Germany’s HIH Real Estate is predicting that rent rates in the office real estate markets of Germany’s “Big Seven” cities should hold firm over the year to come, despite market activity being drastically reduced, with only a few large-scale new lettings providing relief. That could contribute to a lowering of average rents down the line, however, if that trend continues.
Against that, the pre-let ratios on developments due for completion in 2020 and 2021 are over 80%, and therefore high enough to provide a bulwark against too strong a fall in rent levels, say the HIH researchers.
According to Ken Kuhnke, Head of Lettings Management and member of the senior management of HIH Real Estate, “For the time being, the occupier market remains shock-frozen. In many cases, lease agreements and lease renewals already in the final negotiation stage will proceed and be signed. But there are definitely rent processe8s that have been shelved by tenants and tenant leads for the time being. We do expect this phase to last through the end of the year.”
Kuhnke predicts: “We assume that 2021 will see an economic recovery as demand will gather considerable momentum, and it will probably be driven by quality needs more than by cost-cutting requirements, just the way things have been over the past years. Even if companies were to start cutting jobs or required less space in the longer run because of their positive experience with their home office solutions, they would definitely make sure that their remaining premises are high-end properties with a high quality of stay.“
“Decisions to move to new locations will take this into account. It will take a considerable amount of time for the present vacancy rates of sometimes less than 1.5% to climb back all the way to 7%, the threshold above which rent rates start to soften on a broader scale,” said Kuhnke. The economic recovery will commence in 2021 and therefore soon enough to keep vacancies from regaining such a level, he believes.
Looking ahead, Kuhnke assumes that even lease renewal negotiations will follow the trend toward shorter lease terms: “The experience of the crisis will prompt tenants and tenant leads to ask for shorter terms of the leases they are about to sign. However, these companies will also be willing to accept higher rents in return for increased flexibility time-wise.”
On a further optimistic note, Kuhnke says the trend toward shorter fixed lease terms will make it easier for investors to anticipate upward rent growth during better times. This itself should also provide further protection against softening rent rates.
