Even scarcer supply and continued strong rental growth – no relief for the market before 2020
- Take-up of 3.7 million sq m was modestly lower than last year's record level (-2.8%)
- Prime and average rents in the top six cities rose by 4.2% and 6.8% respectively compared with 2017
- Vacancies across the top six markets total 3.15 million sq m, representing a vacancy rate of 3.7%
- Projection for 2019: rental growth to reach 4% and the vacancy rate to decline further
The boom in the top six German office markets continued unabated in 2018. “Growth in all the major German office lettings markets was characterised by an ever decreasing supply combined with further increases in rents,” says Panajotis Aspiotis, Managing Director and Head of Agency Germany for Savills, adding: “For occupiers, it is becoming increasingly difficult to find space in their preferred size category and location since there is now less vacant office space in the top six markets than the average volume taken up during a year.” Take-up in 2018 totalled 3.7 million sq m, representing a decrease of 2.8% compared with the record figure from the previous year.
Vacancies totalled 3.15 million sq m at the end of the year, equating to an average vacancy rate of 3.7% across the top six cities. The vacancy rate fell across all markets over the last twelve months. Frankfurt witnessed the strongest decrease of 110 basis points, taking the city's vacancy rate to 7%. Berlin has the lowest vacancy rate of 1.5%, which is 50 basis points below the previous year’s level.
Rental levels increased significantly in 2018 owing to high demand and low levels of supply. On average, the prime rent across the markets rose by 4.2% to €31.47 per sq m/month, while the average rent increased by 6.8% to €17.72 per sq m/month. Berlin registered the strongest growth. The prime rent in the city rose by 12.6% to €35.80 per sq m/month, while the average rent gained 15.2% to reach €22.00 per sq m/month. Just five years ago, Berlin was the backmarker of the top six cities in terms of rental levels. Today, the prime rent in the capital is only exceeded by those in Frankfurt and Munich while the average rent is by far the highest overall. This is a consequence of the economic catching-up process, with Berlin now enjoying a leading position in Europe as a start-up location, a tech city and a magnet for national and international companies.
Trends in rents and vacancies were also so significant in 2018, in Berlin and elsewhere, since there was no noticeable relief from completions of new office space. The completion volume of just below 850,000 sq m in 2018 was below the five-year average of 900,000 sq m and only marginally higher than the previous year’s level of 834,000 sq m.
How developments in the market will unfold in 2019 is largely dependent on demand. “While the economic outlook has recently deteriorated somewhat, demand for office space is not expected to decline for the time being. It is simply likely to grow less strongly than in recent times,” predicts Matthias Pink, Director and Head of Research Germany for Savills. However, take-up in 2019 is likely to be lower than last year's level, which is also attributable to the supply situation.
On the one hand, there is less and less vacant existing space available and this is expected to decrease further across all six markets. On the other hand, while the completion volume is expected to rise to over 1.2 million sq m in 2019, more than two thirds of this space is already let. Against this background, rents are likely to increase further. We expect prime and average rents across the top six cities to rise by an average of just over 4%. The strained market situation is unlikely to witness any relief before 2020, when the completion volume will increase to more than 1.9 million sq m.