Berlin office market outperforms its German counterparts

Berlin has outperformed its German counterparts to record the strongest office rental growth in the third quarter, up 3.2%, according to JLL’s European Office Clock Q3 2018, published this month.

All of Germany’s ‘Big 5’ markets witnessed strong growth in the third quarter, including Hamburg (+1.9% q-o-q), Düsseldorf (+1.9%), Munich and Frankfurt (both up +1.3%).

‘Berlin recorded the strongest office rental growth in the ‘Big 5’ because there is almost no vacancy, so it is getting really hard for companies to find space,’Hela Hinrichs, national director EMEA research at JLL, told REFIRE. ‘Going forward, we expect office rents to go up by about 2% on average in the ‘Big 5’, but there will be weaker sentiment due to the political and economic climate, including sanctions on Iran, global trade wars and the problems in Italy and Brexit.’

Elsewhere in Europe, late-cycle recovery markets were the standout performers, particularly in Barcelona (+3.1%) and Madrid (+3%). Prime rents in Warsaw (+2.2%) are also bouncing back. Other strong performers included Paris (+3.8%) and Budapest (+6.7%), with rents remaining stable in most other major markets.

Looking ahead, JLL is European office rental growth of 1.9% a year on average over the next five years, with demand remaining robust and low speculative development supporting rental levels.

Growth expected to level off in occupier markets

The European economy has seen a deceleration in economic activity this year, albeit a modest one, according to JLL. As a result, growth is expected to remain more muted in both Germany and France this year. Predictably, Brexit is putting a dampener on the UK outlook, but growth is set to continue. Nevertheless, the outlook for the European office market is encouraging. As unemployment continues to fall across the region, JLL expects demand for offices to remain solid and rental growth to outperform the 10-year average.

Office Rents

JLL’s European Office Rental Index increased by 2.4% q-o-q in the third quarter of this year, with 15 of the 24 Index markets recording growth over the quarter, compared with just 10 in the second quarter. At 6% y-o-y, annual European rental growth continues to outperform the 10-year average. This strong result is reflected by the anti-clockwise movement of numerous markets on the clock in the third quarter, including Amsterdam, Budapest and Cologne.

In London, prime rents increased by 4.5% in the third quarter, reflecting the resilience of the occupier market despite headwinds in the wider macro environment.

In the Eurozone, rental growth was strongest in the third quarter in the Netherlands, led by Rotterdam (+7.1% q-o-q), Utrecht (+3.9%), Amsterdam (+3.7%) and The Hague (+2.6%), according to JLL, largely due to tight vacancy rates and strong competition for high-quality space.

Office demand continues to climb

Following a strong first half in 2018, demand shows no signs of weakening, with third quarter European office take-up reaching a record 3.3m sqm - up 4% y-o-y. As in the second quarter, Central and Eastern Europe (+5% y-o-y) outperformed Western Europe (+3% y-o-y), according to JLL.

In Germany, take-up has fallen slightly by 3% y-on-y to 874,000sqm in the ‘Big 5’ in the third quarter. Nonetheless, some markets benefited from strong growth, notably Munich (+18% y-o-y), Frankfurt (+11%) and Hamburg (+10%).

‘Office take-up fell by 21% in Berlin in the first three quarters, just due to the lack of available space,’ Hinrichs said. ‘There’s definitely not a decrease in demand. We’re not expecting any decrease in office rents in the ‘Big 5’ in the next five years because demand is strong and supply is limited. ‘

In Amsterdam, take-up fell by 38% on 2017 because occupiers are finding it increasingly difficult to secure space in the key office districts and are instead looking to other Randstad cities. While the development pipeline will provide some breathing space in one of Europe’s tightest markets, it is likely that take-up will level out in the short term, according to JLL.

In London, Brexit has not yet had a major impact on occupier activity, with take-up falling by just 1% y-on-y, compared to a drop of 18% in Paris. ‘Demand could weaken from this quarter onwards, due to uncertainties over Brexit,’ Hinrichs said. ‘A “no deal” Brexit would be difficult.’

Take-up in Barcelona increased by 84% y-o-y, or 10% year-to-date compared to last year. ‘Spain is recovering, so we think demand should be strong going into next year, providing there is no bad news out of Italy, which could affect Spain,’ Hinrichs said.

Central and Eastern Europe recorded a strong third quarter, led by a significant increase in activity in Warsaw (+20% y-o-y) and Prague (+12%).

JLL is now forecasting office take-up across Europe this year to be around 13.2m sqm, below the record set last year but still 18% higher than the 10-year average. (ssk)