- Germany’s office markets seem to be bottoming out
- Office space take-up increases by 9% compared to the first half of 2023
- Top rents in the second quarter of 2024 exceed previous-year figure by about 5%
Munich, 20. August 2024 – The pbbIX index ended the second quarter of 2024 at -1.95 points (Q1 2024: -2.01; Q4 2023: -1.96), putting an end to six consecutive quarters of downtrend in place since the end of 2022. This could indicate that the German office markets are starting to bottom out. Germany’s economy began 2024 with low economic growth and some prospects of a cautious economic recovery, but this was followed by an unexpected dampening of the macroeconomic environment in the second quarter. General economic weakness and ongoing structural changes as to how office space is used meant that demand for office space remained below average, while investment market volumes increased quarter-on-quarter, albeit remaining on a very low level. Initial yields stabilised and capital values rose marginally as a result of increasing rents.
In the absence of any economic support, and with market sentiment still gloomy, demand for office space remained very weak in the second quarter. A total of approx. 645,000 sqm was taken up in the big 7 markets, which compares to 627,000 sqm in the first quarter. In total, take-up during the first half of the year amounted to 1.27 million sqm – an increase of 9% com-pared to the previous year, but a decrease of around 20% compared to the ten-year average.
Across all markets, average vacancies rose only slightly despite weak demand. After 6.0% in the first quarter of this year, 6.2% of office space was unlet in the second quarter. New construction activity in the first half of the year led to the completion of approx. 900,000 sqm of office space, i.e. 37% more than in the previous year. New construction pipelines in the big 7 markets are expected to fall sharply from 2026 onwards. 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 second quarter of 2024 were about 5% higher than in the previous year, whereas average rents edged up by only 1.5%. Competition for prime space in central locations with good accessibility remains strong: this will keep driving rental growth in the prime segment during the second half of 2024.
Even though they were up by 74% compared to the previous quarter, second-quarter inflows on the investment market remained distinctly subdued. Aggregate investment volume of approx. €2.0 billion generated in the first six months of 2024 was at its lowest since the same period of 2009.
Prime yields in the office sector showed a stable performance in the sec-ond quarter when compared to the previous quarter and the yield curve might have plateaued in this cycle. The development of net initial yields for first-class properties is an indicator for the pricing pressure on the markets: the average across all big 7 markets stands at 4.28%, i.e. it has not moved since the beginning of the year.
What the investment market needs is an environment that encompasses stable purchase prices, an adequate risk premium vis-à-vis risk-free in-vestments, plus steady to declining interest rate conditions for borrowing. If economic prospects begin to improve over the course of the year, the investment markets could record a slow and sustained recovery.
As usual, the complete report for the second quarter of 2024 is available at pbbIX.com.