Real Estate Market Report Q1 2023

According to the latest forecasts, the German economy will achieve marginal growth this year. Inflation is declining overall but remains stubbornly high; the latter is especially true for core inflation and there is a compelling argument for continued interest rate hikes by the ECB, ultimately making the financing situation more difficult for many economic entities. Interestingly, despite the recent turmoil in the banking sector, the ifo Business Climate Index improved in March for the fifth month in succession, but it should be noted that financial services providers do not participate in the ifo survey. Any effects on the real economy that emerge over time, such as even more restrictive lending, should become apparent in forthcoming ifo survey results.

Property yield, inflation, swap rate, government bond

*Net initial yield
Source: Avison Young; Federal Bank of Germany; Macrobond. Status: March/April 2023

There is currently no indication of a renewed tightening of conditions. In addition to companies' assessments of the situation and their expectations, other aspects analysed, such as investment plans and employment intentions, rose again in the ifo Institute’s March survey. Macroeconomic uncertainty remains high and is evident from the sustained heightened volatility on the financial markets.

Meanwhile, the employment situation in Germany remains robust with the unemployment rate remaining stable at 5.7% in March, as in the previous two months, up from 5.4% at the end of last year and up 60 basis points year-on-year (March 2022: 5.1%). 

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: March/April 2023

Investment market

In contrast to the rental market, the German investment market is 'frozen'. The transaction volume was just EUR 4.9 billion in the first quarter of 2023, around half of the previous quarter or 65% below the average for the first quarters of the past five years. The main reason is the absence of high-volume transactions. But even in smaller volume classes, there are significantly fewer deals taking place at present. The strongest decline was recorded in the office segment, which saw its share of the total commercial transaction volume fall again to 26%. Office property, which has been relatively 'safe' in terms of its risk-return profile so far, is now being carefully scrutinised for assurance about its long-term suitability at the due diligence stage of transactions. In addition to ESG criteria, other critical parameters in these investigations include service charges, future office space requirements (both quantitative and qualitative) in the respective market, and forecasts of local economic and demographic trends.

Commercial real estate investment volume Germany

Source: Avison Young
Status: March/April 2023

Yields have continued to rise with prime office yields increasing by around 90 basis points year-on-year to reach their current level of 3.5% (average of the Big 5 markets Berlin, Hamburg, Dusseldorf, Frankfurt and Munich). Further increases are expected by the end of the year, by which time the price correction should be largely completed. The supply of properties for sale has increased every month since autumn 2022, so there is significantly more product available on the market. At the same time, investors are increasingly positioning themselves to take advantage of the first attractive buying opportunities before the transaction markets become more active again across the board. This could begin as early as the second half of the year. However, it will require an end to the ECB's cycle of interest rate hikes in the summer and for sellers to realise and accept the need for price discounts.

Office prime yield

Source: Avison Young
Status: March/April 2023

Germany: office markets

The delayed reaction of office markets to macroeconomic developments has been evident since the final quarter of 2022, when the chain of effects of the conflict in Ukraine reached the rental markets. Since then, restraint has been exercised, particularly by those seeking space, a situation that has not changed in the first three months of 2023. Companies and therefore the office markets are still a long way from a high level of decision-making. As expected, more leases of office space are being extended, some for only a few years, with many companies shying away from long-term location decisions.

After a lengthy planning phase, tenants and owner-occupiers have been identifying the working model that works best for them, which in most cases includes regular home office work, and ultimately a slightly lower office space requirement. Space which is subsequently deemed surplus to requirement is often offered for subletting. In some cases, this can involve units larger than 10,000 sq m. Medium-sized and large companies are in a position to substantially reduce their office space requirements. However, in the case of smaller companies, the often poor flexibility of the rental space does not provide any scope for downsizing. Increasingly, the proximity to flexible office space providers, either in-house or in the immediate vicinity, is becoming relevant for tenants seeking space. This provides them with a certain degree of flexibility. 

Take-up top 4 cities

Source: Avison Young
Status: March/April 2023

The market is continuing to differentiate towards good (and often ESG-compliant) properties and space, and easily accessible and urban locations. Quality product can secure good levels of occupancy and rising rents, while vacancy rates in lesser sought-after properties are increasing and rents are coming under pressure. In such cases, landlords principally attempt to maintain nominal rents by offering greater incentives, which in turn reduces the effective rents.

Office prime rents and office vacancy rate

Source: Avison Young
Status: March/April 2023

Most projects not yet under construction are being deferred. Alongside the continuing high building costs, stricter lending requirements and massively increased financing costs are playing a role here. These high building or interim financing costs also mean that the question of economic viability arises even in cases of projects with a high pre-letting status already under construction. This trend will restrict the supply pipeline over the long term and affects both much sought-after ESG-compliant new developments and refurbishment projects. Of course, not all office tenants require space that meets ESG requirements. Some lack budget, others lack awareness or relevant information, and other users simply see no need for ESG-compliant structures or measures. Such properties will continue to find tenants if they otherwise meet the user-specific requirements - albeit at sometimes significant rent discounts, and possibly with the inherent risk of becoming stranded assets due to more discerning user requirements or statutory regulation. 

