German retail sees trend reversal in peak rents

If a word can describe the space leasing market in Germany last year in retail, it would be 'hesitancy'. The year finished up with again less retail space turnover than in the previous year, according to the latest retail market survey for 2016 from property advisors JLL.

Last year space turnover in German retail was 487,000 m² across 1,070 transactions – about 7% less than in the previous year and about 15% less than the five-year average of 569,000 m².  Given that the number of concluded deals remained constant, they were thus by definition smaller on average than in the previous year. The best quarter of the year was the final quarter with 134,000 m², and, at 284 deals, at the same time the highest amount of concluded transactions.

Peak retail rents are stagnating in Germany's Big Ten cities. Growth has averaged 6.8% since 2013, but there is no doubt that in the last 12 months the market has lost a significant amount of dynamism. Last year's growth was a mere 1.2% overall, but significantly in the 185 largest towns and cities in Germany, rents grew last year by only 0.1%.

According to Dirk Wichner, head of retail leasing at JLL Germany, "In 2016 you could clearly see that major retail chains, particularly clothing chains, were carefully scrutinizing their commitments to any location. We are expecting that this year the market is going to have to fight very hard again to regain its dynamic – dependent on location, we're also expecting to see peak rents actually recede."

The share of the market of the Big Ten cities remained constant over the period, and saw turnover of 180,000 m² in 2016, giving them a market share of 37% of the total leasing market. This share has oscillated between 33% and 39% over the past five years. The biggest market, with a very strong final quarter, was Berlin which turned over 36,000 m². The city is very much a launching pad for international brands, who subsequently roll out their retail presence into other German cities. Behind Berlin was Frankfurt with 28,000 m², fueled by big project developments such as Zeil 111 or the refurbishment of the Kaiserpassage. In third place was Stuttgart, which booked its best result for five years.

However, well below its long-term average was Hamburg with 20,000 m², Cologne with 17,000 m² and Düsseldorf with 15,500 m². Cologne, in particular, made up more than half of its turnover in the final quarter. In Bavaria, Munich (13,300 m²) and Nuremberg (13,100 m²) went head-to-head, with Nuremberg winning out by 5 to 1 in the battle for large lease signings.

All markets are experiencing the trend towards smaller and mid-sized lettable spaces, with three quarters of all lease contracts signed falling into this category. There were also noticeable shifts in usage – clothing and textiles, the market leader, made up 260 transactions as against 292 in the previous year. By contrast, gastronomy boosted its share by 40 transactions to 219, while the health and beauty sector also increased by 20 transactions, bringing its total for the year up to 84.

This had an effect on overall market share. Textiles and clothing has now slipped from 40% in 2014 to 33% in 2016, while gastronomy has steadily inched upwards and now accounts for 20% of all new leases, with the trend set to continue. Several big new arrivals have also made their presence felt such as the vegan chain Alge and the US confectionery group Cinnabon. Companies in the health and beauty segment are also expanding strongly and increased their share from 10% to 15%. Apart from the big drugstore chains, big national fitness groups like Fitness First and McFit also signed several new tenancy agreements.