BNP Paribas Real Estate publishes Q1 2023 office market results
The German office markets posted a weak Q1 2023 as expected. Take-up in Germany’s top 8 locations of Berlin, Düsseldorf, Essen, Frankfurt, Hamburg, Cologne, Leipzig and Munich totalled 621,000 sqm in Q1, reflecting a decrease of more than 20% compared to the previous-year result and the 10-year average. These figures are based on the latest analysis by BNP Paribas Real Estate. Overview of key results:
- • 621,000 sqm in take-up, 23% below the previous-year result and 21% below the long-term average
- • Vacancy up 5.5% to 5.4 million sqm
- • Vacancy rate in Berlin, Hamburg, Cologne, Leipzig and Munich below 5%
- • Prime rents stable with upward trend in Q1
“The economic slowdown in the wake of the war in Ukraine, which could already be seen in lower leasing activity and take-up at the end of 2022, could still be felt on the office markets in Q1 2023. Uncertainty around the economy, a looming recession and gas shortages in the winter led many companies to postpone their investment decisions. The combination of these factors left its mark on Q1 take-up, which came in at a moderate 621,000 sqm. The roughly 20% decline, which seems steep at first glance, is similar to what we saw at the beginning of 2009 in response to the global financial crisis. What we are seeing this time, however, is a temporary response to the challenging macro-environment and not to structural changes in demand,” says Marcus Zorn, CEO of BNP Paribas Real Estate Germany.
Main office hubs also see slow market momentum in Q1
For the reasons outlined above, leasing activity is currently recorded at below average in all main German office hubs, although some markets are holding up much better than others in this challenging environment. Berlin once again led the pack with 144,000 sqm in take-up, putting the city 22% shy of the previous-year result and 21% under the long-term average. Munich once again came in second with 120,000 sqm in take-up, down a steep 37% yoy and 33% below the 10-year average. Hamburg came in third with 102,000 sqm in take-up, exhibiting the most robust performance results down 11% both yoy and compared to the 10-year average. Frankfurt failed to hit the 100,000-sqm mark with 93,000 sqm in take-up, falling short of the long-term average of 108,000 sqm. The markets in Düsseldorf and Cologne were practically on par with each other, posting take-up of 64,000 sqm and 59,000 sqm, respectively. Leasing activity, however, was more moderate in Düsseldorf. The Cologne market once again showed its resilience with take-up only 7% below the city’s 10-year average. Leipzig and Essen rounded off the field with take-up at 20,000 m² and 19,000 sqm, respectively. Leipzig was unable to maintain the strong performance seen in previous years, falling 16% short of the long-term average. Essen was the only office market to outperform yoy (+73%). Market momentum in the city, however, is currently below average (-21.5%).
Vacancy posts moderate increase
Vacancy in Germany’s 8 major office locations currently comes to 5.4 million sqm, reflecting a slight yoy increase of 5.5%. However, vacancy trends vary considerably across the top office markets with vacancy rates remaining low across the board. Berlin saw vacancy rates fall yoy and compared to the end of 2022 with vacancy rates in the city currently at a low 3.2%. The situation is similar in Hamburg and Cologne where vacancy rates continue to hover at a below average 3.9% and 3.3%, respectively. The vacancy rate in Leipzig fell yoy to a current 4.0%, pursuing a more stable trend in Q1. Munich, Düsseldorf, Frankfurt and Essen recorded a rise in vacancy both on yoy and qoq. Vacancy rose extensively yoy, particularly in Düsseldorf and Munich (+19% and +16%, respectively), albeit at a slower pace in early 2023. Vacancy in Frankfurt picked up for the first time after three quarters of decline in contrast. While the vacancy rate in Munich remains at a low 4.8%, Frankfurt and Düsseldorf are currently posting rates slightly above the long-term average at 8.8% and 10.8%, respectively.
In addition to traditional vacancy, subletting is playing an increasingly important role. The amount of space available for subletting in the main office hubs currently comes to around 1 million sqm, the majority of which is located in Frankfurt (roughly 300,000 sqm), Berlin (290,000 sqm) and Munich (around 200,000 sqm). The reasons why companies, especially multi-national corporations, are offering space to sublet are manifold and currently include slow growth, increased cost awareness, workplace consolidation and remote working trends.
