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Berlin Office Market: Take-up in current year weakest since 2014, strong demand for core properties

06/10/2020

To the end of the third quarter of 2020, the Berlin office market’s cumulative take-up reached 451,400 sqm. A level of take-up last seen in the capital in 2014. The third quarter contributed 144,800 sqm, 18 percent less than the previous quarter. Only the public sector again absorbed a relatively large volume of space. As in the previous quarter, the vacancy rate rose further, to 2.5 percent. Prime rents fell from € 40.00 per sqm per month to € 38.00. The average rent also fell, from € 27.50 to € 26.60.

Lowest nine-month take-up since 2014
To the end of the third quarter of 2020, office space take-up in Berlin totalled only 451,400 sqm. At the same point in 2019, a record-setting year, the figure was 800,100 sqm. But even in comparison to the average of the last five years, it was 31 percent less. Third quarter take-up was 144,800 sqm, which was 18 percent less than in the second quarter, the peak of the Covid-19 crisis. However, this fall does not adequately reflect the development of the demand situation, as second quarter performance was boosted by the largest lease for several years, by Deutsche Rentenversicherung (national pensions agency)  for 84,300 sqm. If this extraordinary letting is disregarded, the third quarter saw an increase in take-up was observed compared with the second quarter. This is also reflected in the development of the number of leases signed: This rose from 110 to 145, and the high level of demand from the public sector is again striking. In the current year, the public administration sector alone (excluding state educational institutions) was responsible for 39 percent of take-up. On the other hand, with the onset of the Covid-19 crisis, transactions and take-up by companies from the ICT sector / online platforms declined by more than average. In 2019, this averaged 35 transactions and 67,800 sqm per quarter. In the second quarter of 2020, the figures were only 13 and 8,200 sqm respectively, and in the third quarter they were also very low at 15 and 14,800 sqm.

Kathrin Hellwig, Head of Office Leasing at Cushman & Wakefield in Berlin, provides some explanation: "IT companies, and start-ups in particular, expanded remote working in Berlin comparatively smoothly with the onset of the Covid-19 crisis. This is due to the fact that the equipment available in the sector is good, that the nature of the work processes is suitable for remote working, and by the fact that working from home and on the road was already often part of everyday life in the sector prior to the crisis. Many growing companies in this sector can therefore do without additional office space for their employees for the time being. However, we assume that with the end of the Covid-19 crisis, this industry will also demand more space again, especially since it is still one of the city's central growth engines.”

Vacancy rate increases further
The vacancy rate rose from 2.0 to 2.5 percent in the course of the third quarter, with 464,500 sqm available for immediate occupancy at the end of the third quarter. As in the second quarter, this was due not only to the low level of take-up, but also to the fact that some companies particularly hard hit by the crisis were giving up space, either by letting existing leases expire, offering space via sublets, or returning space. For example, half of the 58,900 sqm of sublet space currently on offer in Berlin is attributable to the effects of the Covid-19 crisis. The additional 29,900 sqm of space not yet let in completed new buildings and core renovation projects also contributed to the rising vacancy rate. Compared with the beginning of the year, the supply of space for occupancy within three months increased by 159,400 sqm, or 52 percent. Two-thirds of the vacancy is in properties outside the central office locations.

Rental pries softening
Subdued demand and the growing number of alternative premises for companies seeking space had an impact on rental prices in the third quarter. Prime rents fell by two euros or five percent to € 38.00 per sqm per month. The space-weighted average rent for the past twelve months fell by three percent to € 26.60 per sqm per month. The prime rent has thus returned to the level of the third quarter of 2019, while the average rent is roughly on a par with that of the beginning of 2020. Rental incentives, such as rent-free periods and fit-out contributions are granted slightly more frequently than before the crisis.

High completion level in the short and medium terms, question mark over speculative planning
To the end of the third quarter this year, 271,100 sqm of office space had been completed, 29 percent more than in the same period last year. The majority of the completions, 147,700 sqm, took place in the third quarter. The fourth quarter will once again bring a very extensive volume of completions, so that a record figure of 448,000 sqm is expected by the end of the year. For development projects that are already under construction and can therefore be considered relatively certain, 805,000 sqm is in the pipeline for 2021 (280,700 sqm still available) and 613,500 sqm for 2022 (379,800 sqm still available). In view of the current uncertainty about market developments, it is assumed that there will be a reluctance to finance projects that have not yet been pre-let and are located in less central locations, and that there will be a cautious wait-and-see attitude regarding construction commencement. Despite this, new buildings and core renovations will be completed on a historic scale in the coming years. 

Expectations remain subdued
As some large searches for new premises are nearing completion and at the same time demand from smaller companies has picked up again, take-up in the fourth quarter may improve. Nonetheless, take-up will remain weak for the year as a whole.

High demand from investors for core properties
Almost unimpressed by the weaker take-up, investor interest in real estate in Berlin remains high. Current demand is concentrated primarily on core properties. In addition, competition for the small number of suitable assets available for sale is intense. In the third quarter, several office buildings with a value of over € 100 million each changed hands, including the Impuls and Neo projects. The prime yield remained stable at 2.90 percent in the third quarter, but compression is expected in the coming months.

Clemens von Arnim, Head of Investment Berlin at Cushman & Wakefield explains: "The gap in yields between core and value-add is widening as secure rental income, for example via long-term leases with public sector tenants, is now even more sought-after than prior to the crisis, while higher risk premiums are being demanded for properties with an uncertain outlook in terms of the level of rental income. Investors are examining tenants even more closely than before and evaluating their crisis resilience.”

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