Chapter 3
Office Market
Germany Real Estate Market Outlook 2024
Key Takeaways
- It’s the economy
Despite signs of rallying, demand for office space will remain muted in the jittery economic environment in the first half of 2024 and only start to rise again when the overall economy and the business climate begin to improve. - Return to office
The challenges facing corporate real estate management (CREM) concerning the topics of return to office, new work, ESG and the flexibilization and hybridization of the office world are changing occupier requirements, along with the demand structure, and creating fresh need for action on the supply side. - Flight to quality
Office occupiers want to see an improvement in their situation: competition for well-connected, high quality offices that can cater to new occupier requirements remains fierce and product is scarce – older stock in weaker locations or of average quality is exposed to leasing risks. - Flight to safety
Reticence on the office investment market is here to stay for now – institutional and private core investors are consolidating their portfolios. Thanks to repricing, they will gradually and selectively return to the buyer side and, in “risk-off mode”, opt for reliable performance and stable value. - Manage-to-core
With the cyclical fresh start to the leasing market, 2024 will become the year of farsighted investors: Capital with the commensurate risk profile, asset management know-how, and market access open up the window of opportunity for leveraging intrinsic return and upside potential.
Cyclical turning point on the office market
The German office market underwent the anticipated turning point in 2023. Caught between the challenges of a hesitant economic recovery and structural change, the office asset class will be faced with challenges in 2024 as well.
Uncertainty about the future business environment faced by companies from almost all sectors, compounded by the need for personnel and office space, is hampering leasing activity. The share of office tenants who currently prefer prolonging the status quo to relocating remains high. Improved leading indicators and the rising number of new inquiries at the end of the year permit an optimistic prospect of the demand side having bottomed out and that the signs are turning positive again.
Against the backdrop of the strong, late-cycle expansion in supply in recent years and the weak demand environment over the last twelve to eighteen months, supply available short term in the form of subletting, vacancies in existing stock and completions has risen. This scenario now gives occupiers new leasing options in the context of stay-versus-go analyses. The significant reduction in the project pipeline at the planning or construction stage is also already indicating another supply shortage as from 2025/2026.
With occupiers’ flight to quality ongoing, accompanied by consolidation in high quality office premises in central CBD locations, the rental price trend can be expected to polarize further. As far as the fungible part of the market is concerned, considerable rental growth can be expected, as opposed to rents in the average (larger) part of the generally older, energy-inefficient less well connected (to public transport) market that will stagnate.
Despite the basic change in the perception of risk regarding the asset class of office, the fresh start to the market cycle will yield new opportunities for occupiers, portfolio holders and asset managers, as well as for core and value-added investors wanting to benefit from the long-term positive fundamentals offered by the office market.
Capital value growth in the Top 5 office market locations, Germany*
Source: CBRE Research, January 2024
In terms of asset managers and portfolio holders, the competition for office tenants is therefore on the rise and harbors risks ranging from leasing right through to obsolescence, as the range of “must have” amenities and fit-out qualities is increasing. Consequently, the core segment is redefining itself: Along with location-related and fit-out criteria, proof must be produced of the respective ESG profile with energy efficiency and well-being to enable secure returns and stable value over the long term.
Portfolio devaluations and repricing on the investment market are making their mark, putting an end to the “super cycle” that has held sway since 2013/2014. Along with the capital market demanding greater returns, the core asset of the future must offer more. Farsighted investors and asset managers with know-how will enjoy new opportunities and have new avenues to explore in the value-add and opportunistic segment in this challenging environment. Active approaches such as refurbishment, repositioning of older stock, or recapitalizing non-performing developments offer opportunities for implementing manage-to-core/manage-to-ESG strategies and leveraging value.
As far as the occupier-oriented submarkets and micro-locations are concerned, there is partly considerable upside potential for return. Together with the bridging gap, the CapEx and OpEx required for repositioning, the readjusting of risk premiums, along with the identification of sustainably functioning markets, locations and sites, pose the main challenges for investors at the start of the new market cycle.
Uncertainty about the future business environment faced by companies from almost all sectors, compounded by the need for personnel and office space, is hampering leasing activity. The share of office tenants who currently prefer prolonging the status quo to relocating remains high. Improved leading indicators and the rising number of new inquiries at the end of the year permit an optimistic prospect of the demand side having bottomed out and that the signs are turning positive again.
Against the backdrop of the strong, late-cycle expansion in supply in recent years and the weak demand environment over the last twelve to eighteen months, supply available short term in the form of subletting, vacancies in existing stock and completions has risen. This scenario now gives occupiers new leasing options in the context of stay-versus-go analyses. The significant reduction in the project pipeline at the planning or construction stage is also already indicating another supply shortage as from 2025/2026.
With occupiers’ flight to quality ongoing, accompanied by consolidation in high quality office premises in central CBD locations, the rental price trend can be expected to polarize further. As far as the fungible part of the market is concerned, considerable rental growth can be expected, as opposed to rents in the average (larger) part of the generally older, energy-inefficient less well connected (to public transport) market that will stagnate.
Despite the basic change in the perception of risk regarding the asset class of office, the fresh start to the market cycle will yield new opportunities for occupiers, portfolio holders and asset managers, as well as for core and value-added investors wanting to benefit from the long-term positive fundamentals offered by the office market.
Capital value growth in the Top 5 office market locations, Germany*
Source: CBRE Research, January 2024
Focus 2024: Manage-to-Core
Structural change in the world of office work is changing the requirements occupiers place on office space. The return to office and adapting to hybrid workplace concepts will constitute a key management task in the coming years for many companies wanting to prevail in the competition for the best talent, promote innovation capability and foster corporate culture, thereby securing their long-term business success. In the short term, this situation will presumably give rise to a trade-off between rental/usage costs and the wishes of the workforce. In the long term, the process of streamlining and consolidating office portfolio, particularly in the case of major corporates, will continue in line with the tenet of “quality ahead of quantity”.In terms of asset managers and portfolio holders, the competition for office tenants is therefore on the rise and harbors risks ranging from leasing right through to obsolescence, as the range of “must have” amenities and fit-out qualities is increasing. Consequently, the core segment is redefining itself: Along with location-related and fit-out criteria, proof must be produced of the respective ESG profile with energy efficiency and well-being to enable secure returns and stable value over the long term.
Portfolio devaluations and repricing on the investment market are making their mark, putting an end to the “super cycle” that has held sway since 2013/2014. Along with the capital market demanding greater returns, the core asset of the future must offer more. Farsighted investors and asset managers with know-how will enjoy new opportunities and have new avenues to explore in the value-add and opportunistic segment in this challenging environment. Active approaches such as refurbishment, repositioning of older stock, or recapitalizing non-performing developments offer opportunities for implementing manage-to-core/manage-to-ESG strategies and leveraging value.
As far as the occupier-oriented submarkets and micro-locations are concerned, there is partly considerable upside potential for return. Together with the bridging gap, the CapEx and OpEx required for repositioning, the readjusting of risk premiums, along with the identification of sustainably functioning markets, locations and sites, pose the main challenges for investors at the start of the new market cycle.