"Well, is there anything else coming up?" - a question that was recently asked frequently in the context of customer discussions at the beginning of the year. What is meant here is the impact of the pandemic on the office property markets. Of course, you must separate the rental and investment markets. To put it less analytically: we are feeling the first slight effects on the rental markets, but none on the investment markets.
From the perspective at the beginning of the pandemic with all sorts of horror scenarios, this is certainly a positive message. Declines or even recession scenarios look different. Once again, the traditional inertia or slowness of reaction of commercial real estate markets seems to be letting the worst pass us by.
Nevertheless: can an industry be immune to the effects of a pandemic? Is it even the “crisis of the others?”. We see it rationally and expect that the pricing of the reorganisation of space will certainly show itself in the medium to long term. "Home office" as a supplementary variable in the area function will have an effect. In the short to medium term, effects from a change in interest rates are to be expected. Let's see how the ECB positions itself here in the coming months.
So to the facts:
- Heterogeneous rental development: For the second year in a row, rental price development is in a very narrow range of +2.08% (B locations) to -0.21% (C locations). In the B locations, the top rent rose to €16.20/sqm, while in the C cities it fell slightly to €14.13/sqm.
- ABBA and ACDC: The A and D locations showed somewhat less dynamics but increased by 0.83% and 0.35% respectively compared to the previous year. In detail, the top rents are €33.92/sqm in the A cities and €11.44/sqm across all D locations.
- Highest rents, tallest buildings: Frankfurt remains the leader in office rents at €45.00/sqm – we see the lowest value in Salzgitter at currently €7.90/sqm, followed by Gera at €8.50/sqm.
- Living below 3%: The average prime yield in the top 7 locations is still well below the 3% mark and has once again fallen slightly compared to the previous year. The lowest prime yields can be found in Berlin (2.5%) and Hamburg (2.6%). The highest measured values are again achieved in Wilhelmshaven (6.9%) and Hagen (6.8%).
- Aif – A-locations in focus: Overall, a sustained yield compression can be observed across all location categories, which, however, is the strongest in A-locations compared to the previous year (-5.92%). Subsequently, the largest percentage decrease occurred in B locations (-2.74%), with compression occurring at similar levels in C (-1.57%) and D cities (-1.26%). This further illustrates the high relevance of A locations for investors.
- The office spread bet: In terms of total return (TR) over the last 10 years, Berlin continues to lead with an average annual total return of 19.76%. This represents a decrease of 88 bp compared to the previous year. However, it can generally be said that the spread between the individual locations continues to decrease.
- B with radiance: For the A cities, the TR forecast for the coming years has become even more compact. As a result, medium-sized cities with a higher initial yield could continue to gain in attractiveness, with the TR forecast for B locations showing strong compression up to 2025.
The increasing confusion of risk parameters, which was already indicated in our analysis last year, can now be observed more intensively across all A to D locations. From an investor's point of view, this means that there is still great potential for diversification. Of course, we should price a change in interest rates into the upcoming investment decisions.