Market Report q1 2024
Economic conditions
The first quarter of 2024 is expected to end with a minimal contraction for the overall German economy. From the second quarter onwards, signs point to growth, albeit initially with limited momentum. Several leading indicators suggest that the German economy has reached the bottom of the recent downturn cycle and is gradually turning towards a path of recovery. However, as many indicators remain at low levels, some still in contraction territory, significant growth is only expected later in the year. From 2025 onwards, German gross domestic product (GDP) is predicted to exceed its long-term average for several years in a row.
Property yield, inflation, swap rate, government bond
Meanwhile, the disinflationary trend remains intact: In March, the inflation rate in Germany dropped to 2.2%, the lowest level in nearly three years. Twelve months ago, it stood at 7.4%. Energy prices in particular are expected to continue declining over the year, unless geopolitical conflicts worsen or resurface. However, the core inflation, which the ECB pays particular attention to, only decreased minimally, remaining too high at 3.3%. The first interest rate cut is expected in June. By the end of the year, the key interest rate is likely to be in the range of 3.5% to 3.75% – a significant decrease from the current level of 4.5%. The financing situation for many companies in Germany is tense; decreasing interest rates would alleviate the situation somewhat.
Office take-up versus ifo Employment Barometer
The German labour market has so far weathered the weak economic conditions. Despite slight increases, the unemployment rate at 6.1% remains one of the lowest in Europe. In 2023, the number of employed persons reached a new record level of 45.9 million people, with the largest increase seen in the service sector. In recent months, companies' hiring plans have been gradually reduced, but German companies still intend to hire. In fact, continued employment growth is planned in the service sector.
Investment market
The commercial real estate investment market remained weak in the first quarter of 2024. Although the achieved transaction volume of €5.2 billion surpassed the same quarter of the previous year by 6%, it was 58% below the five-year average for first quarters. Office properties accounted for only 21% of the investment volume. Investors continue to be very cautious towards this asset class. Large transactions are scarce, not least because financing is still predominantly available for smaller lot sizes.
After holding on to old property values for a long time in the hope continuing to achieve them or avoiding sales altogether, owners are increasingly forced to sell at significant discounts (‘seller capitulation’). According to PwC, the share of non-performing loans (NPLs) in commercial real estate financing has already risen sharply, albeit from a very low level. Regulatory and supervisory pressures make it more difficult for banks to cooperatively manage troubled credit exposures with their clients. Banks are increasingly considering selling loans, and they remain restrictive in granting new loans for real estate. The more elaborate acquisition and financing due diligence processes significantly contribute to the reduced dynamism in the real estate investment market.
After holding on to old property values for a long time in the hope continuing to achieve them or avoiding sales altogether, owners are increasingly forced to sell at significant discounts (‘seller capitulation’). According to PwC, the share of non-performing loans (NPLs) in commercial real estate financing has already risen sharply, albeit from a very low level. Regulatory and supervisory pressures make it more difficult for banks to cooperatively manage troubled credit exposures with their clients. Banks are increasingly considering selling loans, and they remain restrictive in granting new loans for real estate. The more elaborate acquisition and financing due diligence processes significantly contribute to the reduced dynamism in the real estate investment market.
Commercial real estate investment volume
The devaluations of individual properties and portfolios have continued in the meantime. Once price adjustments in various market segments reach their new equilibria, deal volume and numbers will increase again. For risk classes above Core and CorePlus, new capital providers are also entering the market. The ongoing yield corrections are creating entry opportunities at prices not seen for years. We maintain our expectation of an initially continuing increase in yields for the time being.
Although markets have already priced in some of the expected interest rate cuts, ECB rate actions are likely to have positive impacts, particularly on the investment market. These effects may initially be moderate, as long-term government bond yields have a greater influence on lending rates than central bank rates. Nevertheless, demand continues to build, especially from international investors. Additionally, segments previously viewed critically, such as office properties, are once again gaining attention. However, price formation is still ongoing, particularly in the office segment. The logistics asset class, for example, is further along in this regard. Overall, 2024 is likely to mark a turning point in the current real estate cycle.
