Coronavirus pandemic having a “slight-to-moderate” effect on the supply side of the German office market

International real estate consultancy firm Cushman & Wakefield (C & W) has published a study on the effects of the coronavirus pandemic on the German office market. The focus is on the supply side in the Top-5 cities; Berlin, Düsseldorf, Frankfurt am Main, Hamburg and Munich. The report analyses the current state of the markets and emerging trends post-lockdown regarding subletting, rent incentives, development projects and the flexible office space segment.

Despite the pandemic, the German office market is in a better position than some might say - this is the conclusion of the study "How is Coronavirus affecting the German office real estate market? The authors Helge Zahrnt, Head of Research & Insight at C & W Germany, and Christian Lanfer, Head of Office Agency at C & W Germany, observe that in the course of the lockdown, office take-up collapsed and employees switched to working from home. At the same time, however, it is clear that "the office will retain its central role as a location of work and communication.” According to the authors of the study, the pandemic is acting as a catalyst for a hybrid model of work in which employees working remotely will play a greater role.

Ever more subletting: Corona only one of the reasons
Helge Zahrnt observes an increase in the supply of space being sublet: "At the end of August 2020, there was 290,000 sqm of space to sublet in the Top-5 cities - 85% of this comprising areas of 1,000 sqm or more. Around 110,000 sqm (38 %) was being offered due to the pandemic or its consequences, however, the majority (62 %) was not, according to a survey of landlords". The reasons for the increase in space being sublet are complex, including changes in the world of work, insolvencies, early moves to new premises, cancelled relocations or delayed moves. Coronavirus has also made a greater or lesser contribution to each of these factors.
Space being sublet contributes a good half-percentage-point of the overall vacancy rate (2nd quarter 2020: 3.9 %). C & W’s real estate experts expect the supply of space being sublet to increase to around 500,000 sqm by the end of this year. By way of comparison: during the dotcom crisis, availability of space being sublet peaked at almost one million sqm.

Subletting: regional and sector-specific differences 
Munich (87,000 sqm) and Frankfurt (80,000 sqm) currently offer the most space to sublet. Berlin and Hamburg have the highest proportions of space being sublet due to the coronavirus pandemic, at just under 50 % each. The transport (85 %), media (70 %) and insurance (70 %) sectors were those who most frequently cited coronavirus as the reason for subletting.

Flex Space industry hard hit by pandemic
Flexible office space providers such as WeWork, Design Offices and Spaces have exhibited very strong growth in recent years. Due to the pandemic, however, these operators suffered severe setbacks. The reason: customers worked from home and the demand for space declined. Since late summer, however, demand for flexible office space has again been increasing. Nevertheless, flexible office space operators are also increasingly subletting space, currently some 12,000 sqm. This corresponds to just under two percent of the operators' total available stock. Christian Lanfer expects a further increase in the amount of space available via subletting. "In general, however, we expect the flex space segment to develop moderately positively in 2021, provided there is no repeated lockdown. The prevailing uncertainty in the market is generally increasing users’ need for flexibility and thus benefits operators".

Coronavirus as a rental-incentive driver
The real estate experts at C & W have observed increases in rental incentives offered by landlords in the summer of 2020 - to an average of 2.2 rent-free months (3.7%) in prime locations and 3.4 months (5.7%) in non-central locations. Coronavirus has led to two reactions here: Rental incentives are intended to counteract the coronavirus-induced weakness in demand, and rental incentives are granted in part as coronavirus assistance when leases are renewed. By the end of the year, the authors of the study expect average incentive increases of a half-month for prime locations and one month for non-central locations. Viewed regionally: Berlin, Düsseldorf and Munich have the lowest level of rent incentives, at around one-to-two months’ rent in prime locations. According to the real estate experts, office incentives offered in Munich’s peripheral region market will have risen to as much as six months’ rent by the end of the year.

Pandemic currently stopping only a few projects not yet under construction
The observations of the study’s authors paint the following picture: "8% (565,000 sqm) of all development projects (7.4 million sqm) with a completion date of 2023 are delayed. Only half of this is corona-related", explains Zahrnt. The expert sounds the all-clear for projects already under construction. These will continue to be built. To sum up, the delays - from a few months to temporary or complete discontinuation - mainly affect projects not yet under construction.
In Düsseldorf and Frankfurt am Main, there are no significant postponements. In Hamburg and Berlin there are a few isolated cases. In Munich, up to 8 % of development projects could be delayed due to coronavirus - equivalent to around 140,000 sqm by 2023.

Coronavirus crisis offers users options, but also poses major challenges
In conclusion, Helge Zahrnt, Head of Research & Insight at C & W Germany, and Christian Lanfer, Head of Office Agency at C & W Germany, state: "The effects of Coronavirus on the supply-side of the office real estate market so far are slight to moderate”. According to the authors, the fact that the 10-year boom phase prior to the pandemic had dramatically reduced vacancy has had a stabilising effect on the market. This provides some relief on the supply side. The increasing supply of space being sublet and the high number of development projects is again opening up new options for office space users. Against the backdrop of the ongoing uncertainty in the market, users have to rethink their space requirements: less space, more space, different space. Coronavirus is acting as an accelerator for new models of work.