Berlin office demand to remain buoyant through 2020

There is likely to be little let-up in the demand for office space in Berlin over the next three years as the number of office employees is set to surge over the period, according to a new report on the sector in the capital.

The survey, "Market Prognosis 2020 – Tomorrow's Office Users in Berlin", was carried out by market researchers BulwienGesa on behalf of the listed commercial property managers TLG Immobilien, Union Investment and CA Immo. The findings were discussd recently with journalists in Berlin (including REFIRE) at what proved to be a lively presentation.

The report predicts that Berlin will be welcoming a further 62,000 office employees by 2020, a rise of 8.7%, bringing the total number of office workers in the city to 775,000 – or 40% of all wage-earners in the city.

This will mean further increases in office rents over the period, with fresh demand for office space potentially hitting 1.6m sqm, said Andreas Schulten, CEO of BulwienGesa. To put that in perspective, this approximates to about three times the total office space at the popular Potsdamer Platz and Leipziger Platz together, we learned.

A key driver of the new demand are digital companies, which have overtaken other demand groups such as government, public administration, auditors and tax advisers since 2011, the study shows. The rise in employment in digital companies in Berlin has been 24% between 2005 and 2015, higher even than London (+24%).

Philip La Pierre, head of investment management for Europe at Union Investment Real Estate, which is already a major investor in Berlin, said: “Due to the current scarcity of space, all central locations will perform well in the near future. Locations such as Berlin-Mitte, City-West, Mediaspree and Europacity and Adlershof, are and will remain attractive to office tenants.”

La Pierre offered a mixed perspective on investor prospects for the city, while remaining bullish on the city's prospects overall. He sees potential for office property project developments in city districts such as Kreuzberg, Tempelhof, Schöneberg and Südkreuz. “With prices on the rise, we believe that only top locations or properties with so-called ’under-rent’ in sustainable locations are lucrative,” he said. “There will presumably be no downside for high-quality office properties in the future.”

Still, the current price boom harbours dangers. “The prices of all other properties in weaker locations and with structural deficits may take a downturn,” he said. “We believe that tenancy problems will arise quickly here – even if such properties are extremely popular today.”

Berlin's status as a cult capital for start-ups cannot be permanently taken for granted, he warned, with digitally mobile enterprises likely to move to cities like Lisbon if they're not being well served in Berlin, including finding the right-priced properties and adaptable infrastructure to grow in. London fintech firms wanting to move to Berlin (for reasons of Brexit or otherwise) would struggle to find space in Berlin at the moment, with not enough suitable buildings. The lack of a functioning major airport was still acting as a major drag on the city, La Pierre and the other panellists agreed.

Niclas Karoff, CEO of TLG Immobilien, also cautioned that investors need to be aware of the risks of Berlin being unable to meet the demand for modern office space and good infrastructure. “Most of the main demand groups for office space operate in non-disruptive lines of business and bring life to the city,” he said. “In order to tie them to the city in the long term, Berlin must permit moderate increases in building density and strengthen its IT infrastructure, especially by expanding its 5G network and public WiFi. Permit processes for new office buildings must also be simplified, streamlined and accelerated.”

Average rents have risen 7% to €15.60 per sqm/month over the last year, while peak rents, currently €25.50 per sqm/month, could be headed to €30.00 by 2020 in certain properties and locations, says the study. Rating agency Feri Eurorating Services have also recently attributed to Berlin the fourth-highest rent increase potential among Europe's twenty top office cities over the coming years. Meanwhile, brokers have turned over more than 400,000 sqm of office space in the first six months of this year, well above the recent ten-year average, while the vacancy rate is now down to 4%. Prime yields from office properties are currently 3.85%, says the study.

Right now, the problem is a scarcity of space, due to the lack of building in the last few years. This is partly due to the authorities' reluctance to issue permits for 100% office-use buildings, given their preference for mixed-use developments.

Now several new projects are coming on stream, including the 140m-high East Side Tower near the Ostbahnhof being built in a joint venture between the Dutch group OVG Real Estate and Luxembourg-based Freo. Another is a large new cube-shaped office complex from CA Immo just south of the main railway station, which Gregor Drexler of CA Immo told us was being built speculatively, with no tenants signed up yet.

Union Investment's La Pierre, facing a barrage of questions as to why he wouldn't automatically invest in a new office building in the city, expressed scepticism that the forecast peak rents of €30.00 would be broadly sustainable, and that a surfeit of new building might also put pressure on long-term rents. As a long-term oriented investor (up to 20 years), Union Investment has seen plenty of real estate cycles - "and a certain scepticism is surely permissible, no matter how positive things look now", said La Pierre.