Real Estate Market Report Q2 2023
Economic situation
After a month-by-month improvement in Germany’s preliminary key economic indicators since their interim low in the autumn of 2022 which gave hope of a slight economic upturn this year, the situation reported in the news has deteriorated again since spring 2023. Following two quarters of declining GDP - in other words, a technical recession - signs are currently pointing to an economic downturn over the year as a whole. By the mid-point of the year, several economic research institutes had reduced their GDP forecasts for 2023 (now predicting a marginal decline in GDP) but raised them again for 2024.
Inflation continues its downward trend despite a slight rise in June due to a base effect. Consensus Economics forecasts an inflation rate of 6.0% over the course of 2023, but this falls to 2.5% for 2024. Second-round effects are likely to remain manageable and the stubbornly high core inflation rate should be forced into a downward trajectory. With real incomes rising as a result, private consumption should also pick up again in the second half of the year.
Inflation continues its downward trend despite a slight rise in June due to a base effect. Consensus Economics forecasts an inflation rate of 6.0% over the course of 2023, but this falls to 2.5% for 2024. Second-round effects are likely to remain manageable and the stubbornly high core inflation rate should be forced into a downward trajectory. With real incomes rising as a result, private consumption should also pick up again in the second half of the year.
Property yield, inflation, swap rate, government bond
*Net initial yield
Source: Avison Young, Federal Bank of Germany, Macrobond; Status: July 2023
However, according to current data, there will be at least one more interest rate hike by the European Central Bank before then - the ninth successive rise. This will further increase companies’ costs. The consequences will only become apparent over the coming months. Germany’s labour market has been stable to date: at the end of June, the unemployment rate of 5.5% was slightly lower than the 5.7% recorded at the end of March.
Office take-up versus ifo Employment Barometer
* Top 5 Cities, 12 months rolling; **Index, Base year 2015, 3 quarters ahead
Source: Avison Young, ifo Institute; Status: July 2023
Investment market
The weak economic situation, uncertainties in terms of the European Central Bank’s future interest rate policy and the lack of clarity as to which ESG criteria will become decisive – for example, in the matter of valuations - continued to hamper pricing throughout the months of April to June. These factors contributed to a further decline in the commercial property investment volume to €3.8 billion in the second quarter of 2023, or €8.7 billion over the first half of the year, which is a fall of 70% compared to the same period last year. There has been an absence of significant large-scale transactions, among other reasons due to the fact that there are hardly any more lenders active in this segment.
Pricing continues to be a tough and wearisome process. Sellers often set their price expectations too high, resulting in many sales processes being terminated before completion. Prospective buyers are holding back while players who are willing to sell are ‘running into’ a period of continually falling prices. Buyers and sellers are not yet coming together in terms of pricing. This is likely to change over the coming quarters, as more follow-up financing has (had) to be concluded on significantly more expensive terms and conditions, and more collateral is required, especially if reduced property values mean a capital shortfall. This often necessitates an equity injection which is often not affordable for the borrower. In many cases, this will result in sales instead. Even real estate funds will have to generate cash through sales to be able to service share payouts.
Pricing continues to be a tough and wearisome process. Sellers often set their price expectations too high, resulting in many sales processes being terminated before completion. Prospective buyers are holding back while players who are willing to sell are ‘running into’ a period of continually falling prices. Buyers and sellers are not yet coming together in terms of pricing. This is likely to change over the coming quarters, as more follow-up financing has (had) to be concluded on significantly more expensive terms and conditions, and more collateral is required, especially if reduced property values mean a capital shortfall. This often necessitates an equity injection which is often not affordable for the borrower. In many cases, this will result in sales instead. Even real estate funds will have to generate cash through sales to be able to service share payouts.