Although markets have already priced in some of the expected interest rate cuts, ECB rate actions are likely to have positive impacts, particularly on the investment market. These effects may initially be moderate, as long-term government bond yields have a greater influence on lending rates than central bank rates. Nevertheless, demand continues to build, especially from international investors. Additionally, segments previously viewed critically, such as office properties, are once again gaining attention. However, price formation is still ongoing, particularly in the office segment. The logistics asset class, for example, is further along in this regard. Overall, 2024 is likely to mark a turning point in the current real estate cycle.
Prime yield
Germany: office markets
The office space take-up in the examined real estate markets of Berlin, Hamburg, Dusseldorf, and Frankfurt stands at 370,100 sqm after the first three months of the year, marking a level as low as four years ago during the peak of the pandemic. This represents a 5% decrease compared to the same quarter of the previous year and a 19% decrease compared to the five-year average for first quarters. Several rental requests that were not completed in 2023 and were therefore expected for the first quarter of 2024 have still not been finalized. Processes often take longer than usual, especially for large requests.
The weak economy, along with the current prevailing uncertainty regarding geopolitical conflicts, economic policy frameworks, or interest rate developments, are having an impact: Long-term locational decisions are more frequently avoided in favour of contract extensions for just a few years. However, through this "postponement," higher demand is expected to build up in a few years.
The weak economy, along with the current prevailing uncertainty regarding geopolitical conflicts, economic policy frameworks, or interest rate developments, are having an impact: Long-term locational decisions are more frequently avoided in favour of contract extensions for just a few years. However, through this "postponement," higher demand is expected to build up in a few years.
Take-up: Berlin, Dusseldorf, Frankfurt, Hamburg
Activities related to lease extensions continue to be high, although they do not reflect in the space take-up statistics. The trend towards moderate reduction in utilized office spaces through the implementation of hybrid work concepts continues to lead to a gradual increase in vacancy rates.
Office prime rents and vacancy rates
High-quality properties remain highly sought after by those looking for space. However, even in this market segment, there are reductions in available spaces. The best properties continue to command high rents, not only through inflation indexing in existing contracts but also in new leases. Conversely, for spaces less aligned with current demand, marketing efforts are significantly increased. Higher financing expenses for property owners and the overall rising competition of spaces in the current weak demand environment can also be triggers for such intensified efforts.
Berlin office market
The office space turnover amounted to 141,700 sqm, marking a 1% increase over the first quarter of the previous year but a 20% decrease below the five-year average. There were two deals larger than 10,000 sqm. The three largest deals (all involving public administration users) alone represent 43% of the total space take-up. Activities in the segment between 5,000 and 10,000 sqm were notably low.
Demand in the Berlin office market has been subdued since the end of 2022. Occupiers continue to assess their future work models and space requirements. Consequently, the number of active inquiries is currently reduced, especially concerning large inquiries. A high volume of lease extensions is the consequence. There are also ongoing reductions, either in the form of space returns or by offering surplus space for subleasing.
Against this backdrop and the growing vacancy rates, many owners face increasing pressure to lease out their properties. Accordingly, not only are incentives being increased, but nominal asking rents are also being reduced more frequently. This no longer applies only to locations outside but also within the S-Bahn ring. Consequently, in some office submarkets, rental price ranges have been adjusted downwards. The average rent has slightly decreased compared to the previous quarter. However, the prime rent could experience an increase by the end of the year.
Demand in the Berlin office market has been subdued since the end of 2022. Occupiers continue to assess their future work models and space requirements. Consequently, the number of active inquiries is currently reduced, especially concerning large inquiries. A high volume of lease extensions is the consequence. There are also ongoing reductions, either in the form of space returns or by offering surplus space for subleasing.
