pbbIX decline slows down – index possibly bottoming out

  • No growth drivers evident in the first quarter
  • Demand for office space and investment market performance both con-tinue to ease
  • Modest increase in macroeconomic indicators suggests potential office market stabilisation for the second half of the year

Munich, 23 May 2024 – The pbbIX real estate index continued its decline during the first quarter of 2024, at -2.01 points hitting the lowest level since the first quarter of 2009. However, the decline lost some of its momentum, which could indicate that office property markets are starting to bottom out. After the economic contraction that dogged 2023, the first quarter of 2024 saw slightly positive growth. Assuming a slow economic recovery, office markets could stabilise over the course of the year and ultimately embark on an upward trajectory. Looking at the second quarter, however, office markets are expected to continue their underperformance and demand for office space will remain depressed for the time being.

In terms of letting performance, the market for office space continued to stagnate in the first quarter of 2024. Letting performance of 625,000 sqm was on a similar level to that seen in 2023, but the first quarter saw a downturn of 16% compared to the strong final quarter of 2023, the reasons being a weak economy and transition towards hybrid working practices connected with a decreased demand for space. Performance in the cities showed a very mixed picture; while letting performance eased in Hamburg, Dusseldorf and, above all, in Cologne, space take-up in Stuttgart increased by around one-third on a year-on-year basis.

In line with the demand for high-quality space, rents for first-class properties in prime locations continued to trend upwards. Prime rents were more than 8% above their previous year’s level in the first quarter of 2024, whereas average rents edged up by only 0.9%. Competition for prime space in central locations with good accessibility remains strong and will once again drive rental growth upwards in the prime segment during 2024. 

Inflows in the big 7 office investment markets remained on a very low level in the first quarter of 2024. Only approximately €700 million-worth of office property was purchased in the big 7 markets, marking the lowest level recorded since the second quarter of 2009, the sector at that time being impacted by the financial markets crisis. To put this into perspective: investments in the first quarter of 2022, i.e. prior to the interest rate hiking phase, amounted to approximately €7.1 billion. Drivers for the current development include the ongoing price discovery process, still high interest rates affecting borrowing costs, the weak performance of office user markets and a stagnant economy at the beginning of the year.

What the investment market needs is an environment that encom-passes stable purchase prices, an adequate risk premium vis-à-vis risk-free investments, plus steady to declining interest rate conditions for borrowing. Some first signs of a positive performance are visible, pointing to a slow recovery of investment markets from the second half of the year onwards.

As usual, the complete report for the first quarter of 2024 is available at pbbIX.com

Note to editors:

The pbbIX (pbbix.com) 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 pbbIX index describes the economic performance of office markets, with the zero line corresponding to the long-term trend. If the index is quoted below the zero line, the office property market is in a worse state than its long-term average. A value below minus 1.0 points indicates a crisis. 

The indices, which pbb provides in cooperation with vdp Research, offer investors and lenders comprehensive information on the current performance of office properties in Germany.

pbb Deutsche Pfandbriefbank (www.pfandbriefbank.com) is a leading specialist bank for commercial real estate finance in Europe and the US.

Media contacts:
Sebastian Zehrer, +49 89 2880-11841, sebastian.zehrer(at)pfandbriefbank.com