Office rents in Germany's major cities are set to rise throughout 2018 due to remarkably low vacancy rates and a limited development pipeline, according to local industry analysts.
Vacancy in Germany's "Big 7" office markets — Berlin, Munich, Hamburg, Cologne, Frankfurt, Stuttgart and Dusseldorf — fell to 4.7% at the end of 2017, its lowest level in 15 years, according to a 2017 market report from real estate services firm JLL Germany.
Germany's strengthening economy is driving the squeeze on vacancy, with job growth of 1.5% in 2017 contributing to a record office take-up of 4.2 million square meters, which surpassed the previous record set in 2016 by 7%, JLL said.
"We will be seeing rising rents in the office sector and that's clearly a continuous topic that we will see for 2018," Matthias Leube, CEO of Colliers Germany, said in an interview. Continued economic growth will feed into rising rents, said Leube, with the International Monetary Fund forecasting that the German economy will grow by 1.8% in 2018 after posting growth of 2.0% in 2017, its strongest performance in six years.
Some submarkets in Germany's largest cities saw vacancy fall to
"The vacancy rate across the board has come down, in some cities to levels where it's even difficult to find empty office space, which has shifted the pricing power to the landlord," said Thomas Neuhold, who covers the German real estate market as head of research, Austria, for Kepler Cheuvreux. "Offices should see good momentum this year."
Limited supply of new office space will support rental growth throughout the year, with the development pipeline not large enough or at a sufficiently progressed stage to significantly impact the market, said Leube. About 860,000 square meters of new office space was delivered in Germany's Big 7 markets in 2017, JLL's report said, about 22% lower than the figure for 2016.
Problems exist with efficient delivery of new stock from the supply side, said Leube. "Overall development is too slow and too [few] building permissions are given [by authorities]. Also, there is a lack of resources within the German construction business to cope with the development pipeline."
However, current market conditions are likely to see significant new supply materialize in the years ahead, according to Neuhold. "The risk for an increase in the supply is currently quite high — not of course in the near term because you realistically have two to three years between getting building permits and delivering the product. But I think this is going to happen sooner or later if the market remains as attractive as it is currently."
JLL expects 1.3 million square meters of newly built or extensively renovated office space to enter Germany's Big 7 markets in 2018, representing an increase of approximately 50% over the previous year.
![]() Frankfurt is expected to benefit from the relocation of financial services jobs from London as a result of Brexit Source: Thinkstock |
A supply rush in the medium to long term is a particular risk for Germany's financial hub, Frankfurt, Neuhold said, which is enjoying a "Goldilocks scenario" as a result of Brexit. Frankfurt is widely predicted to benefit the most from the relocation of jobs from London's financial services sector and related industries to other European Union locations as companies move to retain access to the bloc's single market. "Rents [are going] up, prices [are going] up, financing costs are low, banks are very willing to finance real estate, so I would not be astonished [if] the currently rather limited supply increased," said Neuhold.
Frankfurt's relatively small size — the city has a population of 730,000 with a metro area of around 5.6 million — means that "the impact of a couple of thousand [jobs as a result of Brexit] is much more dramatic than you would see in London," Leube said. Office landlords with exposure to Frankfurt and Berlin, such as alstria office REIT-AG, TLG IMMOBILIEN AG and Aroundtown SA, are likely to perform particularly well in 2018, equity analyst Neuhold said.
Alstria CEO Olivier Elamine said in an interview that the strength of the German office market was attracting a level of investor interest that makes it "very, very difficult to find attractive investment opportunities [that] would make sense and deliver the kind of return we would expect from a proper real estate investment." Almost €25 billion was invested in the German office market in 2017, marking the second-highest transaction volume ever recorded after 2007, according to a 2017 JLL investment market report.
The German market "feels very much like the situation in 2006 and 2007," Elamine said, and the assets Alstria is looking to buy today — "assets with mid-term cashflow and a lot of reversion" — are the same as back then, he added. "There is this expectation that you're going to have a lot of rental growth in the market and so vacancy is becoming the new Eldorado."