Berlin office market

  Q1 2023 Compared to previous year Outlook*
Take-up (m²) 140,500 -17 %
Prime rent (€/m²/Month) 44.00 +3.00 €
Average rent (€/m²/Month) 28.70 +0.40 €  
Vacancy rate (%) 4.0 +110 bp

* in each case by end of year,
except take-up: compared with previous year

Source: Avison Young
Status: March/April 2023

Berlin was the only major German office market to record a quarter-on-quarter increase in take-up in the first quarter of 2023, recording a rise of around 6.0% to 140,500 sq m. Despite the result also being 17% lower year-on-year, it can still be classified as robust in the current market. Significant contributions to this result came from four deals larger than 5,000 sq m (with two of them even exceeding 10,000 sq m), adding up to around 43,000 sq m. There are still large-scale enquiries in the market which are likely to be concluded in the coming months. The vacancy rate has remained almost unchanged and, despite rising from 3.9% to 4.0%, remains too low for the number of companies looking for space. With the demands of many companies still so high that they opt to lease space in a new development, such projects accounted for one in three of the fifteen largest deals concluded. It is mostly new developments that achieve the highest rents.

Take-up, vacancy and prime rent

Source: Avison Young
Status: March/April 2023

The currently well-filled construction pipeline will supply the market with a high volume of vacant space until at least 2025, including in the highly sought-after locations within the S-Bahn railway ring. Together with the space that will become vacant or offered for subletting in the coming quarters, this will contribute to a sustained rise in the volume of vacancies. If momentum picks up soon, new projects will have to be started quickly in an effort to satisfy the demand for high-quality and ESG-compliant space. While the prime rent is expected to increase slightly towards the end of the year, rents in the lower-quality segment and in some lesser sought-after locations have declined due to significantly reduced demand. 

Take-up by Top 5 Sector

Source: Avison Young
Status: March/April 2023

Top 5 Deals

Boston Consulting Group (BCG):- 19,200m²
„AP 15“ – Mediaspree

Jobcenter Marzahn-Hellersdorf:- 12,800m²
East

ASML Berlin GmbH:- 10,100m²
„Behrens-Ufer“ – East

PAO Gazprom:- 5,500m²
„the Graph“ – Friedrichshain-Kreuzberg

BIMA:- 5,300m²

Completions

Source: Avison Young
Status: March/April 2023

Rental bands – Berlin q1 2023

Source: Avison Young
Status: March/April 2023

Dusseldorf office market

  Q1 2023 Compared to previous year Outlook*
Take-up (m²) 54,000 -24 %
Prime rent (€/m²/Month) 38.00 +9.50 €
Average rent (€/m²/Month) 20.20 +0.40 €  
Vacancy rate (%) 8.8 +90 bp

* in each case by end of year,
except take-up: compared with previous year

Source: Avison Young
Status: March/April 2023

While the first-quarter take-up in the Dusseldorf office market was the weakest for almost two years, falling by 20% quarter-on-quarter and 24% year-on-year, the prime rent recorded its biggest-ever increase. It climbed from EUR 34.00/sq m/month in the fourth quarter of 2022 to its current level of EUR 38.00/sq m/month, a rise of almost 12% within a single quarter. It has even increased by 33% year-on-year. At the same time, at 8.8%, Dusseldorf has the highest vacancy rate of all German real estate strongholds.

This paradox can be explained on the one hand by the highest demands for and low supply of good quality space available at short notice, and on the other, by the high volume of vacant space which, from the perspective of potential users, is often inadequate in terms of its location and/or building attributes. Moreover, there is a short to medium-term tendency to seek to reduce the size of office space occupied and to offer space for subletting that is surplus to requirement. Added to the high volume of space still available and already under construction, this tendency is expected to lead to a significant rise in the overall vacancy rate with the vacancy rate possibly reaching double digits by the end of the year.

Take-up, vacancy and prime rent

Source: Avison Young
Status: March/April 2023

Although around 46,000 sq m of space will be completed in the prime locations alone by the end of 2023, thereby increasing the supply of high-quality units, the prime rent will continue to rise. Momentum on the demand side is likely to remain quantitatively restrained for the time being, leading to expectations of a lower take-up than in 2022.

Take-up by Top 5 Sector

Source: Avison Young
Status: March/April 2023

Take-up by size category

Source: Avison Young
Status: March/April 2023

Top 5 Deals

Hengeler Müller:- 9,600m²
„Trinkhaus-Karree“ – CBD

NGK Spark Plug Europe:- 5,600m²
„The Square“ – Ratingen

Ed. Züblin:- 4,200m²
„F101“ – Airport City

SRAM:- 2,000m²
„Plange Mühle“ – Harbour

Blades 1775:- 1,400m²
Kennedydamm

Completions

Source: Avison Young
Status: March/April 2023

Rental bands – Dusseldorf q1 2023

Source: Avison Young
Status: March/April 2023

Frankfurt office market

  Q1 2023 Compared to previous year Outlook*
Take-up (m²) 85,000 -21 %
Prime rent (€/m²/Month) 46.50 0.00 €
Average rent (€/m²/Month) 23.80 +2.50 €  
Vacancy rate (%) 8.4 +50 bp

