Office market situation in Germany remained strong in 4Q18 - pbbIX index rises slightly

  • Shortage of available office space in almost all real estate markets 
  • Cash inflows increased massively in the 4th quarter of 2018
  • Köntgen: Instability potential on the market for office properties increasing

The development of the big seven German office markets was expansive at the end of 2018. Despite a recently weaker economic growth, the pbbIX office property market rose from 0.75 points in 3Q18 to 0.80 points in 4Q18. The office market situation in Germany therefore remained strong, but was no longer at the very high level of the boom phase of 2015-2017, when the index peaked at 1.30 points. 

pbbIX describes the development of the 7 largest German office markets. The zero line corresponds to the long-term trend. If the index is above the zero line, the office market is better than the long-term average. From a value of 1.0 points, one speaks of a boom. At the current index level of 0.80 points, office market development since the mid-1990s has only been characterised by stronger growth than at present in around 20 % of cases.

In 4Q18, pbbIX was boosted in particular by developments on the office space and investment markets. There is a shortage of available office space in almost all real estate markets. The ongoing, although decelerating, increase in employment further reduced the vacant space available in the fourth quarter of 2018. As a result, vacancy rates overall have continued to fall at an already very low level. Until recently, new construction has failed to keep up with the demand for office space – or to even provide a modicum of relief. This supply/demand imbalance benefited landlords in particular, who were able to negotiate significantly higher rents on new agreements. 

Developments on the rental markets were accompanied by exceptionally high levels of activity on the investment markets. Cash inflows increased in 4Q18. Against the backdrop of persistently low interest rates and strong cash flows into the office markets, increased investments were to be expected, but the extent of the additional capital inflows was remarkable. Foreign investors in particular stood out, while domestic inflows declined from the previous high levels. 

For each of the top 7 office locations in Germany, the pbbIX also showed an increase in the fourth quarter compared to the previous quarter. The markets in Hamburg, Cologne and Frankfurt gained the most with 0.6 points each. Düsseldorf recorded the highest level with 1.32 points, followed by Frankfurt with 1.04 points. These are the only top 7 cities for which the index is even booming, all other markets are expanding.

Thomas Köntgen, Deputy CEO of pbb and responsible for real estate financing, said: "The situation in the office property markets was still very good in the fourth quarter of 2018. However, since the third quarter of 2016 we have observed a continuous weakening, and the potential for instability is increasing from our point of view.” According to Köntgen, this is supported on the one hand by the yields, which have reached absolute lows. On the other hand, although some rents are still rising, the overall economic development has cooled noticeably. In addition, the providers of co-working offices now play a very important role - in New York, for example, they already are the largest tenant. "These spaces have often been leased at relatively high prices at the peak of the cycle, but in a weaker market they still have to be adequately leased to end users," says Köntgen.

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Notes to the editors:
The pbbIX index family comprises the composite index, as well as seven individual indices tracking the key German office property markets of Berlin, Cologne, Dusseldorf, Frankfurt/Main, Hamburg, Munich and Stuttgart, including their respective catchment areas. The indices, which pbb publishes in cooperation with vdp Research, provide investors and lenders with comprehensive information on the current performance of office properties in Germany.

As a result of a methodological change in the aggregation of the seven individual indices, the index pbbIX Big 7 was adjusted retroactively. The result is a correction in the level of the time series, but the patterns and dynamics of the time series remained unaffected.

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