Prime rents up despite the pandemic

Text: Dr. Martin Kern

Events in the top six office markets last year were overwhelmingly shaped by the COVID-19 pan-demic and the associated economic uncertainty. Relative to previous years, demand in all of the top six office markets was rather subdued. The size category above 10,000 sq m was particularly affected, registering a 45% decline in take-up. Lead times in this segment are normally at least 24 months and many occupiers are in the dark as to what their space requirements will be after such a period, with the uncertain progression of the pandemic currently obscuring their vision of the fu-ture. This is benefiting office space that can be leased flexibly or on a short-term basis. Take-up in the segment below 1,000 sq m, for example, declined only by 10%.

One of the few active sources of demand in the larger size category is public sector occupiers, which are currently benefiting from their status as secure tenants. In uncertain times, they are pre-ferred by landlords. Hence, they currently account for around 30% of the market in the size catego-ry above 10,000 sq m, which is triple the proportion from 2019.  The decline in take-up across all top six office markets in 2020 compared with the previous year totals approximately 33%. Düssel-dorf and Frankfurt witnessed the sharpest declines of 47.9% and 41.9% respectively. Berlin was less drastically affected with a decrease of around 25% after a strong final quarter for the German capi-tal. The fourth quarter of 2020 was a relatively strong quarter across the board. In Berlin, Frankfurt and Cologne, it was the strongest quarter of 2020. Nevertheless, take-up figures for all top six office markets were below the five-year average. Occupiers that were previously seeking space placed their requirements on hold for the time being or, in many cases, extended their existing leases.

Despite the subdued demand, rents remained largely stable or increased. The average prime rent across the top six office markets rose by 2.1% on the previous quarter and by 3.6% compared with the corresponding quarter in the previous year. Frankfurt witnessed the strongest increase, with the prime rent in the second half of the year rising by 6.7% from €45.00 per sq m to €48.00 per sq m thanks to a number of high-priced lettings. Only Cologne registered a decline in its prime rent, which fell by 5.1% compared with the fourth quarter of 2019. Demand remains high in the prime segment and occupiers are also prepared to pay premium rents. Looking beyond the prime seg-ment, however, and taking all locations and qualities of property into account, rents are rather moving sideways. In some peripheral locations, rents are already falling. The median rent* across all top six office markets fell by 0.5% compared with the previous quarter and by 1.2% compared with the corresponding quarter in the previous year.

The vacancy rate rose by 20 basis points compared with the previous year but remains at historic lows on average across the top six office markets at 3.5%. The largest increases were witnessed in Berlin and Munich, where vacancy rates in 2020 rose by 80 basis points to 2% and 2.9% respective-ly. Office utilisation has rapidly declined since the outbreak of the pandemic. Whether this will re-turn to pre-crisis levels once the pandemic has been overcome cannot currently be foreseen. How-ever, there is much to suggest that the option of remote working will increasingly establish itself in day-to-day work. In the medium term, this could result in decreasing demand for office space and a higher vacancy rate. Whether this higher vacancy rate will also lead to lower rents, however, will depend on the requirements occupiers apply to their office space and whether these can be ful-filled within their building stock.

*The median rent is the average rent across all letting transactions. Hence, 50% of all lettings lie above the median rent and 50% lie below it. However, the size of the space in each letting is not factored into the weighting when calculating the median rent.

Further information on the top 6 office markets as well as the all charts and raw data for download can be found in the PDF.