The amount of space under construction roughly falls in line with the previous year (+1%) at 4 million sqm, reflecting a decline of 4% compared to December 2022. A consistent trend in construction activity is not apparent at this point. This comes as no surprise given the varying compositions and different vacancy levels in Germany’s top markets. However, the pace of property development activity has slowed considerably across the country. Developers are generally much more cautious in view of rising debt and construction costs combined with current weak economic performance.
German prime rents stable throughout Germany with upward trend in Q1
Prime rents were up in all office hubs yoy. This trend continued in Berlin, Düsseldorf and Cologne in Q1 2023. In Berlin, prime rents rose by €1.00 per sqm to a current €45.00 per sqm (+4.7% yoy) and are keeping pace with Munich (€45.00 per sqm; +4.7% yoy). Driven by leases signed for premium space on Königsallee, prime rents in Düsseldorf experiences another jump of 11.8% at the beginning of the year to a current €38.00 per sqm (+33.3% yoy). Cologne also saw an increase in rents at just under 11% qoq to an above average €31.00 per sqm. Prime rents passed the €30-per-sqm mark in Cologne for the first time, recording an increase of 14.8% yoy. Prime rents in Frankfurt (€48.00 per sqm; +2.1% yoy), which are still the most expensive in Germany, were remained unchanged as was the case in Hamburg (€35.00 per sqm; +6.1%), Leipzig (€18.50 per sqm; 8.8%) and Essen (€17.00 per sqm; 3.0%).
All office markets posted rising or at least stable average rents compared with Q1 2022 with the exception of Hamburg, where average rents fell both yoy and qoq (-1.9% and -4.1%, respectively) to a current €21.10 per sqm. Berlin continued to lead the pack at a current €29.50 per sqm (+6.9% yoy). Frankfurt followed in the ranks at €23.30 per sqm (+19.5%) ahead of Munich at €22.10 per sqm (+4.7%). Average rents in Düsseldorf posted €20.40 per sqm (+25.9%), €18.90 per sqm in Cologne (+27.7%), a stable €12.50 per sqm in Essen and €11.90 per sqm (+1.7%) in Leipzig.
“As it stands right now, we expect demand to gradually increase, particularly in the second half of the year. Although the economic environment has not yet fully stabilised, we are seeing more and more signs pointing to a significant improvement. Almost all forecasters now expect German GDP to grow for the year as a whole; energy prices have eased considerably, supply chains are more stable than last year and inflation is falling, albeit at a slow pace. All this is also reflected in the sentiment indicators for the German economy, which have been slightly improving in recent months. Business sentiment is likely to continue to improve as well. This should also translate into higher take-up even if Q2 in particular will still be somewhat characterised by the aftermath of recent uncertainties,” comments Marcus Zorn.
The fact that Germany has the largest economy in the EU gives the office markets a solid foundation, which also plays a decisive role in this assessment. German vacancy rates are still very low by international standards and it is unlikely that we are going to see a significant increase in supply from property developments due as debt and construction costs continue to rise. “Demand, in particular for modern, flexible space, will remain high in the medium term. The decisive factor here is the fact that many companies are looking to implement new office formats, not least in order to be able to more effectively respond to the trend toward anticipated growing demand around remote working and flexible workplaces,” adds Marcus Zorn.
It will be important to keep an eye on the further development of vacancy and in particular of space available to sublet, although it remains to be seen as to what extent the amount of space available for sublet will become relevant to the market. In the past we have seen that subletting is often difficult due to challenging fit-out requirements and the rent expectations of potential tenants and that the expense of subletting often exceeds the potential return.
“Leasing activity on the German office markets is likely to pick up in the coming months in the wake of a recovering German economy. This will probably not translate into significantly higher take-up in Q2 but should boost results in the second half of the year. The underlying trend toward modern, high-quality space with excellent accessibility is likely to become more established, which should cause in rent prices to continue to rise,” concludes Marcus Zorn.
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