How is the pipeline unfolding in the top six office markets?

Approximately 5.5 million sq m of office space will be completed in the top six office markets over the next three years. This equates to around 6.5% of the current office stock. In absolute figures, the office completion volume was only higher during the period from 2001 – 2003 (5.9 million sq m). At the time, this represented around 9.5% of the office stock, which is the highest figure achieved to date in reunified Germany. The 10-year average (2011 – 2020) completion volume for the three following years stands at 4.5% of the office stock.

Looking at the top six office markets individually, it is evident that the significant pipeline is princi-pally attributable to the new-build volume in Berlin. Although, the average office completion vol-ume for the coming three years exceeds the 10-year average in all top six market, this figure is ex-ceeded threefold in Berlin. In the remaining cities, the new-build volume ranges from 3% (Frankfurt am Main) to 75% (Düsseldorf and Cologne) above the 10-year average. Moreover, Berlin has the lowest pre-let rate, which stands for the current year at 55%. Last year, the pre-let rate for the cur-rent year (2020) stood at 84%. However, pre-let rates are not only low in Berlin but also in the re-maining top six office markets. For comparison, in 2019, pre-let rates stood at around 80% for the current year (2019) and around 60% for the following year (2020).

For office occupiers the strong growth in supply is positive. On the one hand, the larger supply is likely to bring relief to vacancy rates. On the other hand, modern office space also offers occupiers more freedom in terms of designing and implementing new workplace concepts. For owners, on the other hand, the high development completion volume means rising competition in the office market, particularly since there are more question marks over future demand for office space than prior to the pandemic (see also: How is activity unfolding in the office markets?). Overall, we as-sume that the high development completion volume, combined with the somewhat reserved de-mand, will produce an increase in vacancy rates. We expect the average vacancy rate across the top six markets to rise to 4.2% by the end of the year (+ 40 basis points compared with Q4 20).

This does not inevitably mean, however, that the new-build vacancy rate will also rise. With its freedom of design, modern office space will remain highly sought-after going forward. However, the potentially significantly larger supply of modern office space will mean that properties with disadvantages in terms of quality or location will have to vie more strongly for occupiers. Owners will have to lower their sights in terms of rental levels, grant more incentives or invest in enhancing their properties. Depending on the property, a change of use may also be an option. Accordingly, the construction boom for new-build projects could be followed by greater development activity on existing property.

The fact that developers remain very active in acquiring property suggests a sustained high level of construction activity.  In 2020, developers were responsible for approximately 6.5% of the overall commercial transaction volume. This compares with a 10-year average of 7.5%. In the first quarter of 2021, however, developers accounted for 11.5% of investment volume. This is the highest quar-terly proportion in the commercial investment market we have ever recorded.