Rental growth and the decline in vacancy rates continue; pipeline over the coming years to significantly exceed the long-term average
- Completion volume to rise to 1.2 million sq m in 2019, the highest total since 2010
- Significant increases in take-up in Cologne, Düsseldorf and Hamburg; modest decline of 2.5% across the top six markets overall to 825,000 sq m
- High-value, city-centre lettings are producing significant prime rental growth in Cologne and Hamburg
The six largest German office rental markets started the new year with the same level of activity as they finished last year. “The market situation remains strained for occupiers with either a further decline in the vacancy rate or further increases in rents across all markets compared with the previous quarter,” says Panajotis Aspiotis, Managing Director and Head of Agency Germany for Savills, adding: “We expect this trend to continue in all markets throughout the course of the year.”
Market activity was strong for an opening quarter in terms of take-up. The top six markets produced take-up of 824,900 sq m of office space, representing a marginal decrease of 2.5% year on year. However, there was significant variation in levels of activity across the individual cities. Cologne (+36%), Düsseldorf (+33%) and Hamburg (+24%) witnessed significant increases in take-up, while Munich (-17%) and Frankfurt (-37%) registered a weaker start to the year.
Rental growth continued across all markets. Cologne produced the strongest prime rental growth of 8.3% compared with the previous quarter, which was attributable to high-value lettings to flexible workspace providers in the city centre. “The fact that the city centres in all markets are particularly commanding higher and higher rents is attributable to the strong competition among occupiers for space in central locations. A good city-centre location is indispensable for many companies in order to compete with other firms for new personnel. Providers of flexible workspaces are also targeting the best locations, however, and are prepared to pay new record-high rents,” explains Fabian Sperber, Associate Research for Savills.
Where companies are unable to find the central space they are seeking, they must find an alternative. Besides optimising the space concept in their existing property, there is also the option of leasing a second office or a temporary letting in a flexible workspace. The beneficiaries of the current market situation include up-and-coming office locations with particularly good infrastructural connections to the city centre and adequate local amenities. Examples of these include the Werksviertel area in Munich or Altona in Hamburg.
With the exception of Berlin, all markets witnessed declining vacancy rates in the first three months, with the average figure across all markets standing at 3.6%. Incentives are scarcely being granted in the current market conditions. “In the current market environment, it can even be an incentive for the tenant if the landlord offers to include an option to extend in the lease,” says Aspiotis.
The new-build pipeline over the coming years will provide some relief. The completion volume for the current year will increase to 1.2 million sq m, which is the highest figure since 2010 and significantly above the 10-year average of around 950,000 sq m. However, three quarters of this space is already let. In 2020 and 2021, a further 2 million sq m and 1.6 million sq m of office space will be added, with the pre-let status for these totals standing at 55% and 30% respectively.
Neither the deteriorating economic outlook nor the uncertainty surrounding the outcome of Brexit are expected to have a significant impact on demand for space this year. “We expect take-up for the full year to come in modestly above or below last year's levels in all markets. In some markets, such as Düsseldorf, major lettings in progress could produce the highest take-up since 2015,” says Aspiotis.