Cushman & Wakefield, one of the world’s largest real estate consultancies, has analysed the behaviour of various sectors with regard to lettings on the Berlin office market and the respective reactions to external events. It became clear that the behaviour of the public sector has a particular influence on market activity and that a return to the letting turnover of 2018 and 2019 is not to be expected.
Traditional, public and growth sectors determine the office lettings market
In simple terms, the office market in the capital is determined by tenants from three sectors. One of these is the ‘traditional sector’, which comprises the sum of all companies with established business models: These include industrial companies, the construction and property sectors, the finance and insurance sector and consultancy firms such as accountants and lawyers. Many of these companies do not have their headquarters in Berlin but want to be represented in the capital. They are the foundation of the economy and rent office space depending heavily on the economic situation.
Cushman & Wakefield’s ‘growth sector’ includes companies whose business models have only emerged through the use of the internet and the digitalisation of processes. Value creation here is often directly related to digital products and services. In Berlin, these companies are also often part of the start-up scene and are looking to expand. As they are more reliant on capital providers than traditional companies, their demand for office space is heavily dependent on the financing environment. This has deteriorated over the past two years as interest rates have risen.
Thirdly, there is the ‘public sector’ and the institutions and associations associated with it. Berlin is home not only to various federal and state authorities, but also to interest groups and private and public educational institutions. In addition, foundations, church initiatives and associations want to be represented in the German capital to fulfil their tasks. The demand for office space from these tenants is partly dependent on the economic situation due to the respective public revenue situation or contribution payments, although there is a significantly greater time lag between the approval of funds and actual letting than in the other two sectors. Due to the long-term orientation, very long-term rental agreements are concluded in the public sector.
Different reactions to external events
The past ten years on the Berlin office letting market have been turbulent. With the economic recovery following the financial crisis and the start of the zero interest rate phase, take-up of space in the traditional and growth sectors tripled within two years. The boom continued for five years or until 2020: Companies in these sectors each rented around 300,000 m² per year. It is worth noting that demand remained stable during this period, although the average rent almost doubled. The public sector followed with a delay until the peak was reached in 2020 with a take-up volume of 239,000 m².
Public sector reacts with a time lag
While the traditional and growth sectors postponed decisions due to uncertainties at the beginning of the pandemic and therefore suddenly only rented around half as much space, long-planned lettings by the public sector, such as the German pension insurance scheme, were completed with over 80,000 m². The brief recovery phase in letting activity on the Berlin office market in 2021 was therefore mainly the result of postponed lettings from the previous year.
Mobile working influences letting behaviour in all sectors
The pandemic has given mobile working greater weight in the planning of many companies' future office space requirements. Since then, the hybrid office has become increasingly important in both the traditional and growth sectors, with a flexible and remote working culture particularly favouring this development in the latter. This leads to lower space requirements.
Although the option of hybrid working is widespread in the public sector, it has not been apparent in the past that this is taken into account to the same extent in rental decisions as in the other two sectors. Nevertheless, there has also been a decline in new lettings here. For example, due to the sharp rise in rents, many of the long-term planning institutions decided to extend existing contracts or to construct their own office buildings or acquire existing ones.
Interest rate turnaround and weakening economy hit growth sector particularly hard
With the start of the rise in interest rates and the economic weakness, the structural upheavals triggered by the hybrid way of working were compounded by a further limiting factor in the demand for office space. This affected the growth sector more than the traditional sector, as the ambitious growth paths were called into question and some office space was reduced or sublet. Investors became more cautious, particularly in the start-up sector, and take-up of newly let space with the growth sector fell to a low of around 100,000 m² last year.
In the first half of 2024, it became clear that the factors of hybrid offices and a challenging financing environment continue to make companies more reluctant to let. Based on the transactions recorded so far in the first six months of 2024, Cushman & Wakefield assumes that the traditional sector and the growth sector will rent even less in the current year than the 209,000 and 102,000 m² respectively in the previous year. In contrast, the public sector's take-up of almost 80,000 sqm in the first half of the year suggests that the previous year's total result of 93,200 sqm will be significantly exceeded, even on a conservative estimate.
“However, it can be assumed that the public sector will also rethink its previous space concepts and take remote work fully into account in future letting processes. This would mean that the sector would lose its stabilising function for the Berlin office letting market in its current form. Owners and developers should bear this in mind when making their decisions,” advises Dominic Rausch, Head of Office Agency Berlin at Cushman & Wakefield.
