Europe’s biggest market: German office take up 5% higher, but Ukraine war and other challenges are having an effect

A total office lease up of approximtaely 0.67 mln m2 was recorded, which is 5% higher year on year. However, the environment has become more challenging for both owners and occupiers, said the international real estate advisor.

Jan-Niklas Rotberg, head of office agency Germany for Savills, said: ‘Owners are benefiting from sustained high rental levels, which continue to rise in some cases, as well as the continued recovery in take-up. Occupiers, in turn, now have somewhat more choice again when pursuing requirements, both in terms of available existing space and the development pipeline, which also remains buoyant.’

‘At the same time, both parties are also facing challenges, such as the sharp increase in construction and fit-out costs, ESG regulations and the Ukraine crisis and its consequences, the outcome of which remains difficult to forecast.’

Vacancy rates continued to rise moderately in most markets, with only those in Hamburg and Cologne remaining unchanged in the last three months. Overall, the vacancy rate has risen by 30 basis points to 4.5% since the end of last year. Both prime and average rents remained unchanged. While there were notable individual increases, such as in Munich, and decreases, such as in Cologne, stagnation prevailed in most markets. The expected completion volume for this year totals almost 2.2 mln m2, which would be almost 700,000 m2 or 45% more than in 2021.

Even if demand has risen further according to Savills observations, it remains the case that large companies are the most reticent.

‘The general trend is that, the larger the company, the more question marks there are in terms of future space requirements. This is no doubt also related to the fact that the increased geographical flexibility in working has far-reaching consequences for larger organisations and the transformation process is, therefore, more complex and time-consuming than it is for small and medium-sized companies,’ said Rotberg.

For major companies who already have clarity regarding their future space requirements, it is becoming increasingly clear that they are planning to occupy less space per employee than prior to the pandemic. Savills can now observe this across all markets and, to some extent, in completed lettings.

Matthias Pink, head of research for Savills Germany, said: There is more and more evidence to suggest that the pandemic effect can be described most accurately as “less space but higher quality”. At least among large companies, office demand per capita appears to have declined overall since the pandemic, while demands on the quality of space and location have increased.’

‘The changing requirements are resulting in an increase in vacant office space, albeit the wrong space from many occupiers’ perspectives. This, in turn, is increasing pressure on owners to invest in their space.’

Savills said demand and willingness to pay for high-quality office space has possibly never been higher than at present and, in view of increased requirements, such space is likely to remain scarce for the foreseeable future. For space outside of the top segments, on the other, the market situation is likely to see increasing relief from an occupier’s perspective,’ explained Rotberg.

The Ukraine crisis is placing stress on the German economy and the uncertainty surrounding the crisis is already resulting in instances of postponed letting or relocation decisions.

Savills currently expects a total annual take-up of around 3 mln m2 and, hence, a marginal increase on last year’s figure. On the supply side, too, there are numerous factors that make projections difficult. In particular, the combination of rising interest rates and construction costs could result in planned development projects being abandoned or at least postponed.

This would have no impact this year but would reduce the pipeline for the coming years, with 2 mln m2 of completed office space currently expected in both 2023 and 2024.