The Coronavirus pandemic was the dominant theme in the economy and society in 2020. The economic upswing that had lasted a good ten years in the wake the global financial crisis came to an abrupt end - it was a black swan event. Sentiment and labour market indicators plunged. In many sectors, a greater loss of jobs was prevented by massive use of short-time working and furlough subsidies. The following indicators illustrate the development of the business year:
- The unemployment rate rose from 4.9% (Dec. 2019) to 5.9% (Dec. 2020) in the course of the year.
- The number of short-time workers rose to around 6 million in April 2020 and was still a good 2 million in autumn 2020.
- The ifo Employment Barometer fell to 86.8 points in April 2020, its lowest value since the start of the time series in 2002 - it had recovered somewhat by the end of 2020
- The ifo Business Climate dropped to 75.4 points in April 2020, the lowest value since the beginning of the time series in 2005 - by the end of 2020 it had shown significant recovery
- As a result, gross domestic product will have declined by 5.4% in 2020 according to the Consensus forecast, but will recover by around 4% in 2021.
The economic slump has clearly impacted the office letting market. With the onset of the first lockdown in spring 2020, uncertainty among participants rose sharply. "For a few weeks there was almost a cessation in office space demand. For smaller spaces in particular, there was almost no activity - but large leasing process-es continued. It was not until the summer that an increase in user interest took place," commented Christian Lanfer, Head of Office Agency Germany at Cushman & Wakefield. However, this was almost exclusively in the smaller and medium-sized space segment and there were still major questions about future demand. The users were unsettled and those who did not have to react in terms of space, for example due to expiring leases, kept their powder dry and waited. "All in all, the world-wide experiment with working from home has worked out well and brought new experience. Remote working has come to stay and will increase flexibility in the world of work. But the degree to which this will be adopted in the future is not yet clear. What is clear, however, is that the office will retain its central importance and possibly even expand it with increased home office use: Collaboration, corporate culture, team spirit, communication and recruitment require regular personal contact and proximity," analyses Helge Zahrnt, Head of Research & Insight at Cushman & Wakefield.
Looking ahead to 2021, there is great hope for the success of the vaccines. In the positive scenario, sufficient vaccine doses will be available for everyone by the middle of the year and herd immunisation will gradually come within reach. Distancing and contact rules can then be lifted, shops, cultural enterprises and institutions can open as usual and "normal" economic can resume. Production levels and investment will increase, some sectors such as pharmaceuticals will remain on the upswing, others such as automotive and finance will still have to struggle with their (old) structural problems. Coronavirus has acted as a catalyst in many areas: it has strengthened developments and trends. Apart from Coronavirus, it remains to be seen how the completion of Brexit will be reflected in everyday economic life and whether the global trade conflict will become less acute due to the new US administration.
Uncertainty in the market resulting in falling demand for office space
"Uncertainty among occupiers about future developments and space requirements, as well as delays in space viewings and letting processes, have caused office take-up in the top-5 markets to fall to 2.2 million square metres in 2020," comments Christian Lanfer. This is a decline of more than a third (-35%) compared to the previous year and the lowest value since 2009 (then 1.96 million square metres). For 2021, we expect a total take-up of 2.5 million square metres (an increase of 14% on 2020).
Berlin remains the strongest market in terms of take-up with 700,000 square metres, recorded a decline in line with the top-5 average. The sharpest fall was in Düsseldorf; by 47% to 270,000 square metres. Munich exhibited the smallest decline, by 26%, to 567,000 square metres and in second place among the top-5 markets.
Fourth quarter performance (almost 600,000 square metres) was roughly on a par with the first quarter. In terms of the number of leases concluded, the fourth quarter was also at a similar level to the final quarters of the two previous years. So, a certain degree of recovery towards the end of the year was apparent. However, in terms of leases by size class, there was a significant reduction in the number of leases for large areas: In the 10,000 square metres and more segments, there were only 23 deals in 2020, compared to 51 the previous year and a 5-year average of 35. The decline was less pronounced for smaller spaces, as demand here rose more quickly in the middle of the year.
The user sector contributing the highest proportion of take-up (18% of take-up and 25% of all deals of 5,000 square metres or more) in 2020 was public administration, followed by ICT (17%) and industrial companies (12%).
Office availability rising, but at a lower level than in the previous crisis
A major difference to the last crisis is the current significantly lower vacancy level. At the end of 2008 the vacancy rate across all T5 markets was just over 9.3% and then rose to 10.3% by the end of 2010. In the cur-rent cycle the vacancy rate was 3.7% a year ago and has now risen to 4.5%. This difference in level provides stability for the majority of prime rents. Among the individual markets, Frankfurt (7.6%) and Düsseldorf (7.0%) continue to have the highest vacancy rates - Berlin continues to have the lowest at 2.7%. By the end of 2021, we expect further increase in the vacancy rate in all markets - by up to one percentage point in Frankfurt and Berlin and a marginal increase in Düsseldorf.
At the end of summer 2020, we reported that sublet space in the top-5 markets had risen to 290,000 square metres. We had analysed the causes and forecast a further increase by the end of the year. This turned out to be much weaker than expected. Currently there is around 350,000 square metres available for subleasing – the coronavirus pandemic has not led to a continued surge.
In addition to vacancies and new sublet space, vacant space in new completions also contributed to vacancy growth. In 2020, office space totalling 1.24 million square metres was completed - the largest amount since 2004. A good 85% of the space was already let on completion. Berlin leads the completion statistics with 466,000 square metres. Hamburg (just under 100,000 square metres) and Munich (314,000 square metres) have the highest pre-letting rates, each at around 90%. Completions will increase significantly in the coming years. Four million square metres are currently under construction, of which just under half is still available. Berlin has the most space under construction, with 1.8 million square metres.
Nominal rents mostly stable or rising - rent incentives at 5 to 8%
Despite the fall in demand, nominal rents have remained stable across the board or even risen further. The low supply of available space has prevented rents from falling. However, the picture is mixed. Berlin is the only location where prime rents have fallen (-2.6%), while Düsseldorf (+1.8%) and Hamburg (+3.4%) have seen an increase. In terms of average rents, there is also only one location, Düsseldorf, where the level fell over the course of the year (-8% to €15.30). All other markets exhibited growth, so that across the top-5 markets the average growth in average rents was 4.9%.
Rental incentives had already been increased during the year and acted as a buffer to prevent falling nominal rents. In the course of the year, rent incentives in the top central locations of the top5 markets grew from an average of 1.2 rent-free months to 3.2. This means that effective rents are a good 5% below nominal rents - in non-central locations this gap increases to 8%.
The pendulum swings from landlord market to tenant market
"The big question is when users will regain confidence and have certainty about future requirements, so that demand for space will pick up again. And then the question arises as to the appropriate office use and mode of operation: More or less space? Other space layouts? Other locations? The coronavirus pandemic has shifted the reference point. The swan is no longer black, but comes in shades of grey. We can now learn from it - for example, workplaces are no longer so densely packed - and use the experience for upcoming space decisions," commented Helge Zahrnt.
"In the short term, rent incentives will prevent nominal rents from falling. Lettings in expensive development projects will also keep the rent level stable or even increase it. But if demand does not pick up again by summer 2021 and the rental incentives no longer have any further stabilising potential, nominal rents may also fall (in some cases). This applies in particular to landlords who urgently need to let their vacant space," commented Christian Lanfer.
This means that the market is developing in the opposite direction to previous years. The pendulum is now swinging towards it becoming a tenant market - this also opens up opportunities for users.
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