Stronger German office growth this year, before slowdown in 2020

A new report on Germany’s office property market by research group Capital Economics suggests that solid employment growth and tightening supply has led the researcher to revise its forecasts for the bigger cities for the rest of 2019, although it still expects a slowdown in occupier and rents into 2020.

According to Andrew Burrell, chief property economist at Capital Economics and the lead author of the report, German office occupier market data came in stronger than expected in Q2 when a combination of buoyant demand and limited supply helped add upward pressure on prime rents. Led by strong rises in Berlin (+3.6% q/q) and Hamburg (+2.6% q/q), German major city prime rents rose by 2.6% quarter over quarter in Q2, a notable acceleration on Q1’s 1.4% q/q.

German GDP growth has been slowing for 12 months and is forecast to be subdued for the rest of this year and into next. But, say the researchers, at least for now, this is chiefly the result of faltering external demand. In contrast, labour markets have been more resilient and the researchers forecasts for German jobs growth, the most important driver of occupier demand, have actually been revised up.

Nonetheless, the report clearly concludes that German employment growth is past its peak. And as the slowdown from industry spreads to the service sector, it expects labour markets to cool further – a view that is in line with the latest survey evidence. It predicts that this weakening of demand should help take the momentum out of rental growth throughout this year and into 2020.

German cities have seen a faster-than-expected tightening of office markets so far this year. Each of the top four markets has registered a 100 bps decline in vacancy rates since last summer. In Berlin, with vacancy now under 1.5%, there is effectively no supply, while Munich and Hamburg are also amongst the eurozone’s tightest markets at around 3% vacancy. Given this, it is not a surprise that occupiers are having to pay higher rents.

However, on the supply side the pipeline of new offices coming on stream remains significant. About 1.1 million sqm is expected to complete this year, although only one-third of this has been delivered in H1, according to the latest agency estimates. Admittedly, with a substantial proportion of this space already pre-committed, this will not have a dramatic

impact on vacancy and space is expected to remain tight into 2020. But there is good reason to expect that we are past the low point in office availability, say the researchers.

The researcher up their national growth rate predictions for 2019 from 3% year on year to 6%, which still implies a slowdown in the second half. But, the researchers conclude, “given the delicate demand-supply balance, we now think that the risks to rents are skewed to the upside beyond this year. So we are also reviewing the rental profile in 2020-21 with a view to further possible upgrades.”