• Take-up remained way below average in the third quarter
• Particular reticence in the large office segment – except from the public sector
• Prime rents generally stable, average rents marginally down
• Vacancy rates up for the first time in years, sublettings on the increase

In view of the coronavirus pandemic and the associated uncertainties, leasing activity in the major German office markets also remained subdued in the third quarter of the current year. While take-up was once again very low, rents remained stable. However, vacancy rates rose for the first time in years and this is likely to continue over the coming months owing to economic and structural developments. “Above all, the future of office work is currently a dominant theme. Many companies are revising their workplace concepts and developing guidelines for flexible working. Many are still in the initial stages of doing so and are correspondingly reticent when it comes to making leasing decisions at present. One more consequence of the economic uncertainties is that those who do not have to lease new office space are also refraining from doing so in the current environment,” says Panajotis Aspiotis, Managing Director and Head of Agency Germany for Savills of the low take-up.

Take-up significantly below average particularly in the large office segment
To express this in figures, take-up across the top-seven markets (Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart) from July to September totalled almost 600,000 sq m. While this represents a modest increase in take-up compared with the second quarter, it is only around half the average figure for the last five years. Take-up for the first three months totalled approx. 1.88 million sq m, which is a good third lower than in the corresponding period last year. Major lettings are particularly conspicuous by their absence. The number of lettings of 10,000 sq m or greater fell by two thirds year on year, with most of these deals also being attributable to the public sector. By way of comparison, the number of lettings in the size category below 500 sq m during the year to date is down by only a fifth compared with last year. “In many cities, public-sector institutions have contributed significantly to take-up figures. Since the associated rents were mostly above-average for the respective cities, these deals not only stabilised demand for space but also rents,” says Matthias Pink, Head of Research Germany for Savills.

Nominal rents largely stable but incentives are increasing
Despite the high-value public-sector lettings, average rents in most markets declined. The average rent across all seven markets declined by 1.1%. When it comes to prime rents, the picture is somewhat less consistent. Prime rents stagnated in most cities. However, Berlin and Cologne registered declines while Frankfurt witnessed an increase. Rents in central locations remain generally stable, although owners of properties in poorer locations are unable to achieve their target rental levels from the beginning of the year in all cases. However, the willingness of landlords to grant incentives is increasing across locations and properties of all qualities. Incentives are not only being increasingly granted on new leases but also when agreeing lease extensions. “There is currently a strong willingness to extend existing leases both on the landlord and tenant side. Extensions allow landlords to avoid vacancies in a period of weak take-up, while tenants save on search and relocation costs at a time when, in many cases, their revenues are in decline. Depending on the specific circumstances, landlords are even granting incentives in such cases in order to secure a longer lease term in return,” says Aspiotis.

Vacancy rates up slightly as sublettings become a growing trend
A similar trend to that in rents can be observed in terms of availability. A look at the traditional key figures (in this case the vacancy rate), shows no noteworthy changes in the market. At second glance, however, there is a significant trend. While the vacancy rate in most cities only increased marginally, many occupiers are preparing to sublet part of their office space. “An increasing number of companies are seeking to sublet at least part of their space because their own space requirements are low either due to the economy or since the majority of their personnel are still working from home,” says Aspiotis.
 
Transformation of office work to remain a dominant theme way beyond 2020
The growing availability of space will also have an effect on rents over the coming months. While the extent of this impact remains to be seen, the negotiating position of occupiers is at least likely to improve. In general, any projections remain encumbered with a high degree of uncertainty in the current market environment, even in terms of leasing activity. For the fourth quarter, the active requirements in the market suggest higher take-up than in the previous two quarters. However, the experience of recent months also demonstrates that occupiers are taking plenty of time over leasing decisions since they are often still unable to estimate their future space requirements in terms of quality and quantity. In that respect, the future of office work remains an issue that will be occupying market participants far beyond 2020.

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Market in Minutes Top 7 Office Markets Germany