Commercial real estate investment volume Germany
Source: Avison Young
Status: July 2023
We continue to assume that transaction activity will increase in the second half of the year; however, any real dynamism resulting in significant increases in the number of deals and investment volumes will only develop later. The price adjustment is still underway. Prime office yields (for top properties in prime locations) in the Big 5 German real estate strongholds rose by an average of 40 basis points to around 3.9% over the second quarter of 2023. They are expected to rise further to around 4.5% by the end of the year, the same level at which products in peripheral locations with property deficits were trading just a few years ago.
As a slight fall in the yield for 10-year German government bonds is expected in the same period, the yield gap between real estate and bonds will widen further. By the end of 2023, this yield gap is expected to be around 200 basis points (average prime yield for office properties in the largest German real estate markets compared to the government bond), which will make real estate investments significantly more attractive again.
As a slight fall in the yield for 10-year German government bonds is expected in the same period, the yield gap between real estate and bonds will widen further. By the end of 2023, this yield gap is expected to be around 200 basis points (average prime yield for office properties in the largest German real estate markets compared to the government bond), which will make real estate investments significantly more attractive again.
Office prime yield
Source: Avison Young
Status: July 2023
Office letting markets
The continued low unemployment rate and the propensity (by long-term comparison) amongst companies - especially business services providers - to hire additional staff are currently providing underlying support for the office letting market. However, the weak economic developments and reduced expectations of companies are already reflected in the subdued willingness amongst occupiers to make decisions, resulting in reduced demand in the office market. Take-up in the Berlin, Hamburg, Düsseldorf and Frankfurt markets was 38% lower in the second quarter and 29% lower in the first half of the year, compared to the same periods last year.
Take-up top 4 cities
Source: Avison Young
Status: July 2023
The second half of the year is also expected to experience subdued demand. The improved economic forecasts for 2024 will mean better prospects for office demand, as this tends to correlate closely with GDP. A gradual fall in demand is being observed because of the decreasing space requirements driven by an increase in hybrid working models. The proportion of staff working from home at least occasionally has almost doubled from pre-Corona levels, from 13% in 2019 to 24% in 2022. This has been accompanied by an increase in the volume of vacated space and space available to sublet. At the same time, there are still many tenants who wish to expand their office space, either by extending their existing rental units or by taking on new leases; this is often accompanied by an ‘upgrade’ in terms of location and property to attract the best quality staff.
Office prime rents and office vacancy rate
Source: Avison Young
Status: July 2023
Tenants are increasingly looking for shorter lease terms due to the uncertainties of how a weak economy and geopolitical upheaval could impact their core business and staff. There are additional questions regarding ESG compliance and new work(place) concepts, i.e. office versus remote working. At the same time, tenants' high demands in terms of space fit-out and the granting of further incentives by landlords often mean that short lease terms would not pay off for the landlord. In this case, tenants will have to be more realistic in their expectations, unless the property is at risk of vacancy from the landlord’s point of view - depending on the perceived risk there will be more ‘trials of strength’ between landlords and tenants.
As many leases that are now expiring were concluded at times of significantly lower rents, occupiers in the office market are finding that circumstances have changed. With many projects now being delayed, prospective tenants must plan a relocation with a longer lead time. Moreover, the supply of new buildings will remain limited over the coming years, among other reasons since speculative developments will usually not be realised currently.
As many leases that are now expiring were concluded at times of significantly lower rents, occupiers in the office market are finding that circumstances have changed. With many projects now being delayed, prospective tenants must plan a relocation with a longer lead time. Moreover, the supply of new buildings will remain limited over the coming years, among other reasons since speculative developments will usually not be realised currently.
Berlin office market
| Q2 2023 | compared to previous year | Outlook* | |
| Take-up (m²) | 253,600 | -31 % | ↓ |
| Prime rent (€/m²/month) | 44.00 | +3.00 € | ↑ |
| Average rent (€/m²/month) | 28.60 | +0.10 € | |
| Vacancy rate (%) | 4.1 % | +90 bp | ↑ |
* in each case by end of year,
except take-up: compared with previous year
Source: Avison Young
Status: July 2023
Take-up in Berlin has fallen by almost a third compared to last year. Although there are still large-scale enquiries in the market, these are exceedingly rare, and many are expected to be concluded as lease extensions in existing properties rather than new contracts; such lease extensions are not included in the take-up statistics. Numerous expansion plans have been suspended.
