Around 517,000 sq m of office space was let or assigned to owner-occupiers in Germany's top-5 office markets in Q1 2023, according to international real estate consultancy firm Cushman & Wakefield (C&W). This represents a continuation of the weak take-up seen in Q4 2022. None of the five major office markets matched the previous year's figures, with only Berlin and Düsseldorf recording major deals. C&W expects an improving economic situation to positively impact demand in the course of 2023.
Large decline in take-up in Q1 2023
Office take-up in Q1 2023 is around 22 percent below the previous year's equivalent result and below the long-term Q1 average. The reluctance of office users already seen since late summer 2022 is continuing, causing the weakest result since Q3 2020. Compared to autumn 2022, however, the economic outlook has brightened. For example, the ifo business climate has risen significantly and a severe recession is no longer expected in 2023. Office take-up often lags three quarters behind the business climate.
Christian Lanfer, Head of Office Agency Germany at C&W, comments: "Experience shows that office take-up correlates with the economic situation after a certain time lag. We therefore expect a certain recovery in demand in the course of the year. However, the hard reality has manifested itself in the market that hybrid working is leading to occupiers leasing less space. And in their decisions, occupiers are increasingly focused on high quality locations and amenities - with corresponding consequences for lower quality properties" C&W expects take-up of 2.7 million sq m in 2023, which would be 2 percent below last year's level and 7 percent below the 5-year average.
Large lettings are rare
In Q1 there were only three large deals of 10,000 sq m or more. This is the lowest number in the past 2.5 years. The largest of these, around 19,000 sq m, was concluded by the Boston Consulting Group in Berlin. The reticence in concluding deals is evident across all size classes. Accordingly, the total number of lettings in the first quarter, 640, is lower than in any of the previous six quarters. Berlin (147,000 sq m) and Munich (111,000 sq m) were the two markets with the highest take-up in Q1. None of the top-5 markets reached last year's Q1 result, falling between 7 and 44 percent short.
Vacancy continues to rise
Office vacancy in the top-5 markets stood at 4.7 million sq m at the end of the first quarter of 2023. This corresponds to a vacancy rate of 6.0 percent and is 0.7 percentage points higher than twelve months ago. The amount of space being offered for subletting has increased sharply and now stands at 480,000 sq m. Among the five markets, Hamburg continues to have the lowest vacancy rate at 4.6 percent. Vacancy in the top five markets is expected to rise to over 5 million sq m in the further course of 2023. The reason for this development, in addition to the restrained take-up dynamics, is the high number of completions that have not yet been let.
Completion volume with focus on Berlin and Munich
In Q1 2023, 347,000 sq m of office space was completed in the top-5 - half of which was already let or assigned to owner-occupiers at the time of completion. Berlin (153,000 sq m) and Munich (123,000 sq m) made the largest contributions here - almost 80 percent of the total.
In 2023 as a whole, around 2.0 million sq m is expected to be completed - this would be a 75 increase on last year. Around one third of this is currently still available. The construction volume at the end of the first quarter is 4.2 million sq m and thus 4 percent above the value of the previous quarter. Here, too, the major proportion is in Berlin (1.76 million sq m) and Munich (945,000 sq m).
Focus on quality causes prime rents to rise further
Occupiers’ preference for high quality locations and fittings is leading to rising (prime) rents. In a year-on-year comparison, achievable prime rents rose in all five markets. In Düsseldorf, after a strong increase last year, they rose by a further 3.00 euros (+9 percent) to 38.00 euros/sq m per month.
The prime rent index for the top-5 markets stood at 159.9 points (2010=100) at the end of Q4 2022, with an increase of almost 10 percent over the last 12 months. C&W expects a further increase by the end of 2023. Rent-free periods in prime city-centre locations are stable compared to the previous quarter at 5.8 percent (based on a 5-year lease across all top-5 markets).