Against this backdrop and the growing vacancy rates, many owners face increasing pressure to lease out their properties. Accordingly, not only are incentives being increased, but nominal asking rents are also being reduced more frequently. This no longer applies only to locations outside but also within the S-Bahn ring. Consequently, in some office submarkets, rental price ranges have been adjusted downwards. The average rent has slightly decreased compared to the previous quarter. However, the prime rent could experience an increase by the end of the year.
Take-up, vacancy and prime rent
Take-up by Top 5 Sector
Take-up by size category
Top 5 Deals
Completions
Rental bands - Berlin q1 2024
Source: Avison Young
Status: March 2024
Dusseldorf office market
Compared to the first quarter of the previous year, office space take-up decreased by 7%, and it was more than a quarter lower compared to the five-year average, standing at 56,200 sqm currently. There was only one deal larger than 5,000 sqm, which was the project leasing of Noerr Partnerschaftsgesellschaft mbB in Le Coeur. Demand in the middle-size segment was unusually weak. Among the submarkets, the CBD, Nord, and Kennedydamm attracted the largest take-up volumes.
Nowhere is the differentiation of the office market by quality as pronounced as in Düsseldorf: While prime rents in top buildings continue to trend upwards and incentives can be reduced, spaces at the lower end of the quality spectrum are increasingly under pressure. Twenty-four months ago, the prime rent stood at €28.50/sqm/month; after another increase in the first quarter of this year, it has now climbed to €42/sqm/month. Meanwhile, the average rent has decreased by almost one euro compared to the fourth quarter of 2023, and for properties with significant weaknesses, owners are significantly intensifying marketing efforts. This includes expanding incentives, but a reduction in nominal rent may also be imminent in some cases, although it remains questionable whether such spaces will find tenants.
Meanwhile, vacancy rates continue to rise: For the first time in 10 years, the vacancy rate exceeded the 10% mark. Outside of top locations, these properties often struggle to find occupants. There are still some - including large - inquiries in the market; a slight market recovery could already begin in the current year.
Nowhere is the differentiation of the office market by quality as pronounced as in Düsseldorf: While prime rents in top buildings continue to trend upwards and incentives can be reduced, spaces at the lower end of the quality spectrum are increasingly under pressure. Twenty-four months ago, the prime rent stood at €28.50/sqm/month; after another increase in the first quarter of this year, it has now climbed to €42/sqm/month. Meanwhile, the average rent has decreased by almost one euro compared to the fourth quarter of 2023, and for properties with significant weaknesses, owners are significantly intensifying marketing efforts. This includes expanding incentives, but a reduction in nominal rent may also be imminent in some cases, although it remains questionable whether such spaces will find tenants.
Meanwhile, vacancy rates continue to rise: For the first time in 10 years, the vacancy rate exceeded the 10% mark. Outside of top locations, these properties often struggle to find occupants. There are still some - including large - inquiries in the market; a slight market recovery could already begin in the current year.
Take-up, vacancy and prime rent
Take-up by Top 5 Sector
Take-up by size category
Top 5 Deals
Completions
Rental bands - Dusseldorf q1 2024
Source: Avison Young
Status: March 2024
Frankfurt office market
In the first three months of the year, office space take-up in the Frankfurt market area amounted to 91,500 sqm, representing an 8% increase over the same quarter of the previous year and a 17% increase over the fourth quarter of 2023. However, both of these quarters were exceptionally weak. The fact that a single large transaction accounts for 40% of the space take-up in the current period illustrates the overall cautious start to the year. This deal involves the leasing of 37,000 sqm to the European Central Bank in the Gallileo Tower. Through a location and space consolidation, the ECB will halve its current usage of 74,000 sqm in the Eurotower and Japan Center after the completion of the Gallileo renovation.
