TOP 7 OFFICE MARKETS 2Q2023: Quality comes at a price

An analysis of the 1st half of 2023 by German Property Partners (GPP) shows that office-letting trends already noted in Germany’s top 7 cities have become more entrenched. Partner firms in the GPP commercial property network are Grossmann & Berger, Anteon Immobilien, GREIF & CONTZEN Immobilien, blackolive and E & G Real Estate. 

Trend 1

Market activity was predominantly attributable to mid-sized or “Mittelstand” firms. Accordingly, the offices selected were smaller and hardly any transactions involved suites offering more than 10,000 m² of office space or construction starts for owner-occupiers:

1. This was most apparent in Stuttgart, where 87 % of take-up comprised office lets of less than 1,000 m². In consequence, the result plunged by 71 % to 63,000 m².
2. GPP has noted only three agreements for more than 10,000 m² of space, compared with 15 in the same period a year before. The largest space let was about 20,000 m², appreciably smaller than at the end of June 2022, when the biggest agreement was for over 60,000 m².
3. Whereas in 2022 agreements for 10,000 m² of office space were concluded in all top 7 cities, to date this has been the case in only two cities this year – Berlin and Hamburg. However, unlike prior years, Berlin has not registered any large rental agreements by public bodies.
4. Although it was an agreement for more than 10,000 m² of space, the biggest owner-occupier commitment in 2023 involved some 13,000 m² and was thus only one fifth as big as the largest such transaction posted a year ago.

These developments resulted in take-up of office space in the top 7 cities falling by 39 % year on year to 1.11m m². The owner-occupier ratio in the top 7 cities has now dropped from 13 % to 4 %. The half-year result is thus even lower than during the pandemic years 2020 and 2021. “Because working styles have changed, smaller office suites will be required in the medium term,” says GPP spokesperson Andreas Rehberg. “Apart from that, various economic and international issues present office markets in the top 7 cities with further challenges. Therefore we have revised our forecast for this year’s total to a lower figure of 2.60 million square metres.” 

Trend 2

In order to attract skilled personnel, firms preferred to take top-quality space in expensive, inner-city locations, even though construction and fit-out cost significantly more than before:

1. As a result, premium rents have soared, quite dramatically so in some cities. The biggest rent surge was noted in Düsseldorf (+31 % to € 38.00/m²/month).
2. Two leases in Munich, in Neuhauser Strasse and Leopoldstrasse, were agreed for rents of up to €55/m²/month, catapulting the city’s premium rent to €52.25/m²/month. This particular metric thus broke through the €50/m²/month barrier for the first time, pushing Munich ahead of Frankfurt and Berlin, where the highest premium rents are usually to be found.
3. Both of the two largest new rental agreements in the 2nd quarter were signed for space in Hamburg’s expensive sub-markets HafenCity and City.

“Many firms deliberately choose quality space and therefore the inner cities remain the preferred areas. They move into smaller premises and can therefore afford a more prestigious location. They have not been deterred by rents at new record highs. As far as the top 7 cities are concerned, we can as yet find no confirmation of the survey findings, released last week by the ifo Institute, that increasing numbers of companies are relocating to places nearer their employees’ homes and thus moving to the suburbs or the environs,” says Rehberg describing the situation. “In our experience, even in peripheral locations, the tenants are reluctant to make any concessions on quality.” 

Trend 3

On the other hand, the economic downturn and increasing cost pressures have caused many firms to delay or shelve any decision about moving offices. Therefore more office space was available and more sub-let agreements signed; additionally, some projects were postponed until a later date:

1. Without exception, the reserve of empty space grew in each of the top 7 cities. However, in both Frankfurt and Düsseldorf the vacancy rate remained in the single-digit range.
2. For the first time, three cities reported that they currently have more than 1m m² of office space available at short notice: these are Munich, Berlin and Frankfurt.
3. In each of the cities which posted the greatest decline in take-up – Stuttgart and Cologne (-66 %) – the number of development projects dropped by five against the prior quarter.

Correspondingly, the vacancy rate in the top 7 cities has grown year on year from 4.8 % to 5.6 %. “In the face of an uncertain future, renewing a lease or exercising an option are further strategies for buying time or locking in good terms and conditions,” explains Rehberg. “One outstanding example of this is INGDiBa which has renewed its lease on 40,000 square metres in the ‘Poseidon’ in Frankfurt up until 2028.”