Take-up, vacancy and prime rent
Source: Avison Young
Status: July 2023
At the same time, there is more space available for subletting coming onto the market. Although it has often been difficult to find subtenants, many of these units are now being successfully let. The mostly short sublease terms suit many prospective occupiers. In some cases, properties are coming onto the subletting market because tenants have deliberately leased more space than they need and are now subletting the space for a defined period. Thereafter, they can expand into these areas, as required.
Take-up by Top 5 Sector
Source: Avison Young
Status: July 2023
By contrast, many prospective tenants are behaving much more cautiously, even in the case of small enquiries, and letting processes are taking longer. At a time of increasing vacancy, prospective tenants are being offered a greater range of suitable space. However, this increased supply is coming at a time when tenants are reluctant to make a long-term decision by signing a new lease. Instead, they increasingly assess the market but often opt to extend leases in their existing premises. This suits their landlords who fear vacancies, especially in more problematic locations. Such landlords try to retain their existing tenants by offering generous incentive packages, which may include reducing the nominal rent. Very few owners can be complacent, as most are actively trying to retain their existing tenants or attract new ones.
Take-up by size category
Source: Avison Young
Status: July 2023
Top 5 Deals
| Boston Consulting Group (BCG) „AP 15“ – Mediaspree |
19,200 m² |
| Jobcenter Marzahn-Hellersdorf East |
12,800 m² |
| Banking / Finance „X8“ - Friedrichshain-Kreuzberg |
5,500 m² |
| PAO Gazprom „the Graph“ – Friedrichshain-Kreuzberg |
5,500 m² |
| BIMA „Lichtwarte“ – Mitte |
5,300 m² |
The new developments expected for the second half of 2023 and throughout 2024 will significantly increase the supply of available space. For this reason, we expect only a slight increase in the prime rent.
Completions
Source: Avison Young
Status: July 2023
Rental bands - Berlin q2 2023
Source: Avison Young
Status: July 2023
Dusseldorf office market
| Q2 2023 | compared to previous year | Outlook* | |
| Take-up (m²) | 89,200 | -53 % | ↓ |
| Prime rent (€/m²/month) | 38.00 | +8.00 € | → |
| Average rent (€/m²/month) | 20.30 | +2.75 € | |
| Vacancy rate (%) | 9.3 % | +120 bp | ↑ |
except take-up: compared with previous year
Source: Avison Young
Status: July 2023
Demand in the Düsseldorf office market remains weak. Reasons for this include the lack of transactions in the >5,000 sq m size category and the increased number of lease extensions which, by definition, are not included in the office take-up statistics. As a result, take-up after the first six months of the year was 89,200 sq m, just half the five-year average (2018 - 2022). Full-year take-up is expected to be just 200,000 - 220,000 sq m.
There are still some large-scale enquiries in the market, but these are unlikely to be be concluded until 2024, or tenants will opt to extend their leases in existing properties. Momentum is expected to return to the market next year. Until then, more landlords are prepared to increase their package of incentives and reduce nominal rents. There have been some significant reductions, depending on the location and property. A stagnation in prime rents is expected over the second half of the year, because demand for high-quality space is still there, even if some companies are reducing their overall space requirements.
There are still some large-scale enquiries in the market, but these are unlikely to be be concluded until 2024, or tenants will opt to extend their leases in existing properties. Momentum is expected to return to the market next year. Until then, more landlords are prepared to increase their package of incentives and reduce nominal rents. There have been some significant reductions, depending on the location and property. A stagnation in prime rents is expected over the second half of the year, because demand for high-quality space is still there, even if some companies are reducing their overall space requirements.
