By Sara Seddon Kilbinger, Senior Reporter, REFIRE
A tale of divergence as economic climate takes hold
Germany’s leasing market is gaining momentum as its investment market slows, showing just how differently they are being affected by both COVID and Germany’s shaky economic position.
Office lettings soared by 45% in the first half of the year across the Big 7 cities, according to JLL, totaling around 1.93 million square metres. Around 55% of half year take-up was generated between April and June and JLL is forecasting around 3.6 million square metres of take-up for the full year, up from 3.1 million last year.
While this might seem unexpected, given Germany’s current economic climate as well as the predicted energy crisis in the autumn and winter, Stephan Leimbach, head of Office Leasing at JLL puts it down to “the catch-up bottle effect”: ‘With leasing, if a contract is expiring, people have to do something,’ he told REFIRE. ‘During COVID, companies tried to wait but now there’s a “making up effect”. Leasing can take 6-9 months to trickle through and that’s what we’re seeing now.’
Berlin leads take-up in first half of 2022
A total of 309,000 square metres of office space was taken up in Berlin in the first half of 2022, reflecting a slight drop of 6% compared to the first half of 2020 and coming in 8% shy of the 10-year average, according to Colliers. Munich took second place with around 230,200 square metres, down almost 29% compared to the first six months of 2020. Hamburg took the third spot, with 213,000 square metres.
Vacancy rates currently stand at between 4% and 8%, according to Leimbach, with the lowest rates in Berlin and Munich. ‘Frankfurt has the highest vacancy rate in the Big 6 at 8%,’ he said.
Predictably, the pandemic and the fundamental change in the office work environment that it caused are challenging traditional office letting principles. Where an increase in vacancies previously caused a decline in prime rents, we have been seeing for some months now how strongly the market is differentiating itself based on quality. Vacancy rates are increasing across the board, while competition for prime space has become even more intense, causing prime rents to continue to rise in top locations.
‘The big trend is how the future of work will change,’ Leimbach said. ‘You really need to offer attractive offices. The big game changer is that a lot of people can choose whether they go into the office or work from home. If an office isn’t attractive, it will be empty. C and D locations will suffer as back office work in these locations can be done from home. Companies such as consulting, life sciences and tech are hiring, hiring, hiring. Even if they need less office space, they are still growing.’
Office tenants are paying the highest average rents in Berlin at €27.50 per square metre, according to Colliers, reflecting a slight €0.50 drop compared to the first three months of the year (-1% y-o-y). In contrast, average rents in Frankfurt rose €0.50 to €23.00 per square metre (+2% y-o-y). Munich came in third with average rents up just €0.20 per square metre to €21.10 per square metre.
‘As expected, office markets are still being impacted by the pandemic,’ said Stephan Bräuning, head of Office Letting at Colliers. ‘Although people are increasingly returning to the office as infection rates fall and vaccination rates rise, most companies have yet to finalize their decisions regarding future space requirements, the results of which will have an impact on market performance going forward. A number of companies are currently developing concepts for what they want their future office space to look like and are adjusting their requirement profiles accordingly.’
The ifo Business Climate Index fell from 93 points in May to 92.3 points in June. Businesses were less satisfied with the current business situation and expectations were also significantly more pessimistic. There was a significant downturn in the index, especially in the manufacturing sector, with energy-intensive industries in particular showing considerable concern, according to JLL. The further fanning of inflation has put central banks on their guard, leading them to bring forward and, most recently, sharply accelerate their interest rate rises. All in all, growth in Germany will be only moderate to weak in 2022, with the 2022 GDP forecast revised downwards to just 1.5% by the end of June from its original level of 3.5% at the beginning of the year.
Investment market remains subdued
Germany’s office investment market tells a similar, subdued story. The deal volume slowed significantly in the second quarter, with just €12.3 billion of deals transacted, roughly half the volume of the first quarter, according to JLL. In total, €36.1 billion of deals took place in the first half of 2022, up 5% on the same period last year. However, most of these took place before the hike in interest rates, which is expected to put a severe dampener on the second half of the year. Subsequently, JLL is forecasting around €70 billion of office deals this year in total, down 37% on 2021.
A total of 68 large-scale transactions above the €100 million mark, adding up to €19.4 billion, took place in the first six months of this year, according to CBRE. The largest single asset transaction in the first quarter was Frankfurt's Marienturm, which was sold by Aermont Capital to an entity managed by DWS for a reported price of €830 million. Marienturm comprises over 45,000 square metres of Grade A office space across 38 floors in Frankfurt’s banking district.
‘The acquisition of the Marienturm in Frankfurt reflects our strong European investment heritage and our ability to deploy capital effectively,’ said Oliver Hein, head of Transactions (DACH) at DWS Real Estate. ‘The Marienturm combines all the quality features that characterize a long-term, attractive investment.’
In May, Norway’s sovereign wealth fund agreed to buy a 50% stake in Berlin’s Sony Center for €677 million. The office and retail complex’s current owner, Toronto-based Oxford Properties Group, has retained a 50% interest and continue as the asset manager for the new joint venture.
Earlier this week, an unnamed regional family office acquired a 7,400 square metre in Hof, Bavaria, from EPISO 5, an opportunistic fund managed by Tristan Capital Partners, for an undisclosed sum. The property is fully leased to a credit institution on a long-term basis. The transaction is the latest disposition from the former Summit Group's portfolio, which was acquired in June 2021. The transaction was led by DW Real Estate, one of the three joint venture partners in the portfolio. Cushman & Wakefield and Clifford Chance acted as advisors to the seller.
