German office rents still predicted to remain stable – research

Germany’s office real estate markets in its largest cities are expected to remain stable despite a fall in economic output of nearly 6%, thanks to persistently strong demand for space and a shortage of supply, according to a new report just published by market researchers Bulwiengesa and investment group Warburg-HIH Invest Real Estate.

Even office vacancy rates are expected to see only modest increases over the next two years, despite the ravages of COVID-19. Still, the study, presented recently at an online press conference titled “How Will Real Estate Markets Evolve”, was significant in that, for the first time, forecasts project no further price hikes, after a decade in which prices were effectively going only in one direction – upward.

The researchers at Bulwiengesa are under no illusions that the consequences of the COVID-19 pandemic will be far-reaching. CEO Andreas Schulten said his firm expects Germany’s GDP to fall by 5.8% this year. “The recession will leave its mark on the labour market, too, and on the national budget above all. The unemployment rate will climb to an average of 5.6 percent by year-end. This translates into 296,000 more job cuts than 2019.” The colossal economic stimulus package and Germany’s famed ‘Kurzarbeit’ scheme to subsidise jobs will cushion the impact to some extend, he said.

On the prospects for the country’s office markets, Schulten said: “The German office markets are defined by the fact that strong demand for space coincides with short supply. The recession as it presents itself at the moment poses no serious threat to the office real estate market, as far as we can see.”

In support of this argument, and the assumption that prime office rents will remain stable, he said: “During the years between 2005 and 2020, roughly two million new office jobs were created in Germany. These require around 50 million square metres in office space. But only three million square metres were completed over the same period of time. It is a factor that bolsters the office real estate market.”

Hans-Joachim Lehmann, managing director at the Hamburg-based Warburg-HIH Invest Real Estate, argued that the true challenge lay in the suddenness of the onset of the coronavirus crisis, and not in its long-term consequences. He believes that the medium-term trend for office demand will shortly re-assert itself. “In the office real estate sector, the coronavirus crisis represents an atypical factor caused by other than economic reasons. Sentiment is currently dragging down markets. But sentiment will brighten again. We need to remember that the crisis hit a robust office real estate market with historically low vacancy rates and few property developments in the pipeline.”

However, he acknowledged that the rapid shift in how office floor space is used could be accelerated by COVID-19. “We’ve been developing large-scale headquarters lately, and plan to keep these in our portfolios. A case in point would be the Zurich insurance company at Messe City in Cologne. Here, the way the premises are used by the employees is subject to an increasingly dynamic change. The number of conference facilities, quiet zones and break rooms of modern design is growing. The accommodation now created in office buildings is very much in touch with real life. This shift in floor space utilisation will continue and probably speed up further in response to Corona.”

At the new head office for e-commerce retailer Zalando, for example, which Warburg-HIH is currently developing, the new realities of working from home and the integration of ‘quiet zones’ into modern office spaces are being recognized. “Here, the structure is open and focuses on ‘mobile devices,’ which is new. Corona will boost the digitalisation drive in this unit. As a result, in-house office accommodation is subject to change. But it’s not going out of style”, said Lehmann.