Take-up, vacancy and prime rent
Quelle: Avison Young
Stand: Juli 2023
Meanwhile, the space available for subletting is rising rapidly. Until now, this space has often been difficult to market and much has been on the market for some time without being let. This is driving the vacancy rate towards 10%, and it is expected to exceed this threshold by the end of the year.
Take-up by Top 5 Sector
Source: Avison Young
Status: July 2023
Take-up by size category
Source: Avison Young
Status: July 2023
Top 5 Deals
| Hengeler Müller „Trinkhaus-Karree“ – CBD |
9,600 m² |
| NGK Spark Plug Europe „The Square“ – Ratingen |
5,600 m² |
| Munichfashion.company „Kennedypark“ – Kennedydamm |
4,200 m² |
| Ed. Züblin „F101“ – Airport City |
4,200 m² |
| Wayss & Freitag „OASIS 31 „ - West |
2,400 m² |
Completions
Source: Avison Young
Status: July 2023
Rental bands - Dusseldorf q2 2023
Source: Avison Young
Status: July 2023
Frankfurt office market
| Q2 2023 | compared to previous year | Outlook* | |
| Take-up (m²) | 183,700 | -6 % | → |
| Prime rent (€/m²/month) | 46.50 | 0.00 € | ↑ |
| Average rent (€/m²/month) | 23.70 | +1.30 € | |
| Vacancy rate (%) | 8.8 % | +70 bp | ↑ |
* in each case by end of year,
except take-up: compared with previous year
Source: Avison Young
Status: July 2023
In view of the overall economic situation, the Frankfurt office market has held up well. Despite the uncharacteristic absence of deals in the >10,000 sq m size category in both the first and second quarters, the overall take-up result in the first half of the year was just 6% below the same period last year and 9% below the five-year average (2018 - 2022). However, there are several large-scale enquiries in the market which are likely to be concluded during the second half of the year, and therefore full-year take-up should be close to last year's performance of just under 400,000 sq m.
Take-up, vacancy and prime rent
Source: Avison Young
Status: July 2023
There is an awareness of the need for cost efficiency on the occupier side, but the ‘flight to quality’, i.e. a strong focus on high-quality locations and properties, remains as strong as ever. This is true not only in the CBD (Central Business District), but also in the other submarkets. In some cases, occupiers are agreeing expensive rents and investing significantly in the fitting out of their space. In Frankfurt it is typically law firms, banks and financial services providers, and consultancies, who dominate this quality segment of the market.
While (major) banks are consolidating their locations and total space, and the largest law firms are not currently concluding large-scale deals, HR and management consultants are highly active in the high-end market segment and are increasing their office footprints, often in central and expensive locations. Since fewer large deals are likely to take place in the near future, this poses challenges for many Frankfurt owners, for example in terms of how standard floor plates can be subdivided for smaller lettings where the overall infrastructure makes it feasible at all.
Parallel to the increase in the overall vacancy rate, the short notice availability of high-quality space in central locations is increasingly scarce, partly due to the lack of suitable product in the construction pipeline. This in turn will result in a further hike in prime rents.
While (major) banks are consolidating their locations and total space, and the largest law firms are not currently concluding large-scale deals, HR and management consultants are highly active in the high-end market segment and are increasing their office footprints, often in central and expensive locations. Since fewer large deals are likely to take place in the near future, this poses challenges for many Frankfurt owners, for example in terms of how standard floor plates can be subdivided for smaller lettings where the overall infrastructure makes it feasible at all.
Parallel to the increase in the overall vacancy rate, the short notice availability of high-quality space in central locations is increasingly scarce, partly due to the lack of suitable product in the construction pipeline. This in turn will result in a further hike in prime rents.
