International real estate consultancy firm Cushman & Wakefield (C&W) recorded take-up of 111,500 sq m for the Munich office market in the first quarter of 2023. Compared to a year previously, this corresponds to a decline of 44 percent. The current quarterly result is 39 percent below both the Q1 5- and 10-year averages (182,500 sq m and 181,200 sq m respectively). Only in the 1st quarter of the pandemic year 2021 was less office space let, at 104,200 sq m.
Scarcely any large lettings in the 1st quarter
The restrained start to the year is mainly due to the lack of large-scale lettings and owner-occupier transactions. In addition, expected larger deals were postponed to the second quarter of 2023. Most of the letting activity (88 out of 155 recorded deals) took place in the less than 500 sq m segment.
However, there were also two deals of over 5,000 sq m in the surrounding submarkets: 5,700 sq m of office space was leased by Bayerische Hausbau Immobilien GmbH & Co. KG in Garden Offices in the Isarhochufer riverbank location (municipality of Pullach in the Isar Valley) and the federal police signed a lease for 5,500 sq m of office space in the Artemis building (Municipality of Hallbergmoos).
Prime office rent increased again
The sustainably achievable prime office rent in Munich reached a new record at 44.00 euros/sq m per month in the first quarter. Compared to a year previously, this is an increase of 4.50 euros/sq m, and compared to the previous quarter an increase of 0.50 euros/sq m. The achievable prime rent is primarily achieved in the Old Town, City West and City North submarkets. C&W expects a further, moderate increase in prime rents to the end of 2023.
The area-weighted average rent for new lettings over the past twelve months also reached a new peak. It is now EUR 23.65/sq m per month, an increase of 0.50/sq m euros compared to the first quarter of 2022.
Surroundings are becoming more attractive
35 percent or 39,500 sq m of total take-up took place in the peripheral submarkets surrounding the city. In the past five years, this proportion has averaged 29 percent. The northern area in particular is very popular with tenants. C&W recorded by far the highest take-up of space here in the 1st quarter, at 22,300 sq m. Cushman & Wakefield also assumes that, in addition to the central locations that are still in demand, the surrounding submarkets will continue to gain in importance in the coming quarters, not least because of the increasing number of high-quality properties outside the city itself.
IT companies are no longer the main take-up drivers
Industrial companies made the largest contribution to take-up, at 24,700 sq m or 22 percent, followed by companies from the construction and real estate sector with 20,200 sq m. IT companies follow with 17 percent of take-up, compared to 30 percent in the first quarter of 2022.
Hubert Keyl, Head of Office Agency Munich and head of the Munich branch of C&W, comments: “Demand dynamics slowed overall in the first quarter. Due to the increasing tenant demands for space flexibility and ESG conformity, a targeted client approach is becoming increasingly difficult. There is increasing demand for sublet space, as a large proportion of this space is in the city centre/CBD and is often let at below market rent.”
Vacancies in the market area at a constant level
The vacancy rate at the end of the 1st quarter was 4.9 percent and thus corresponds to the level of a year ago. Vacancy pace at the end of March 2023 totaled around 1.05 million sq m, of which 111,800 sq m was for sublet. An increase in the vacancy rate is expected in the future, not least because of an increase in subletting.
Construction activity remains high, new buildings are still sought after by tenants
In the first quarter, 122,800 sq m of office space was completed in Munich. At the time of completion, an average of 36 percent of the space was still available. A total of 944,600 sq m of office space is currently under construction, of which 52 percent has already been pre-let. Around 1.1 million sq m of office space is also currently in planning.
