What awaits German offices: the market problems of the country’s largest cities
Office real estate was one of the first to suffer during the pandemic, and its recovery is not as fast as we would like it to be. This also applies to the demanded markets. For example, offices in Germany have lost demand from tenants by about 30%. This applies to major cities in the country, where demand for real estate is usually extremely high.
At the beginning of 2021 the market showed development, but fairly weak, then the situation improved slightly, but the dynamics is still not enough to restore the position and show growth.
Analysts at JLL say demand is likely to remain weak. In order to cover the losses, the owners will have to reduce rental rates, according to experts, now the market is experiencing a turning point, when the share of vacant facilities is increasing. Therefore, it is extremely important to pay attention to the volume of construction and compare it with the already available space.
The vacancy rate in the seven largest cities in Germany is 3.7%. According to forecasts, this figure is set to rise, reaching 4.5% in the near future. The reason for this is the activity of developers, who after the quarantine restrictions have resumed their activities and rush to complete their projects.
This situation will be profitable for tenants in terms of payment. For example, if you calculate for 5 years the rate of actual rent in major German cities, it turns out that it is 4% less than the nominal contractual rate. This figure corresponds to 2-3 months of rent without payment.
Experts note that the office real estate market in Europe as a whole is beginning to change. Such trends contribute to the growth of supply with a decrease in demand. And different markets suffer from this, including stable and strong, which includes Germany.
However, despite the rather worrying forecasts, JLL analysts do not see serious reasons for a significant oversupply. This is evidenced by rent rates, which are still fairly high. Demand growth is promised in the third quarter, when developers will begin to implement projects that have been postponed for the past two years.
As elsewhere in Europe, hybrid lease contracts are growing in popularity. This document has points from the standard lease agreement and management contract. In this case, a minimum payment is stipulated, which is supplemented by a certain percentage of the tenant’s turnover or profit. However, it should be understood that fixed-rate contracts will play a major role in the market, so it is not worth renegotiating contracts.