Market Perspectives of Commercial Real Estate | Office Market
Market Perspectives of Commercial Real Estate | Office Market
For the autumn report of the ZIA, we analyzed investments, office, logistics, hotel and care properties. Here you can read our summary of the office market: It is (still) more stable than many people think.
Developments on the market for office properties vary greatly for the various stakeholders. Reservations on the part of the financing banks for new construction projects, the media discussion about the success of home offices and the resulting lower office space requirements or the first critical weeks for the providers of flexible workspace have initially influenced the mood.
Due to the economic uncertainties caused by the Covid 19 pandemic, companies were much more cautious in the first half of the year. Rental decisions were suspended for the time being or postponed significantly into the future. As a result, the sales result in the first half of 2020, with 1.13 million m² of office space taken up, was only 66 % of the previous year's level, with the second quarter of 2020, for example in Frankfurt am Main, showing a particularly sharp drop.
The economic impact of the Covid 19 pandemic on the working population and companies has been well mitigated by extensive fiscal measures in recent months. As far as the labor market is concerned, it will continue to be the case in the coming months that - in analogy to the financial and economic crisis of 2008/2009 - various measures will at least partially compensate for the spread of the negative economic consequences.
The effects of the recession will be felt in particular by the precariously employed and self-employed. However, the majority of office workers will remain in employment even after the crisis is over. A fundamental slump in demand due to declining employment is therefore not expected in the office sector at present. Nevertheless, the crisis is leaving its mark, which can already be seen in sharply declining sales figures.
Not only the number of office employees, but also per capita space consumption is relevant for future demand. Two diametrically opposed developments can be seen here: On the one hand, the relevance of home office regulations in work organization will increase, which will have a basically compressive effect on consumption. On the other hand, new workplace concepts will provide for more distance between employees in order to maintain hygienic standards.
The crisis is expected to have a considerable impact on the project development sector - in particular, construction projects with unsecured financing and low pre-letting rates are likely to be postponed at present. Completion figures of around 1.5 million m² are nevertheless expected at German class A markets this year, equivalent to year-on-year growth of around 40 % and the highest figure since 2003. The projects finally initiated already have very high occupancy rates and are predominantly encountering a very tight supply situation in the seven office metropolises, which is why no project stops are to be expected here. The situation is different for projects that are still in the planning stage and generally involve increased marketing and development risks. Here, it can be assumed that the completion horizons will shift significantly.
However, the risk of corporate insolvencies has not yet been completely eliminated, even in sectors relevant to the office market, such as transportation, tourism or events. In alternative scenarios to bulwiengesa's main forecast for the office market, unemployment and employment figures and their development play a major role here.
Overall, the vacancy rate in the seven office metropolises will move slightly upwards until 2024; the peak in the class A cities is expected in 2021 and 2022. A calculation of the foreseeable average scenarios of vacancy development for the A-cities shows how strong the effects can be: between an - for the year as a whole - at least minimally positive growth in office employment in Germany of 0.07 % p.a., a stagnation scenario or a reduction in office employment of 0.5 % p.a. With zero growth in office employment, a vacancy rate of approx. 4.9 % is expected in the seven class A cities by 2024, which roughly corresponds to the 2016 level. With a slight decline in employment, the vacancy rate rises to approx. 6.7 % in the top office locations by 2024 according to scenario two, which would have a much more lasting effect on office rents.
Home office trend causes headaches for many
Home office and mobile working were of central importance during the lockdown from mid-March 2020, both in concrete implementation and, above all, in the media discussion. In recent years, the home office and mobile office share in Germany has remained constant at around 12 %, while it was already significantly higher in other European countries, at around 25 % in France and 30 % in the Netherlands. Connected to the home office are the digital prerequisites such as powerful WLAN, secure VPN connections, cloud computing and - quite simply - adequate equipment with suitable hardware. But the legal requirements must also be designed pragmatically. This applies, for example, to the workplace ordinance, which was modified in 2016 with rules for the home office.
Most surveys and contributions to the discussion in this context currently assume that the home office trend will mean that around 10 % less office space will be required in the future than the average office space requirement in 2019. International and national corporations such as Facebook and Siemens are announcing major investments to make the home office completely or for one to three days a week possible. Workspace service providers are going one step further and, in addition to this trend towards home offices, are also seeing a parallel need to reconfigure narrow open-plan and group offices in order to comply with distance rules or to better meet social and process-oriented needs.
Historically, the decisive factor for the German office real estate market and per capita space utilization has been the extent to which office employment has increased or decreased. Most recently, office space per capita in the A-cities fell from around 27 sqm in 2006 to around 25 sqm in 2019, which was accompanied by an increase in office employment of around 2 million people in Germany as a whole over the same period. This effect has certainly had a greater leverage effect on the real estate market and will continue to do so in the future than, for example, details in the sector-dependent work organization.
Conclusion
Commercial real estate has so far been relatively unaffected by the effects of the pandemic. This is particularly true for office real estate, for which the fundamental indicators remain positive. Here the market is benefiting from the excellent starting situation before the crisis - vital demand, particularly in the metropolitan areas, was offset by very limited supply. However, this can only be seen as an interim conclusion. Possible slumps in demand cannot be ruled out in the event of a renewed lockdown scenario and the associated recessionary distortions.
Note: The autumn report can be downloaded from the ZIA website (only in German language).
Contact person: Oliver Rohr, Project Manager Office, rohr [at] bulwiengesa.de