As with other recent user decisions to lease smaller office spaces, additional vacancy is being built up here prospectively, which will only become market-effective upon relocation. By the end of March, total vacancy in the Frankfurt market area reached nearly 1.2 million sqm, equivalent to a vacancy rate of 9.6%. Spaces offered for sublease continue to increase.
In addition to central locations, peripheral locations are also attracting larger users in the Frankfurt market area. Four out of the five largest transactions were concluded outside of central locations. One reason for this is the high rents in prime locations, although rents in submarkets and also the prime rent remained stable in the first three months of the year. In terms of incentives, owners, especially (but not exclusively) outside the high-quality space segment, are becoming increasingly flexible – and this now applies to new leases as well.
As with other recent user decisions to lease smaller office spaces, additional vacancy is being built up here prospectively, which will only become market-effective upon relocation. By the end of March, total vacancy in the Frankfurt market area reached nearly 1.2 million sqm, equivalent to a vacancy rate of 9.6%. Spaces offered for sublease continue to increase.
In addition to central locations, peripheral locations are also attracting larger users in the Frankfurt market area. Four out of the five largest transactions were concluded outside of central locations. One reason for this is the high rents in prime locations, although rents in submarkets and also the prime rent remained stable in the first three months of the year. In terms of incentives, owners, especially (but not exclusively) outside the high-quality space segment, are becoming increasingly flexible – and this now applies to new leases as well.
Take-up, vacancy and prime rent
Top 5 Deals
Completions
Rental bands - Frankfurt q1 2024
Source: Avison Young
Status: March 2024
Hamburg office market
The office space take-up of 80,400 sqm is 22% lower than the same quarter of the previous year and 31% below the five-year average take-up for the respective first quarters. This exceptionally low volume can be attributed primarily to the fact that there was only one deal exceeding 5,000 sqm: the project leasing of the consulting firm Mazars in LEE (Überseequartier) in the Hafencity. Several large inquiries that were not concluded in 2023 also remained unfinished in the first three months of the current year, contributing to the low take-up volume.
The increase in vacancy continued in the first three months of the year and is expected to continue throughout the year, particularly outside of top locations, where most of the speculative spaces from the construction pipeline will enter the market. In the central locations of the City and Hafencity, however, there are only five development projects expected to be completed by the end of 2025, that can each offer more than 3,000 sqm of available space.
Many owners feel pressure to optimize the occupancy levels of their spaces. This applies not only to existing spaces but also increasingly to new constructions in B-locations. Attempts to improve marketing opportunities involve expanding incentives. Prospective tenants often request shorter lease terms, but from the owner's perspective, this can only be realized if there are no significant renovation costs involved.
In the second half of the year, there should be a bit more activity in the market. Rent stability is expected, with slight growth possibilities in prime rent due to consistently high user requirements amid decreasing availability of high-quality spaces.
The increase in vacancy continued in the first three months of the year and is expected to continue throughout the year, particularly outside of top locations, where most of the speculative spaces from the construction pipeline will enter the market. In the central locations of the City and Hafencity, however, there are only five development projects expected to be completed by the end of 2025, that can each offer more than 3,000 sqm of available space.
Many owners feel pressure to optimize the occupancy levels of their spaces. This applies not only to existing spaces but also increasingly to new constructions in B-locations. Attempts to improve marketing opportunities involve expanding incentives. Prospective tenants often request shorter lease terms, but from the owner's perspective, this can only be realized if there are no significant renovation costs involved.
In the second half of the year, there should be a bit more activity in the market. Rent stability is expected, with slight growth possibilities in prime rent due to consistently high user requirements amid decreasing availability of high-quality spaces.
Take-up, vacancy and prime rent
Take-up by Top 5 Sector
Take-up by size category
Top 5 Deals
Completions
Rental bands - Hamburg q1 2024
Source: Avison Young
Status: March 2024
Kontakte
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Director Market Intelligence, Germany
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Market Intelligence
