Berlin, August 2013 – The 2013 half year results are in. According to JLL´s most recent report, total office take-up in Germany´s top cities amounted to 1.36 million square meters – 11% lower than a year earlier – and lettings activity remains generally subdued.
Why is this? According to JLL, landlords are seeing active demand from potential tenants, but tenants are unable to find what they need and their searches are therefore not included in the statistics. It appears that options for office spaces are limited by more demanding user requirements in terms of the quality of the spaces, fittings and fixtures and location, and these criteria have the overall effect of delaying the decision-making process.
So with this waning demand, why does the vacancy rate remain similar to last year´s of 8.6%?
I caught up with our resident leasing advisor and expert, Axel Kochsiek, to find out his view on the state of lettings and tenant demand “from-the-ground.”
According to Herr Kochsiek, the low rate of speculative developments in the big cities in Germany has reduced the vacancy (or as some like to say, have increased occupancy). Indeed, according to JLL, completions are down by 7% over last year so supply and demand remains in balance.
He further conjectures that the low rate of development results from the strained financing environment. Banks will not consider a project until 30 – 40 % of the space is pre-let, but with take-up down and lettings taking longer, many projects are not reaching this level before the developer needs capital.
Herr Kochsiek further says that demand for existing modern buildings (raised floors, air condition, certain ceiling height, in-house parking) is strong, while “unmodernised buildings” are not attracting tenants despite lower rents of 15 – 25 %. For example, he says that Activum sees a lot of interest in the more modern office buildings as prospective tenants target good quality space and larger office footprints than their existing space (presumably much of this demand is coming from internet companies that are growing). Rental levels are still important but not the main factor in making decisions. When Activum offers better fit-outs, tenants are prepared to accept higher rents. Particularly with the new-age media and internet companies who are in the market of attracting high quality, well-educated workers, and certainly for any companies in the client service space who are looking to woo potential clients, the quality of the office space is paramount in achieving their objectives.
Tenant demand also appears to be regional. Activum sees a lot more Frankfurt based companies considering future development than, say, Berlin based firms. In general, companies are prepared to sing long term leases (5-10 years), which is a big difference to 2009-2011 when tenants tried to sign leases for 3 years.
Herr Kochsiek says “my feeling is that the economic outlook is a lot more positive right now since the German economy is doing well. Fortunately, Activum´s asset management’s team is in a position to make decisions quickly and has the cash needed to build-out space and fulfil tenants’ needs.
Axel Kochsiek is Head of Asset Management at ActivumSG Advisory GmbH in Berlin who advises ActivumSG Capital Management, Ltd, and brings with his comments 22 years of leasing experience in Germany. You may catch him walking down the streets of Berlin or Frankfurt sometime wearing a fedora hat. For his full bio click here.