* in each case by end of year,
except take-up: compared with previous year

Source: Avison Young
Status: March/April 2023

The weak start to 2023 in the Frankfurt office market is not surprising given the economic circumstances. However, a quarter without major deals is the exception rather than the rule in this major city. No deals for more than 10,000 sq m of space were recorded and the largest deal finalised between January and March was the 9,600 sq m lease concluded by Universal Investment in the envisaged Timber Pioneer timber hybrid property in the Europaviertel/Traid Fair submarket. Nonetheless, several major enquiries that were not concluded in 2022 are now further advanced and expected to be finalised in the coming quarters. 

Take-up, vacancy and prime rent

Source: Avison Young
Status: March/April 2023

The number of companies downsizing their office footprints and concluding new leases continues. However, much of the space vacated in the process is not considered marketable in its current condition. This is providing owners with the opportunity to modernise, refurbish, demolish, rebuild, or even embrace a new type of use, such as housing. For almost two decades, market players in Frankfurt in particular have gained significant expertise of transforming the existing stock and are able reposition problematic space in the market. 

The vacancy rate in the first quarter of 2023 exceeded the 1 million square metre mark for the first time since 2017. Nevertheless, there is still a shortage of top-quality space in the highly sought-after locations. Moreover, very little adequate supply in the pipeline for central locations is expected to come onto the market over at least the next two years. One of the few exceptions is the FOUR skyscraper project. Even if demand for space remains relatively subdued, many Frankfurt companies are not making any concessions when it comes to quality, and so the prime rent, which has remained stable at EUR 46.00/sq m/month since the second quarter of 2022, should rise again by the end of the year to around EUR 48.00/sq m/month.  

Top 5 Deals

Universal-Investment-GmbH:- 9,600m²
„Timber Pioneer“ – Europaviertel / Traid Fair

Öffentliche Verwaltung:- 9,100m²
Sossenheim / Rödelheim / Hausen

Massif Central Projektentwicklung:- 5,800m²
„Bethmannhof“ – City

Z.V.E.I:- 4,200m²
Airport

Sanofi-Aventis Deutschland Gmbh:- 3,400m²
Banking District

Completions

Source: Avison Young
Status: March/April 2023

Rental bands – Frankfurt q1 2023

Source: Avison Young
Status: March/April 2023

Hamburg office market

  Q1 2023 Compared to previous year Outlook*
Take-up (m²) 103,000 -17 %
Prime rent (€/m²/Month) 35.00 +3.00 €
Average rent (€/m²/Month) 20.90 +1.70 €  
Vacancy rate (%) 3.8 +10 bp

* in each case by end of year,
except take-up: compared with previous year

Source: Avison Young
Status: March/April 2023

There was a well-balanced sectoral mix in the Hamburg office market in the first quarter, both in terms of the largest deals and overall take-up. While, in contrast to the same quarter last year, no deals larger than 10,000 sq m were recorded, four deals totalling around 25,000 sq m were concluded in the 5,001 - 10,000 sq m size category. The <1,000 sq m size category recorded the strongest demand, followed by units with between 1,001 sq m and 5,000 sq m of space. 

Take-up, vacancy and prime rent

Source: Avison Young
Status: March/April 2023

Similar to the other real estate strongholds, after the first three months of the year, at 103,000 sq m, office take-up was 17% down on the same quarter last year with much of this downturn attributed to the uncertainty of companies about the current economic situation. While there were very few expansions of space, several existing leases were extended (in part for relatively short terms) and subleases concluded. Some companies have a surplus of space that they can offer to the market and are opting to make office space they no longer need available for subletting while renewing their leases for the remaining space.
 
At the same time, an increasing number of tenants are considering whether it would be better to secure space now at the current rental levels for as long as possible in view of foreseeable rent rises. This is because prime rents in both the overall market and the individual sought-after submarkets are expected to rise further. Moreover, with vacancy rates remaining stable and very little available space coming onto the market over the next few quarters, landlords are able to minimise or even withhold incentives offered in the relevant properties due to the robust demand and limited alternative space available. 

Take-up by Top 5 Sector

Source: Avison Young
Status: March/April 2023

Take-up by size category

Source: Avison Young
Status: March/April 2023

Top 5 Deals

Telefónica Germany GmbH:- 7,000m²
„Tichelhaus“ – City

IU International Hochschule:- 6,800m²
„Zeughaus“ – Eppendorf / Hoheluft

H-Tech:- 6.200 m²
Other

THU Harburg:- 5,010m²
Harburg

Edge Working Places:- 4,200m²
„EDGE“ – HafenCity

Completions

Source: Avison Young
Status: March/April 2023

Rental bands - Hamburg q1 2023

Source: Avison Young
Status: March/April 2023


Contact

Christian Ströder

    • Director Market Intelligence, Germany
    • Market Intelligence
[email protected]

Johann Mikhof

    • Prokurist | Director
    • Investment
    • Sales & Leasing
[email protected]