- Bottoming-out phase continues
- Take-up of rented office space increases by 12% compared to the first nine months of 2023
- Top rents in Q3 2024 rise by just under 5.5% year-on-year
Garching, 18 November 2024 – Having arrested the decline prevailing since the end of 2022, the pbbIX continued its tentative recovery in the third quarter of 2024, reaching an index value of -1.92. Germany’s office real estate markets remain in a bottoming-out phase. Economic output declined in the second quarter but staged a surprising recovery in the quarter under review. General economic weakness and ongoing structural changes as to how office space is used meant that demand for office space remained below average.
Investment market turnover further declined quarter-on-quarter, remaining on a very low level. Initial yields in the prime segment remained stable during the year to date; capital values only rose marginally on account of continued rent increases. Despite the initial round of interest rate cuts between June and October 2024, market participants are still uncertain as to how economic and inflationary developments will pan out. This means that overall activity on the office markets is going to remain muted.
Germany’s economy remains mired: according to preliminary figures, GDP rose by 0.2% in the third quarter. Figures from the German Federal Statistical Office indicate that the increase was mainly attributable to government spending and private consumption.
The macroeconomic outlook for Germany has deteriorated in the third quarter. Business sentiment has improved overall: following four consecutive declines, the Ifo business climate index rose again for the first time in October. The impact of the US election outcome and of the collapse of the German government is uncertain and remains to be seen.
The markets for office space in the seven biggest German cities continue to suffer from sluggish demand, evidenced by rental development. Despite rising slightly in the third quarter compared to the weak previous quarter, take-up remained low at 730,000 sqm. Performance in the cities showed a very mixed picture: Hamburg and Dusseldorf saw year-to-date rental performance decline by 7% and 5%, respectively, while Stuttgart and Munich posted increases of 36% and 34%.
Against the background of below-average demand and a high completion rate, average vacancy rates across all markets rose by 40 basis points against the previous quarter, to reach 6.6%. Figures for the individual markets ranged from 4% in Cologne up to 9% in Frankfurt and even in excess of 10% in Dusseldorf.
In line with the demand for high-quality space, rents for first-class properties in prime locations continued to trend upwards. Top rents in the third quarter of 2024 exceeded the previous year’s figure by 5.5%. Competition for prime space in central locations with good accessibility remains strong and will once again drive rental growth upwards in the prime segment between now and the end of the year.
Cash inflows remained low, posting a significant 40% decrease from the previous quarter. Aggregate investment volumes of approximately €2.7 billion for the first nine months were down by around 12% year-on-year. To put this into perspective: nine-month volumes in the years 2017 to 2022 ranged between €13 billion and €17 billion. Inflow levels as low as in the current year have not been seen since 2009.
Yields for first-class properties have been trending sideways since the beginning of 2024: it now looks as though they may have peaked in the current cycle. The average across all big 7 markets stands at 4.28%, i.e. it has not moved since the beginning of the year.
Structural problems on the office markets are compounded by uncertainty regarding economic developments. Any recovery of investment markets is likely to be moderate over the coming quarters, and will be vulnerable to setbacks.
As usual, the complete report for the third quarter of 2024 is available at pbbIX.com.