Market in Minutes Top-7 Office Markets Germany

2019 in brief: an increasing supply shortage

Text: Matthias Pink

From an occupier's perspective, conditions in the major German office lettings markets became increasingly challenging during the course of 2019 and remained so until the end of the year. The average vacancy rate across the top seven markets of Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart stood at 3.1% the end of December (-0.1 percentage points compared with Q3 19 and -0.5 percentage points compared with Q4 18), reaching its lowest level since 1992.

The supply reserve in most cities is less than one year (see graph below). Conversely, office rents rose to their highest level in almost thirty years. The average prime rent across the top seven cities at the end of 2019 stood at around €33 per sq m, representing an increase of almost 9% year on year. The average rent rose by almost 10% to approximately €19 per sq m, which is a third higher than five years ago, while the prime rent was up by almost a quarter.

The current strong momentum in new-build completions could offer tenants some relief provided that it continues for a few years. Approximately 1.3 million sq m of office space was completed last year, which was almost completely let by the end of the year.

This year, almost 2 million sq m of new office space is expected to come to the market, of which around three quarters is already pre-let. Despite the high pre-let rate, development projects are expanding office occupiers’ options since many pre-lets involve relocations, which will free up existing space. The higher completion volume is opposed with lower growth in the number of office employees according to current projections. The stark discrepancy between strong growth in demand and modest growth in supply, which has persisted for almost ten years, should slowly dissipate over the coming two years, with another approximately 1.9 million sq m of office space expected to be completed in 2021. Berlin will see a particularly strong increase in activity, with approximately 730,000 sq m of office space scheduled for completion this year, which is around twice the volume completed last year. Nevertheless, we still expect further moderate growth in prime rents in the German capital, particularly since occupiers’ requirements are increasing when it comes to quality of location and space. We expect prime rents across the top seven cities to increase by an average of 3% to 4% in 2020, which would equate to half the growth witnessed last year.

Take-up, which totalled almost 4 million sq m across the top seven cities last year, is likely to be somewhat lower this year owing to the afore-mentioned lower growth in the number of office employees and weaker economic activity. The three sectors with the highest share of take-up last year were ‘knowledge-intensive services’, ‘information and communication’ (each with 14%) and ‘trade and logistics’ (13%). The manufacturing sector has been and remains the most affected by the weaker economic activity and accounted for less than 8% of overall take-up, which is somewhat below the five-year average (10.2%).

Our outlook for 2020 can be summarised as follows. While individual parameters will change, the overall situation for office occupiers will remain largely unchanged this year. More specifically, this means tenants will have to adjust to the sustained supply shortage, the corresponding intensive competition for the limited space available and continued very high rental levels. For occupiers seeking high-quality space in good locations, we continue to largely advise pre-lets in developments with the allowance of an appropriate lead time. For landlords, the environment remains correspondingly friendly, although this time should be used to prepare for those years when rents will no longer increase without intervention on the part of the owner. The general challenge here is that occupiers’ requirements in terms of location, property and space are increasing and these requirements, along with a growing need for flexibility, must be met.

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