• Take-up in Q3 was down 19% compared with the previous quarter
• Prime and median rents rose by 2% and 5% respectively over the last three months
• Vacancy rate rose marginally to 4.7%

The German office letting markets* experienced both tailwinds and headwinds in the third quarter of the year, with the former prevailing overall. While rents increased for the most part despite a marginal increase in vacancy rates according to Savills, take-up was almost a fifth lower than in the second quarter. Jan-Niklas Rotberg, Head of Office Agency Germany for Savills, summarises the current market environment as follows: “We are still witnessing relatively high leasing activity and there remain large requirements in the market. In view of economic developments, the outlook is undoubtedly becoming more challenging and competition for attractive occupiers is already increasing among landlords.”

Rents continue to rise, space continues to shrink
Both prime and median rents increased over the last three months, in some cases sharply, with those in Hamburg rising the most by 6% and 7% respectively. Prime rents across all six cities rose by an average of 2% while median rents rose by an average of 5%. Rents remained stagnant in certain markets and did not decline in any cities. According to Savills’ observations, however, incentives granted by landlords have increased, meaning that effective rents are likely to have risen less sharply than nominal rents. Nevertheless, the increasing rents can be regarded as an expression of the higher expectations of office occupiers when it comes to space and its fit-out standard. In Savills’ estimation, higher expectations in terms of office space often go hand in hand with reduced space requirements, particularly from major companies. “We have seen numerous lettings in recent months that have involved occupiers moving into smaller offices while paying a multiple of their previous rent per square metre. More and more companies are no longer looking at the rent per square metre at all. Rather, the cost of space per employee is increasingly central,” says Rotberg. The lower space requirements per capita could cause a structural shift in office demand towards smaller offices. Matthias Pink, Head of Research Germany for Savills, says: “In the three years prior to the pandemic, the average space leased in the top six markets was consistently larger than a thousand square metres and, since that time, the figure is below that threshold.” Pink continues: “The trend towards smaller space could also be overlaid with the fact that companies with several offices are tending to merge them, thereby shifting into a large size category.”

Pressure on owners to act is increasing: asset management is becoming more important
“The increased requirements for office occupiers to change and upgrade is also exerting increasing pressure on owners to take action. Offering simple office space is often no longer sufficient, particularly in the prime segment. The status of an office has increased to such an extent from companies’ perspectives that they are making higher demands when it comes to ‘added extras’ and requesting, or even expecting, services such as a concierge service, canteen, day nursery or a co-working space in the property,” says Rotberg, adding: “On the one hand, this provides major opportunities for owners since occupiers are prepared to pay more for good office space. However, they must also invest in their space in order to attract occupiers to their property going forward. In brief, asset management is becoming more important.”

Recession means a temporary decline is likely
Savills believes the pressure on landlords is also likely to increase since the deteriorating economic outlook, combined with the numerous risks and stress factors, may well temporarily reduce companies’ willingness to take out leases. “Most economic projections expect the German economy to contract over the next year. All recessions over the last thirty years have also consistently entailed a decline in office take-up. Landlords should adjust themselves to this probability over the next year,” says Pink. “We are already witnessing a trend whereby German companies in particular are preferring to extend their leases rather than to consider moving in the current environment,” adds Rotberg. The numerous (large) requirements in the market may still produce a high take-up over the coming month according to Savills. However, in the medium term, take-up is expected to decline. Rents could also fall over the next year for the first time since 2009, although there remains a trend of overwhelming upward pressure from rising occupier requirements and the consequent sustained shortage of high-quality office space. “In view of the economic upheaval, the German office markets will be unable to avoid at least a short cyclical downturn. However, they will go into this potential downturn from a position of significant strength,” says Rotberg.

* Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne and Munich

Find out more:
Market in Minutes: German Top 6 Office Markets