Office demand in Berlin soars

Demand for office space in Berlin is dramatically outstripping supply, with the market struggling to play catch up, Gerald Dietzold, team leader Office Leasing at JLL Berlin, told REFIRE this month.

‘We still have huge demand for offices in Berlin; the biggest problem is that we just don’t have enough supply,’ he said. ‘We get a call from a client at least once a day asking for 2,000 sqm of office space in Berlin but we often can’t help because the pipeline is very small.’

Average prime office rents in Berlin are €34 per sqm, up 13% in the past 12 months, and JLL expects that to rise to €36.50 by the year-end, Dietzold said. In areas such as Mediaspree, which lies between Friedrichshain and Kreuzberg right on the river Spree and which counts Zalando as its biggest tenant, prime rents now stand at €37.50. Daimler is also a tenant. ‘The highest office rents in the city are still in Parisier Platz, right by the Brandenburg Gate, because it’s such a unique location,’ Dietzold said. ‘There, you can pay more than €40 per sqm. Average rents across the city are €21.10 per sqm, a huge jump from just €13.70 five years ago,’ he added.

Such is the demand for office space that the vacancy rate in some parts of Berlin is virtually zero. Around a million sqm of new office space is currently being built across the city, primarily around Central Station, Prenzlauer Berg and Friedrichshain, according to the Skjerven Group. Around 340,000 sqm of office space is due to be completed in the city by the end of this year but 60% of that has been pre-let, so it’s not all going to be available on the open market, according to Dietzold.

‘For 2020, 40% of new developments have already been pre-let. It’s hard to say what will happen with yields,’ Dietzold said. ‘When developers and landlords ask us, we say that this year will be a good year, as will 2020, but after that, who knows? It depends partly on external factors, such as Brexit and other global issues. So far, Berlin is not seeing any knock on effect from Brexit because there are hardly any British companies there.’

And while turnover in the rental market fell by 11% last year, due to the lack of supply, it remains 10% higher than the five-year average at 841,700 sqm. This year, JLL is forecasting around 900,000 sqm.

‘Top 7’ office rents also on the up

The ‘Top 7’ cities have benefitted from the strongest rental growth in past 12 months, up 5.7% to an average of €31.04 per sqm, according to Catella’s ‘Market Tracker: Investment locations Germany 2019’, published this month. Frankfurt leads the pack, at €42.00 per sqm, whereas the lowest measured value is in Gera, Thuringia, at just €7.50 per sqm.

Interestingly, ‘the locations in the C category have achieved an almost analogous increase and are thus overtaking the B locations in our analysis for the first time ever’, said Prof.Thomas Beyerle, managing director of Catella in Frankfurt. The top rents in 30 C locations have risen compared to the previous year by an average of 5% to €13.35 per sqm. Cities such as Braunschweig, Bochum and Mönchengladbach also experienced above-average growth rates.

In the 13 B locations analyzed, rents are up 4.1% to an average top rent of €15.54 per sqm. Predictably, the increase has been more muted in D cities. Some locations are stagnating but cities such as Bamberg, Halle (Saale) and Salzgitter are also achieving double-digit growth. On average, the prime rent level of these 26 locations has risen to €10.48 per sqm (+1.7 %).Catella’s Market Tracker analyses offices across 76 German markets, from A to D locations.

Office yields tighten

How much lower can office yields go? Prime office yields in the Top 7 are 3.06%, down 24 bps, y-on-y. However, this was a less dramatic shift than in 2017, when yields tightened by 37 bps. In Berlin and Munich, prime yields are just 2.8% and 2.9% respectively, according to Catella.

In the 26 D locations tracked by Catella, average prime yields fell by 28 bps to 6.7%. Yield compression in B and C locations has been virtually identical over the past 12 months (-27 bps and -26 bps respectively). However, the yield gap between the two categories has narrowed further and is currently just 83 bps. Investors are proceeding with a balanced understanding of risk/return and are mainly focusing on a sustainable cash flow from their investments, according to Beyerle. The highest yields can be found in Solingen and Wilhelmshaven (8%), followed by Weimar and Siegen with 7.4% each.

Vacancy rates falling nationwide

Office vacancy rates dropped again last year, according to the Association of German Pfandbrief Banks (vdp). At the end of 2018, less than 5% of available office space in all of Germany was unoccupied, and in the country’s seven largest office property markets, the weighted vacancy rate stood at only around 3% on average last year, according to the vdp.

Subsequently, office rents climbed considerably as a result, and will continue on their upward trajectory in 2019 – even if the economic stimulus to demand proves to be weaker in the months ahead, according to the vdp.

Dr. Franz Eilers, head of market research at vdp Research, expects the cash flow generated by office properties to be higher this year than last year. Considering the low level of interest rates, this suggests stable demand for investment properties in the market for offices for the time being.

‘However, it is impossible to estimate how long interest rates will stay low,’ he said. ‘And we have no experience of the effect of persistently low interest rates on the behavior of office property market investors.’

The Association of German Pfandbrief Banks (vdp) is one of the five central associations of the German banking industry. The vdp represents the sector’s most important finance providers for residential and commercial construction as well as for general government and its institutions. (ssk)