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Occupiers between cost pressure and high standards
With take-up of 2.3 million sq m in the top 6 office letting markets, the previous year's result was exceeded by 5%. However, take-up was 24% below the average of the last ten years. While the public sector has become more active again, private companies remain cautious. Thus, take-up by the public sector increased by 39% compared to the previous year, while that of all other groups rose by only 2.1%. Among private companies, the economic situation is the main factor preventing their willingness to relocate. Instead, they often extend their leases, as long as the location, space and building quality continue to meet minimum requirements.
High required pre-letting rates make project developments more difficult
Relocation is usually only attractive if the new office is better than the old one. In most cases, only new or refurbished buildings can meet the increased requirements. The availability of such space varies from city to city. For example, the pre-letting rate for projects in Hamburg for 2025 is 90%, while in Düsseldorf only about half of the space has been pre-let. In the medium to long term, however, the situation could become tighter regardless of the city. This is because the initiation of new projects has become more difficult, mainly due to more restrictive project financing. Many banks are demanding higher pre-letting rates than before the wave of insolvencies, often at least 50%. At the same time, pre-letting is more difficult to achieve as there is less demand for large spaces. Over the past twelve months, only 24 spaces of more than 10,000 sq m were let in the top six cities, which is below the ten-year average of 35 lettings. As a result, several medium-sized or smaller tenants are needed. However, as the size of space decreases, the willingness to commit to a space at an early stage tends to decrease, which in turn makes pre-letting and the start of a project more difficult.
Rents are rising, but increasing vacancies are putting pressure on them
In addition, tenants are more hesitant to accept higher rents due to increased cost sensitivity, which makes it even more difficult to (pre-)let new space. The higher prices per square metre are usually only accepted if a relocation is accompanied by a reduction in space. The average top rent in the top 6 cities increased by 2.2% compared to the previous quarter. Average rents rose by 1.9%. However, rents could come under pressure from rising vacancy rates in the future as supply increases. After all, the vacancy rate in the top 6 cities rose by 20 basis points to 6.5% compared to the third quarter.
Tenants demand flexibility - Landlords are willing to negotiate
The increased competition among landlords as a result of rising vacancy rates is also leading to a greater willingness to negotiate. Many tenants are demanding more flexibility, such as shorter lease terms, annual break options or the ability to lease space on or off. Given the uncertain economic situation and the shift towards a hybrid working environment, many companies want to be able to respond more quickly to changes in the future. And although many landlords find these demands difficult to meet, they are at least more willing to negotiate than in the past due to the decline in demand.
Outlook: Occupiers want to relocate, but only if the economic situation stabilises
It seems that more and more companies are now aware of their needs in the hybrid working world and want to adapt their space to modern workplace concepts. While higher prices per square metre can potentially be offset by reducing space, the process is time-consuming and the one-off costs, such as analysing needs or equipping, are high. As a result, many relocations have been postponed and this is likely to continue while economic uncertainties remain. However, as soon as these are resolved, the office letting market is likely to start to pick up again. At the same time, demand is likely to shift further in favour of high-quality space, which could make them (even) scarcer. This is because the vicious circle of high pre-letting rates demanded by banks, which are more difficult to meet, is likely to lead to a shrinking project pipeline. High-capitalised developers could seize this gap.