German office rents to hold up despite boost to supply - Capital Economics
European Commercial Property

German office rents to hold up despite boost to supply

European Commercial Property Update
Written by Amy Wood

Softer office occupier demand is expected to weigh on German prime office rents this year. But we still think that rents can grow at a decent pace because, even though office supply is expected to increase significantly, office occupier demand will still be strong enough to absorb this.

  • Softer office occupier demand is expected to weigh on German prime office rents this year. But we still think that rents can grow at a decent pace because, even though office supply is expected to increase significantly, office occupier demand will still be strong enough to absorb this.
  • Provisional data released today suggest that the German economy stalled in Q4, pulling annual growth to just 0.5% y/y. Although the economic slowdown weighed heavily on employment growth, prime office rental growth was stronger than even our upwardly revised expectations (See our Update), growing by almost 10% y/y in 2019. (See Chart 1.)
  • While we only have employment data up until Q3 last year, this reflected that most of the slowdown in jobs growth was driven by the industrial sector. In contrast, as discussed in an Update, office-based employment growth held up. Further, supply conditions remained tight, meaning that office vacancy rates either held steady or continued to fall across the big four German markets.
  • That said, towards the end of the year, there were signs that the industrial downturn was spilling over to other parts of the economy. Indeed, the services PMI averaged just 52.1 in Q4, down from almost 56 in Q2. And, for the office sector, after holding up on a four-quarter rolling basis for most of 2019, there was a notable reduction in take-up in Q4. Indeed, take-up in Q4 was more than 15% lower than Q4 2018.
  • With economic growth expected to remain lacklustre this year, German employment is expected to grow by just 0.6% y/y, below its post-financial crisis average of 0.9% y/y, and office-based employment growth is likely to soften. As such, we see little prospect of a sustained improvement in office occupier demand. Even so, given supply conditions are expected to remain tight, we still expect a decent pace of rental value growth this year.
  • Admittedly, office completions are expected to strengthen across the big four German markets to over 1.2 million sqm, from around 0.8 million sqm in 2019. But, overall, supply will still only be equivalent to under one years’ average take-up. And even in Berlin, where office completions are expected to almost double this year, we still expect rental growth to outpace the other German markets. Indeed, with Berlin’s office vacancy rate at just 1.1%, any additional supply is not expected to put as much downward pressure on prime rents as increases in supply elsewhere. (See Chart 2.)
  • On balance, we have revised up our forecast for German prime office rental growth this year to 5% y/y, from 3% y/y previously. Although this is just half of 2019’s pace, it is still above the average rate of rental growth over the past 10 years.

Chart 1: Germany Employment and Prime Office Rental Growth (% y/y)

Chart 2: Office Vacancy and Completions Pipeline (2020, % of Existing Stock)

Sources: Refinitiv, Capital Economics

Source: Capital Economics


Amy Wood, Property Economist, +44 20 7808 4994, amy.wood@capitaleconomics.com