Since the coronavirus pandemic, there has been a significant decline in take-up on the German office market. This development is currently the result of two main factors: a phase of economic weakness and a structural change in demand. A study by Cushman & Wakefield, one of the world's largest real estate consultancies, analyses how occupier demand for space has changed based on more than 100 leases managed by the company since 2022.
Office space take-up in the top 5 markets
With the start of the pandemic and the subsequent phase of economic weakness, office take-up in the top 5 markets has fallen sharply. In 2023, take-up was 2.08 million m², around 28 per cent below the 10-year average. Despite an increase in economic sentiment indicators such as the ZEW economic expectations since autumn 2023 or the ifo business climate index since spring 2024, demand on the office market remains cautious.
In particular, there continues to be a clear reluctance to sign large-scale deals of 5,000 m² or more, where take-up in 2023 has fallen by 55 per cent compared to the average of the previous five years. Demand for office space is expected to pick up slightly in the coming years, although it will remain below average. A noticeable upturn in major deals is required for stronger swings on the market.
‘There is a close correlation between the development of the labour market and office space take-up. The ifo Employment Barometer shows a correlation of 0.75 with take-up in the period from 2006 to 2024. Since the start of the pandemic, however, the correlation has only been 0.53, which indicates the increasing importance of other influencing factors such as changes in work organisation. This is reflected in newly concluded rental agreements,’ explains Helge Zahrnt, Head of Research & Insight Germany.
Changes in demand: Flight to quality = less space, better quality
‘The analysis shows that office users rented 19 per cent less space on average when relocating. The space per employee, the central lever for space efficiency, has also fallen: by 11 per cent across all analysable rental agreements. If only those occupiers are considered who want to achieve efficiency benefits in terms of space at their new location, i.e. who have reduced their space per employee, this figure rises to 31 per cent,’ says Pierre Nolte, Head of Head of Offices & Leasing at Cushman & Wakefield Germany, analysing the figures. The average space per employee for these users at the new location is 13.6 m², compared to 19.7 m² at the previous location. Across all user groups, the space per person fell from 16.7 m² to 14.9 m².
Analysis of office relocations
The study also shows that the desk share ratio (number of workstations to employees) is lower at the new location with a value of 0.79 compared to 0.88 at the old location. Two thirds of the users analysed use desk sharing in the new office, compared to 36 percent at the old location. This shows that the number of workstations per employee has been reduced at the new location, which indicates a more efficient use of space. This development goes hand in hand with the increasing importance of hybrid office concepts and home offices.
Market changes: Prime rents and average rents
Despite the fall in take-up, prime rents are continuing to rise. This rise is due to the increased demand for high quality and higher construction costs. Prime rents in the top 5 markets have increased significantly since 2014. For example, the prime rent in Munich at the end of the first quarter of 2024 was €50/m² per month, in Frankfurt €48.50/m² per month and in Berlin €45/m² per month. This increase reflects the high demand for first-class properties with new-build quality in prime locations.
Quality and ESG criteria
The proportion of contracts signed in buildings with first-class quality has risen from 31 per cent in 2020 to 38 per cent in the first quarter of 2024. This trend shows a growing interest among users in high-quality buildings, even if this means higher rents. The rising proportion of contracts signed for these properties is a clear indication of the flight-to-quality trend.
Sustainability criteria are playing an increasingly important role in office letting. Project developments that fulfil these criteria are in particularly high demand, which is also leading to rising rents. Buildings that do not fulfil these criteria, on the other hand, must expect lower demand and reductions in rent.
‘The office market is changing. The trend is towards less, but higher-quality space, driven by changes in work organisation and an increased focus on ESG criteria. Despite the expected growth in the number of office employees, the need for space is being reduced by more efficient utilisation concepts such as desk sharing and hybrid offices. Demand for first-class office space remains high, which will cause prime rents to rise further. These structural changes will continue to shape the office market in the coming years,’ says Tina Reuter, Head of Germany at Cushman & Wakefield, summarising the results.
