We cannot look very far into the future with a precision landing, but we can analyse the past and the current situation, interpret it and derive recommendations for action from it. Above all, we can "price in" the current corona situation on the commercial real estate markets - you only have to talk to the corporates, landlords tenants and investors, and a robust picture will emerge of what will happen in the coming quarters. To put it in a nutshell: The German office markets are by no means immune, in view of the economic situation - but so far they have shown themselves to be largely crisis-resistant. Vacancies are rising only moderately; rents and purchase prices are holding steady.
The reason for this is the very below-average completion rate of recent years. Nevertheless, take-up has collapsed almost everywhere due to the crisis and concerns about disruptive market changes and their consequences for future demand for space (home offices, insolvencies) determine the outlook. One thing is certain, however: the yield development of recent years will not continue at the same pace, although there may still be price increases in central locations. Nevertheless, there is much to suggest a dip rather than an overarching trend reversal in the markets.
We examined a total of 76 German office markets.
- The rental price development of the past 12 months lies within a very narrow range of +1% (A locations) to -1% (B locations) and shows itself to be a fixed constant in 2020. The top 7 currently record an average prime rent of €33.64/sqm, in the B cities it has fallen moderately to €15.87/sqm.
- The numerous C and D locations show even less impetus on average with 0.43% and 0.44% rental growth. In absolute figures, we see monthly rents of €14.16/sqm and €11.40/sqm respectively.
- The strongest rent declines, not only due to the low take-up, were observed in Cottbus and Neuss. Hamburg clearly stands out among the A locations with a plus of 6.9%. Rostock and Schweinfurt, meanwhile, can boast double-digit growth rates.
- The front-runner in office rents remains Frankfurt with €45.00/sqm - we see the lowest value in Gera in Thuringia with currently €7.50/sqm, followed by Salzgitter with €7.80/sqm.
- The average prime yield in the top 7 locations remains well below the 3% mark. Supported by the unabated high demand for core properties and the renewed decline in long-term interest rates, the prime yield has fallen by 5 bp to 2.83%. Here, too, Hamburg stands out with a decline of 15 bp to 2.7%. Nevertheless, further interest rate fantasies and deflation worries are likely to have dissipated slowly, limiting further room for manoeuvre in the medium term.
- The lowest prime yields are still to be found in Berlin and Munich at 2.60% each, the highest measured value is achieved in Wilhelmshaven (6.9%) followed by Hagen and Solingen at 6.8% each.
- Further yield compression, in some cases strong, can also be observed in the remaining location categories. Particularly in B (-65 bp) and C (-111 bp) cities such as Nuremberg, Leipzig and Wiesbaden, high investor demand is ensuring relatively strong transaction volumes and rising market values. However, the yields are not directly comparable with the previous year due to methodological changes in the data collection. Investors see a balanced risk-return profile here and are primarily looking for sustainable cash flow when investing.
- Looking at the total return (TR) over the past 10 years, Berlin is the lonely leader with an average annual total return of 20.64%, followed by Leipzig (18.61%) and Dresden (17.06%). These are disproportionately due to increased market values, i.e. yield compression. The other top 7 locations also show a significantly lower share of the rental component.
- Overall, the A cities (14.56%) lead the unweighted TR well ahead of the B cities with 13.02%, followed by the C cities (12.76%) and D cities (11.6%).
- Jena, Kassel, Wuppertal, Braunschweig and Essen show a balanced relationship between rental yield and change in value. Chemnitz and Fürth stand out with a disproportionately strong total return relative to the D cities. In contrast, Bremen and Duisburg lag behind the B cities.
- For the A cities, we see limited room for manoeuvre as far as the TR forecast for the coming years is concerned, as the possibility of further yield compression is limited here. Thus, mid-sized cities with a higher initial yield could gain further attractiveness.
If you analyse the differences between the individual location categories A to D, it becomes apparent that the gaps in the average yields continue to narrow and the risk parameters, especially in locations B to D, are becoming increasingly mixed. For investors, this offers an extremely attractive diversification potential with a broad spectrum of property- and location-specific risk factors.