Office landlords demanding fresh lease terms as vacancies plunge

New figures published by broker network GPP German Property Partners show that the available office space in Germany’s Top 7 cities fell a further 5% at the end of Q3 compared to a year ago to 2.76 million sqm. At a 3.4% vacancy rate on average, the figure represents a new all-time low in German office vacancies among the leading cities surveyed.

The figure comes after a rate of 3.7% after Q2 and 3.9% after Q1, a strong indication of the level of office demand in Germany’s commercial centres. The third quarter saw new leases of 1.04 million sqm in the top cities (Hamburg, Berlin, Munich, Cologne, Frankfurt, Düsseldorf and Stuttgart), making it the second best quarter of the last five years.

GPP says peak rents have risen in all the cities, bar Stuttgart, which saw median rents stabilize but give up something at the very top end. For peak rents, Frankfurt topped the table at €42.00 per sqm/month. Berlin picked up the reins as leader among the cities for average rents, at €20.70, but also saw both peak rents (at €32.00, up 10%) and average rents (up 14%) rising at the fastest rate in the country. (For comparison, Frankfurt peak rents, in its top skyscrapers, are still only half the cost of London office space, according to the latest Global Cities 2018 report from Knight Frank.)

Even perennially-plagued Frankfurt saw a surge in office demand to 458,000 sqm after Q3, a rise of 4%. The banking metropolis also saw the biggest fall in vacancy rates, by 1.9% to a relatively solid 7.2%. It topped the list for new co-working space at 49,600 sqm, ahead of Munich in second place.

GPP spokesman Guido Nabben says relief is unlikely to be expected on available space before 2020. “The increasing shortage of space has driven office rents to new highs and vacancy rates into to the ground. Naturally, as a consequence, demand has been filtering into less-than-prime office locations.” Nabben expects the final full-year tally for 2018 to reach 3.71 million sqm of new office leases.

Projects on stream and in the pipeline for 2018 and 2019 are expected to be 2.42 million sqm of office space, across 251 separate developments. Of this 68% is pre-let, more than at the half-way stage this year.

Co-working space and business centres make up 207,000 sqm of the pre-lets, compared to 113,000 sqm in 2017, for a total of 7.5% of all existing office space in the Top 7 cities.

A new study by consultants PwC shows that many landlords are dispensing with lease extensions with existing tenants, and instead offering completely new lease agreements, such is the demand for prime office space.

The “Real Estate Investor Survey” by PwC shows for the first time since 2014 a stabilizing of the so-called All-Risks-Yield (ARY) in Germany’s top office markets at about 3.3%, with investors expecting this for the coming five years.

Among secondary markets, respondents to the PwC survey also saw yields retreating. They are currently led by Magdeburg (6.5%), Duisburg (6.2%), Erfurt (6.0%), Dortmund (5.8%), Rhein-Neckar with Mannheim, Heidelberg and Ludwigshafen (5.7%), Dresden (5.6%), Bremen (5.6%), Essen (5.5%), Karlsruhe (5.5%), Wiesbaden and Mainz (5.4%), Leipzig (5.3%), Hannover (5.2%), Nuremberg (5.1%) and Bonn (5.0%).

When questioned about interest rates, 68% of German and international respondents are expecting rate rises in the coming five years, well up from the 54% of respondents saying the same thing last year.