The economic slowdown also hit the job market in late 2019. For the first time in six years, Germany saw a month-over-month increase in its unemployment figures in December. The country recorded 47,000 more cases of unemployment than in November 2019 and the unemployment rate rose by 0.1 percentage points to 4.9%. Although this increase is only slight and the German labor market remains strong, the trend also shows that companies are currently seeking fewer new employees, which could mark a turning point in Germany’s employment landscape.
The German economy is currently characterized by mixed signals. On the one hand, we are seeing turmoil in the industrial sector accompanied by job cuts. On the other, the job market is still facing shortage of skilled workers and the ifo Index has recovered, an indication that businesses are heading into the new year more confident than before. However, these statistics do not take into account the recent tensions between the US and Iran. It is in the hands of politicians to resolve this issue and we should be prepared for volatility and some uncertainty in 2020. Risks at the moment at times appear out of our control and almost unpredictable.
The mixed signals currently being felt in the German economy can also be seen in the general fundamentals. It remains to be seen if these will be strong enough to weather the US-Iran conflict. Consensus economics expects the German economy to grow by 0.5% by the end of 2019 and by 0.9% in 2020. The German economy continues to be driven by consumer spending, which is expected to rise by 1.3% this year. The manufacturing sector, however, is unlikely to be a major driver behind this trend.
What does all of this mean for the office leasing market?
“The most important factor is how willing businesses are to hire, especially in the service industry. Hiring figures remain strong, although the trend is expected to slow in 2020. It would therefore come as no surprise if take-up in Germany’s Big 7 declined over the course of this year. However, net absorption is still positive and higher than previous-year averages and we’re far from seeing a significant decline in demand,” says Timo Tschammler, CEO JLL Germany.
Take-up slightly exceeds previous-year results – activity levels vary in Big 7
Office take-up in Germany’s top 7 cities surpassed the 4-million-sqm mark towards the end of 2019 (4.03 million sqm, up 1.6% from 2018). This is one of the strongest results in recent years, second only to 2017’s record result. What makes this result even more impressive is the fact that less than 25% of transaction volume was generated in Q4, typically the strongest quarter of the year. “It remains to be seen if this is the beginning of a downswing. However, in light of current political risks and economic prospects, it would come as no surprise,” comments Timo Tschammler.
In any case, there are some discrepancies between the individual markets. Stuttgart (+48% to 319,000 sqm), Düsseldorf (+33% to 550,000 sqm) and Berlin (+19% to just under 1 million sqm) have recorded increases, while Frankfurt (-8%), Cologne (-5%), Hamburg (-9%) and Munich did not manage to match previous-year results. Munich recorded a steep decrease in take-up of more than 22%. “Munich’s result is still above the 10-year average and it’s also worth noting that companies like Apple and Google have significantly expanded in the city. This, combined with Tesla’s announcement in Berlin, shows that Germany is an internationally competitive location for the technology sector,” says Helge Scheunemann, Head of Research JLL Germany.
Demand for flexible office space remained high in 2019. Flexible office space providers generated more than 220,000 sqm in take-up in the Big 7 for the third year in a row. 2019’s result, however, reflects an 18% yoy decrease. Q4 was the weakest quarter of the year in terms of take-up. This drop in activity can mainly be attributed to a lack of available space in top locations, especially in Berlin and Munich. “Many providers are looking to expand. However, in light of the uncertainties following the WeWork’s IPO withdrawal, many landlords now are now more closely assessing the sustainability of each company’s business strategy before signing a lease. We do not expect this tenant group to generate more than 200,000 sqm in take-up in 2020,” Helge Scheunemann adds.
Ongoing supply bottleneck – vacancy reaches 3%
The situation remains stable supply-side, at least in terms of space available for immediate tenancy. Only 2.85 million sqm were available for companies in the market for new space in Germany’s Big 7 at the end of 2019. The trend toward slower space absorption that we saw in Q3 continued throughout the rest of the year. While vacancy has dropped by an average of 250,000 sqm per quarter over the past few quarters, only 15,000 sqm was added to the market in the last three months of the year. This also applies to relative figures: While vacancy in the Big 7 declined by 21% in 2018, it was only down 16% in 2019.
Nevertheless, five of Germany’s top 7 cities recorded a double-digit yoy drop in vacancy, ranging from 12% in Frankfurt to 33% in Cologne. Vacancy in Berlin was “only” down by around 6%, with the city recording the lowest vacancy rate in Germany at 1.8%. Stuttgart was the only city to register a slight yoy increase of 0.1 percentage points to 2.3%, which can be attributed to 20,000 sqm of office space being vacated and not yet re-let. “Companies that have been looking for new space in a variety of submarkets, in secondary locations and even in the periphery for quite some time now are increasingly coming up empty-handed. They end up staying at their old properties as a result, which they then refurbish and restructure,” says Helge Scheunemann, adding, “The overall vacancy rate in Germany’s Big 7 came to exactly 3% at the end of December, down 0.6 percentage points yoy. Even the fact that new-build activity is picking up will not be enough to increase vacancy in 2020. On the contrary, we expect the average vacancy rate to bottom out at 2.9% this year.”
Munich 858,000 sqm (37% of which vacant). New space being added to the market will have a considerable impact on the vacancy rates in these markets as of 2021.
Rents up in all top 7 cities for the second year in a row
Office rents in the Big 7 have risen since 2010 thanks to high demand and shrinking supply. Prime rents rose by 5.4% on average in 2019. The JLL prime rent index (which reflects average prime rents in Germany’s Big 7) is currently at 218, the highest result since 1992.
Cologne (+11%) and Berlin (+9%) claimed pole position. “We expect prime rents in the Big 7 to increase by 3.9% on average in 2020, continuing the upward trend at a somewhat slower pace. Other submarkets will likely post higher growth rates given that they are starting from lower rents than the CBDs,” says Timo Tschammler.
Rising rents mean significant cost increases for users. Tenants who still have lease options will most likely be happy to exercise them. Considerable workforce expansion in the past few years means that some offices are “bursting at the seams.” The need to relocate cannot be ignored in such cases, with companies only being able to avoid rent increases by turning to secondary locations (not possible for every company) or by implementing modern workplace concepts bringing more efficient use of space at their current locations.
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