• Take-up fell by a third year on year despite a stronger final quarter
• Sharp decline in the large size category though the public sector was particularly active in the segment above 10,000 sq m
• The vacancy rate rose by 20 basis points over the full year but remains historically low    

Events in the top six office markets last year were overwhelmingly shaped by the COVID-19 pandemic and the associated economic uncertainty. Relative to previous years, demand in all of the top six office markets was rather subdued. The size category above 10,000 sq m was particularly affected, registering a 45% decline in take-up. Lead times in this segment are normally at least 24 months and many occupiers are in the dark as to what their space requirements will be after such a period, with the uncertain progression of the pandemic currently obscuring their vision of the future. This is benefiting office space that can be leased flexibly or on a short-term basis. Take-up in the segment below 1,000 sq m, for example, declined by just 10%.

Public sector provides stability in the large size category
One of the few active sources of demand in the larger size category is public sector occupiers, which are currently benefiting from their status as secure tenants and are preferred by landlords during uncertain times. These currently account for around 30% of the market in the size category above 10,000 sq m, which is triple the proportion from 2019. The average decline in take-up across all top six office markets in 2020 compared with the previous year was approximately 33%. Düsseldorf and Frankfurt witnessed the sharpest declines of 47.9% and 41.9% respectively. Berlin was less drastically affected with a decrease of around 25% after a strong final quarter for the German capital. The fourth quarter of 2020 was a relatively strong quarter across the board. In Berlin, Frankfurt and Cologne, it was the strongest quarter of 2020.

Nevertheless, take-up figures for all top six office markets were below the five-year average. “Occupiers that were previously seeking space put their requirements on hold for the time being, or extended their existing leases, either because they currently have lower space requirements owing to the economic situation or because the majority of their personnel are working from home,” says Panajotis Aspiotis, Managing Director and Head of Agency Germany for Savills.  

Central locations remain popular with occupiers - rising rents in the prime segment
Despite the subdued demand, rents remained largely stable or increased. The average prime rent across the top six office markets rose by 2.1% on the previous quarter and by 3.6% compared with the corresponding quarter in the previous year.

Frankfurt witnessed the strongest increase, with the prime rent in the second half of the year rising by 6.7% from €45.00 per sq m to €48.00 per sq m thanks to a number of high-priced lettings. Only Cologne registered a decline in its prime rent, which fell by 5.1% compared with the fourth quarter of 2019 to €27.75 per sq m. Demand remains high in the prime segment and occupiers are also prepared to pay premium rents. “Looking beyond the prime segment, however, and taking all locations and qualities of property into account, rents are rather moving sideways. In some peripheral locations, we are also already seeing rents falling,” says Aspiotis. The median rent* across all top six office markets fell by 0.5% compared with the previous quarter and by 1.2% compared with the corresponding quarter in the previous year. Generally, landlords are increasingly willing to reduce their effective rent via incentives, both when agreeing new leases and extending existing leases. It also remains the case that, the more peripheral the location, the more likely incentives are to be granted.
 
Rapid decline in office utilisation as vacancy rates rose modestly
The vacancy rate rose by 20 basis points compared with the previous year but remains at historic lows on average across the top six office markets at 3.5%. The largest increases were witnessed in Berlin and Munich, where vacancy rates in 2020 rose by 80 basis points to 2% and 2.9% respectively. In Hamburg, meanwhile, the vacancy rate declined further. “Office utilisation has rapidly declined since the outbreak of the pandemic. Whether this will return to pre-crisis levels once the pandemic has been overcome cannot currently be foreseen. However, there is much to suggest that the option of geographically flexible working will increasingly establish itself in day-to-day work, which could result in low demand for office space and a higher vacancy rate in the medium term,” says Dr. Martin Kern, Research Consultant for Savills. Whether this higher vacancy rate will also lead to lower rents, however, will depend on the requirements occupiers apply to their office space going forward and whether these can be fulfilled within their building stock.

The progression of the pandemic will shape activity in the office lettings market
In view of the complete lack of clarity surrounding the further progression of the COVID-19 pandemic, it is scarcely possible to make any serious forecasts regarding developments in the lettings markets. “While the progression of the pandemic remains impossible to assess, take-up could come in at the level seen in the second quarter of 2020 or it could stabilise at the level from the last quarter. Since companies require a lead time for their plans, we do not expect letting activity to normalise before the second half of 2021,” says Aspiotis.

*The median rent is the average rent across all letting transactions. Hence, 50% of all lettings lie above the median rent and 50% lie below it. However, the size of the space in each letting is not factored into the weighting when calculating the median rent.

Further information:
Market in Minutes Top 6 Office Markets Germany - January 2021