The German commercial real estate markets are in a turbulent environment. The ECB's interest rate turnaround in July 2022 ended the low-interest phase in the eurozone. Last year, the key interest rate was raised by 250 basis points in four steps, with a further 100 basis points added so far this year. Due to continued high inflation rates, at least one further interest rate hike by the ECB by the middle of the year is a realistic scenario. The significant rise in interest rates and the ongoing macroeconomic tensions and uncertainties are leading to restraint on the side of numerous players on the German real estate market. A significant reduction in dynamics on the transaction market by probably the end of Q3 2023 is therefore very likely.
In contrast to the investment market, the office leasing market is remaining fairly stable. Developments in the German office market over the past four quarters have shown that, despite the use of home office, the office building remains a central element in the world of work, even in the "New Work" movement. Nevertheless, potential space savings will become measurable in the German office market in the coming quarters. This will primarily be seen in peripheral locations of large office centres and in specific C and D locations. In contrast, there will still be high demand for office space in the central locations of the top 7 cities in the future. Investors will focus on so-called green office properties in the new build and refurbishment segments in central locations with modern space design.
This year, we looked again at the rents and yields of these top properties in prime locations on the German office markets. This resulted in the following aggregated market data:
- The limited supply of space and the high demand for office space in central locations in German office markets are leading to rising aggregate rents in the A, B, C, and D markets compared with our analysis from Q1 2022. For example, the prime rents in the A locations rose to an average of EUR 37.29/m2 (+9.92 %). For the B locations, the average value of prime rents is EUR 17.03/m2, which represents a growth of 5.09 %. For C locations, the average prime rent is 14.74 EUR/m2 (+4.30 %) and for D locations 12.06 EUR/m2 (+5.43 %).
- Current market dynamics have led to increasing yields on the German office markets over the past 12 months. For all aggregated location classes (A, B, C and D locations), there was a year-on-year increase in the level of prime yields. In A markets, the average level of prime yields is 3.37 %, an increase from last year's analysis of significant 24.87 %. In the B markets, prime yields increased by an average of 6.59 % to 4.16 %, and in the C markets by 2.70 % to an average of 4.52 %. The average increases in the D markets were slightly lower at +0.75 % to 5.54 %.
- The continued high demand for office space on the German market is not leading to a nationwide decline in prime rent levels, despite the current economic turbulence. For the A locations, we expect prime rent levels to increase in the coming six months, especially in the new-build segment. For all other German office markets, we expect stable prime rents overall in the coming six months.
- Price declines combined with stable rental developments are expected to result in an increase in the level of prime yields over the next six months. (Exception Düsseldorf, where we expect a stable level of prime yields).
- The highest prime rent level according to our analysis is to be found in the office markets of Frankfurt (Main) and Munich, both at EUR 45.00/m2. At EUR 7.90/m2, the lowest top rents are to be found in the market of Salzgitter.
- The lowest prime yields (3.25 %) can be seen in the office market Düsseldorf. The highest prime yields (7.20 %) can be realized on the market Wilhelmshaven.
- Our analysis of yield developments over the past 15 years (including the financial crisis in 2008) shows that total returns in Germany's top seven office markets were largely generated by the increase in market values. In smaller office markets, on the other hand, a larger share of total returns is attributable to income returns.
- The highest average annual total returns for the period 2007 to 2022 are attributable to the markets Leipzig (16.32 %), Chemnitz (15.31 %) and Dresden (14.76 %). Among the top 7 markets, by far the highest average annual total return within the observation period is observed in the market Berlin (14.40 %). The average value of the average annual total returns for the period under review at the A locations was 11.89 %, at the B locations 11.61 %, at the C locations 11.88 % and at the D locations 10.83 %.