Top 5 Deals
| Universal-Investment-GmbH „Timber Pioneer“ – Europaviertel / Messe |
9,600 m² |
| Staatliches Schulamt Frankfurt Sossenheim / Rödelheim/ Hausen |
9,100 m² |
| Eintracht Frankfurt Süd |
8,800 m² |
| Massif Central „Bethmannhof“ – Innenstadt |
5,800 m² |
| American Express „The Spin“ - Europaviertel / Messe |
5,000 m² |
Completions
Source: Avison Young
Status: July 2023
Rental bands - Frankfurt q2 2023
Quelle: Avison Young
Stand: Juli 2023
Hamburg office market
| Q2 2023 | compared to previous year | Outlook* | |
| Take-up (m²) | 220,000 | -29 % | ↓ |
| Prime rent (€/m²/month) | 35.00 | 0.00 € | ↑ |
| Average rent (€/m²/month) | 21.10 | +0.20 € | |
| Vacancy rate (%) | 3.8 % | +10 bp | ↑ |
* in each case by end of year,
except take-up: compared with previous year
Source: Avison Young
Status: July 2023
In the current market environment, demand is dominated by small-scale deals. Nonetheless, take-up after the first six months was just 11% below the five-year average (2018 - 2022).
The principal focus of many occupiers in Hamburg is on quality. Accordingly, there have been numerous pre-lets in project developments. However, even occupiers who are not looking for a new-build property but whose quality requirements are unfulfilled from the available existing stock, for example in terms of location, size and layout, are opting to lease space in a development. In return, these tenants commit to long leases with no break options, which is typical in the project development sector. Other tenants seeking to bridge the current period of uncertainty would like to extend their lease for just one or two years at first, rather than be forced into making long-term decisions.
The principal focus of many occupiers in Hamburg is on quality. Accordingly, there have been numerous pre-lets in project developments. However, even occupiers who are not looking for a new-build property but whose quality requirements are unfulfilled from the available existing stock, for example in terms of location, size and layout, are opting to lease space in a development. In return, these tenants commit to long leases with no break options, which is typical in the project development sector. Other tenants seeking to bridge the current period of uncertainty would like to extend their lease for just one or two years at first, rather than be forced into making long-term decisions.
Take-up, vacancy and prime rent
Source: Avison Young
Status: July 2023
Space available for subletting is increasing in Hamburg because of companies' new workplace models, characterised by increased working from home and reductions in office space. Principal tenants often prefer to sublet for a short term, at the highest possible rent and without up-front investments. They seek to avoid excessive costs for fitting out the space for the subtenant, or reducing the rent that would subsidise fit-out costs. The short unexpired terms mean that the rent would barely amortise the costs of conversion or modernisation. However, many tenants still benefit from a head lease at the favourable rental prices of a few years ago, which means they can offer their space at a rental level which is affordable to subtenants while providing them with the financial latitude for upgrading the space, without having to accept financial losses. Not only the supply of space but also the number of subletting deals are already increasing.
Overall. the outlook for the second half of the year is positive: while office take-up may reach 450,000 sq m for the full year, just 7% below the five-year average, there is further potential for rental price rises in the prime segment.
Overall. the outlook for the second half of the year is positive: while office take-up may reach 450,000 sq m for the full year, just 7% below the five-year average, there is further potential for rental price rises in the prime segment.
Take-up by Top 5 Sector
Source: Avison Young
Status: July 2023
Take-up by size category
Source: Avison Young
Status: July 2023
Top 5 Deals
| RTL Harbour City |
17.200 m² |
| Bürgerschaft Hamburg City |
9,850 m² |
| Deutsche GigaNetz „TRIIIO Hamburg“ – City |
7,250 m² |
| Telefónica Germany GmbH „Tichelhaus“ – City |
7,000 m² |
| IU Internationale Hochschule „Zeughaus“ – Eppendorf / Hoheluft |
6,800 m² |
Completions
Source: Avison Young
Status: July 2023
Rental bands - Hamburg q2 2023
Source: Avison Young
Status: July 2023
Kontakte
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Director Market Intelligence, Germany
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Innovation and Insight
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Senior GIS & Research Analyst
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Innovation and Insight