Across Germany, the office letting market is hungry for new space amid booming demand from companies of all sizes.
Now, a significant shortage of office space in prime city center locations is leading to developers to adapt existing buildings as vacancy rates plummet and companies re-consider their options.
According to JLL’s Office Market Overview, office space take-up across Germany’s Big 7 cities – Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Stuttgart and Munich – reached around 4.2 million square meters (sqm) in 2017, surpassing the previous year’s record by almost 7 percent. At the same time the vacancy rate fell to its lowest level in 15 years at 4.7 percent by the end of the year due to a lack of new supply combined with companies upsizing their premises and hiring more people.
“The surge in demand for German office space is driven by strong economic growth and increasing employment numbers, especially in the service sector,” explains Stephan Leimbach, JLL’s Head of Office Leasing in Germany.
Yet with available office space in short supply, some companies were left disappointed. “We’d have seen even more lettings, if the market situation were not so tight,” says Leimbach.
Indeed, it wasn’t just companies looking for office space to occupy themselves that were active in the market; providers of flexible office workspaces were also seeking to leasing new offices as well as traditional business centers. These “flex workspace” providers still only account for less that 1 percent of office stock overall, but in 2017 they snapped up 6 percent of space and are expected to increase their share in 2018, according to Leimbach.
Supply boost for 2018
High demand for office space is spurring companies into action to secure the space they need. “We observe that negotiations with users for spaces in new building developments take place at an early stage, and projects under construction generally have good pre-let quotas,” says Leimbach. “This practice of ‘forward renting’ spaces in buildings that are not yet completed was a characteristic of last year.”
Meanwhile, companies are looking for alternatives to conventional leases. “As well as traditional business centres, co-working spaces have become popular in 2017,” says Leimbach.
And others still are signing up to spaces they may not have previously considered – as retail space continues to shrink, upper levels of stores are being converted to offices. “Increasing demand for high-quality, centrally located offices, combined with high vacancy rates, make the re-use of retail space on top floors more attractive to owners than ever before,” says Dominik Talhof, Team Leader at JLL’s Office Leasing Team Germany.
And while new office developments are in construction, they won’t be ready for some time. Around 860,000 square meters of newly built office space was recorded for 2017 as a whole – down 22 percent in terms of volume on 2016 and three times lower than in 2002. “It’s far from golden times for project developers with a shortage of land and the high capacity utilisation in the building industry delaying some new building plans and contributing to the low building volume,” says Leimbach.
Yet 2018 could herald happier times ahead. “Almost 1.3 million sqm should either be newly built or extensively renovated,” says Leimbach. He also expects rents to rise further in 2018.
A tale of two cities
Unsurprisingly, attention has been focused on Germany’s biggest cities. Berlin broke records with almost 955,000 sqm of office space taken up in 2017. Munich took the top spot, hitting close to one million sqm—its second-best performance ever.
Building activity in 2018 will keep the spotlight on these cities. In the capital, Austrian developer SIGNA is planning a 90-meter-tall office building on the sought-after Mediaspree, a central riverside location that’s already home to high-profile tenants like Zalando and Mercedes Benz. In Munich, a development called Kap West will add 41,000 square meters to the city’s available office space, and was recently purchased by financial services company Allianz.
For investors, the picture is positive. “Continuing low interest rates and strong lettings markets have helped transactions reach €56.8 billion for the German commercial property market overall—an increase of 7 percent on 2016,” says Leimbach. What’s more, the situation is encouraging investors to take more risks, with growing interest in projects outside the Big 7.
As the market goes from strength to strength, the main challenge for the near future remains meeting demand. “We can expect to see more momentum as a consequence of continued economic growth,” concludes Leimbach. “The only reason 2018 is likely to fall short of the 2017 result is lack of availability of new and modern space.”