wait until the autumn before rolling compared to a year previously – the lowest figure in over out their strategic plans for a post-pandemic working environment. There is likely to be a general consensus that we are heading towards a more hybrid way of wor- Completions and Vacancy Rate Big 7 king. However, the balance between working in the of- fice, at home or in a third place will heavily depend on the business activity and employee preferences. And it has been unclear for some time whether more or less of- fice space will be required as a result. It is essential that the quality of office furnishings improves, and that the number of square metres per workspace no longer ser- ves as the sole defining benchmark in future. Demand for office space is stabilising – outlook is cautiously positive The short- to medium-term outlook for the rest of the year is not so negative given the complex situation. How- ever, the figures for the last three months or the first half Cover page 2 Contacts of the year only confirm that the prevailing uncertainty German office market would then still emerge in very prevented more dynamic activity on the German office good shape from a crisis situation never seen before lettings market. This is one of the reasons why take-up in this form. stood at around 1.31 million sqm for the six months to the end of June. The figure is virtually unchanged from Vacancies continue to rise significantly except the first half of 2020 (minus 1%). Nothing else was to be in Frankfurt and Stuttgart expected since the office market represents a lagging The growth in vacancies that was already evident in the indicator of economic fluctuations. It will be some time first quarter continued in the period from April to June. yet before the positive underlying data will affect de- Currently, more than 4 million sqm of office space is mand, and furthermore assumes that the vaccination available at short notice in the seven strongholds, an in- rate will continue to rise and that any fourth wave in the crease of just over 1 million sqm or 35% compared to autumn would not require a mandatory return to home the end of June 2020. This further cements the somew- working. Against this backdrop, some companies are hat unusual turning point in the cycle at the end of 2020, sticking to a policy of working from home for the next with increasing vacancies yet rising or stable rents. The three months. What’s clear is that almost all industries average vacancy rate for the Big 7 currently stands at and companies will face changes, but it’s also clear that almost 4.3% and is therefore 40 basis points higher than the office will remain a central hub for communication in the first quarter. However, in the last 20 years vacancy and the exchange of information. In addition, many em- rates have been lower in only nine of the 80 quarters ployees may appreciate the positive effect of a regular in total. Furthermore, the proportion of sub-lettings – office routine more than ever. a type of seismograph for future developments – has remained at a consistent level and accounts for 12% A glance at the individual markets reveals broadly simi- lar trends compared to the first three months. Four of the seven strongholds recorded growth, with Cologne Prime Rental Index and Take-up Big 7 and Frankfurt in the lead (each with over 50% growth). Hamburg (+34%) and Berlin (still with +6%) are next. The German capital also recorded the highest absolute take- up figure of around 366,000 sqm. Düsseldorf, Stuttgart and Munich, on the other hand, registered losses of bet- ween 30% and 37% compared to the previous year. There was an absence of large lettings that would normally boost take-up levels. This also reflects the fact that large companies with several locations or with heterogeneous office space concepts currently have to rearrange and restructure themselves. What will the second half bring? Some recovery, yes, but not a spectacular race to catch- up. We are unlikely to see significantly greater momen- tum on lettings markets before 2022. Our take-up fore- cast for 2021 as a whole is about 2.8 million sqm, which would be 5% more than 2020. In terms of demand, the Cover page 3 Contacts (about 480,000 sqm) of overall vacancies. This share the proportion of space that is already rented and occu- could creep up to 15% during the year, but would still be pied stands at a somewhat lower level of 43%. It remains well below the rate recorded in 2002 (24%) with a similar to be seen whether this trend of declining pre-letting economic crisis but without a banking crisis. rates is already an effect of the recent sharp rise in buil- ding prices. The property market is not immune to hig- The vacancy rate has risen particularly strongly in Berlin. her construction prices. Both new construction projects Within the last 12 months, it has more than doubled – and the renovation or modernisation of property are re- albeit from a very low level. At 3.9%, the vacancy rate in source-intensive, and delivery bottlenecks and sharply the capital is still below the average for the Big 7. Frank- rising prices can have significant effects on the markets. furt registered the smallest rise in vacancies in a year- The markets become gripped by uncertainty, which can on-year comparison (by 5% to 6.6%). In Stuttgart, va- delay the completion of projects already under cons- cancies fell by another 9%, and the vacancy rate again truction and thus increase the risk for project developers dropped below 2%. We still expect to see a further mo- and users. If a move cannot take place as planned and derate increase in vacancies to an average of 4.5% by an old lease has already been terminated, such delays the end of the year. In addition to vacancies in existing can cause problems for companies that have opted for buildings, newly built space is now exerting at least a new space in projects that have not yet been completed. certain amount of pressure on vacancies due to an in- crease in the share of speculative builds. We assume Prime rents remain stable – growth expected that the office market will fundamentally become in- in Berlin and Cologne creasingly differentiated: modern and flexible office The demand for space is stable and prime rents are also spaces will remain in demand, while offices that only at consistent levels. The JLL prime rent index remained support rigid concepts and fail to score points in terms at 222.35 points at the end of the second quarter and of sustainability will find fewer takers,. was therefore unchanged for the third quarter in a row. In a 12-month comparison, the rate has increased by Building volume rises as pre-letting rates fall – a rise 0.9%, which is owing to the increases in Berlin and in construction costs could have a dampening effect Hamburg at the end of 2020.