Tailwind still prevails

The German top six office letting markets experienced both tailwinds and headwinds in the third quarter of the current year, with the former still predominating. While rents rose for the most part compared to the previous quarter despite a slight increase in vacancies, take-up was almost a fifth below the level of the second quarter. Both prime and median rents have risen in the last three months, in some cases sharply, with the strongest increases in Hamburg of 6% and 7% respectively. On average across all six locations, prime rents rose by 2% and median rents by as much as 5%. In some cases, rents stagnated, but no declines were observed. However, the incentives granted by landlords seem have increased, so that effective rents are likely to have risen less strongly than nominal rents. Nevertheless, the rising rents should be seen as an expression of the higher demands of office users on the space and its standard of fit-out. In our observation, the higher space requirements in terms of quality often go hand in hand with reduced space needs, especially among large companies. In recent months we have observed numerous lettings in which the users will move into a smaller office, but at the same time pay several times their previous rent per square metre. More and more companies are no longer looking at the rent per square metre. Instead, the focus is increasingly on space costs per employee. The lower per head space requirement could structurally shift the demand for office space towards smaller office sizes. The trend towards smaller spaces could currently be overlaid by the fact that companies with several locations tend to combine them and thus switch to a larger space segment.

Pressure on owners to act is increasing: Asset management becomes more important
The greater need for change and upgrading on the part of office users is also putting owners under increasing pressure to act. Offering bare office space is often no longer enough, at least in the top segment. From the companies' point of view, the importance of the office has increased so much that they are also demanding more amenitites and, for example, are asking for or even expecting a concierge service, a canteen, a day nursery or a coworking space in the property. That offers great opportunities for the owners because the users' willingness to pay for good office space has increased. But they also have to invest in their space in order to be able to convince users of their property in the future. In short: asset management is becoming more important.

Recession makes temporary downturn likely
In our view, the pressure on landlords is also likely to increase in the short term because the slowdown in the economy and the numerous risks and negative factors are likely to temporarily reduce companies' willingness to rent. According to most economic forecasts, the German economy will contract in the coming year. All recessions of the last thirty years have always brought with them a decline in office space turnover. In our opinion, landlords should also prepare for this in the coming year. We are already observing a tendency among German companies in particular to prolong their leases rather than relocate in this environment. The numerous (large) requests in the market could still result in a high take-up in the coming months, but in the medium term it is likely to decline. Rents could also fall again in the coming year for the first time since 2009 - but the upward pressure from rising occupier requirements and the resulting continuing shortage of high-quality office space outweighs the downward pressure. In view of the economic distortions, the German office markets will probably not avoid at least a brief cyclical downturn. However, they are entering this possible downturn from a very, very strong position.

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