In 2020, take-up in the Berlin office market area was 34 per cent lower than in the record-setting 2019, at around 700,000 square metres due to the crisis. Although this is the weakest result since 2014, it can also be seen as positive in view of the extraordinary challenges. Despite the adversities, it is only six per cent below the ten-year average, underlining the resilience of the Berlin office market. With the onset of the Coronavirus crisis in March 2020, corporate leasing activity plummeted and remained at a low level for much of the year. However, the year ended comparatively strongly. At around 242,000 square metres, take-up in the fourth quarter was only five per cent below the level of a year previously and 17 per cent above the ten-year average.
It was noticeable that public administration leased a large amount of space in 2020; some 195,000 square metres, similarly to the previous year (three per cent increase on 2019), thus supporting the market. However, as take-up by other sectors was significantly lower in 2020 than in 2019, public administration's share of take-up increased from 18 per cent to 28 per cent. In the second quarter of 2020, at the height of the crisis, it was a huge 56 percent.
The non-public sectors took-up almost as much space in the fourth quarter as in the first three quarters combined (87 percent). Here, therefore, a clear recovery in leasing activity across the full breadth of market participants was latterly apparent. The ICT sector/online platforms leased around 39,000 square metres in the fourth quarter, industrial companies leased 34,000 square metres and the banking and financial service sector and the construction and real estate sector each leased over 26,000 square metres.
Regarding demand for new spaces, it is apparent that demand in the small-space segment was the first to recover while it remains very restrained for large spaces. The leases signed for large contiguous spaces were still based on search processes that were already well advanced by the beginning of the crisis.
Vacancy rate rises moderately
Despite high take-up in the fourth quarter, the supply of space available for immediate occupancy increased moderately, to 519,900 square metres, a vacancy rate of 2.7 per cent. This includes 75,600 square metres offered to sublet, 16,700 square metres more than in the third quarter, much of this due to the effects of the Coronavirus pandemic. A number of development projects completed in the fourth quarter but not yet fully let also provided additional available space amounting to 17,700 square metres.
Rents stable in the fourth quarter
The sustainable prime rent and the area-weighted average rent remained stable compared to the previous quarter at € 38.00 and € 26.75 euros per square metre and month respectively. Compared to the previous year, these values changed only slightly, with the prime rent one euro lower and the average rent 35 cents higher than a year previously. Rent incentives, such as rent-free periods, are granted more often than before the crisis. In addition, owners are willing to invest more in fit-out of spaces, with the amount again showing a slight increase in the fourth quarter.
Extensive project development pipeline, but new building space in prime locations remains scarce
2020 was a record year for the Berlin office market in terms of the amount of space completions in development projects. At 465,800 square metres, it was 74 per cent higher than in the previous year and almost twice as much as the average of the last five years. In the coming years, even more space will be completed in new development projects. 782,000 square metres is for completion in 2021, of which 279,000 square metres is still available to let, but of this, only just under 75,000 square metres of this in central office locations. New-build space in prime locations will therefore remain scarce in 2021. For 2022 and 2023, a further 1,847,000 square metres is planned to be added. For some of the development projects, especially the 459,000 square metres not yet under construction and which have not yet been let, there could be difficulties with financing and delays in the commencement of construction due to the changed market situation. The general willingness of property developers to build speculatively has also decreased.
Falling yields for core properties due to increased attractiveness of secure cash flows
The Berlin investment market for office properties was extremely robust. The investment volume for offices totalled € 5.6 billion. The high demand was also reflected in the large number of transactions in the triple-digit millions. A good twenty office properties in this price range changed hands in 2020.
Clemens von Arnim, Head of Investment Berlin, comments on the development of yields: "Yields for properties in the core segment with tenants with strong credit ratings and long-term leases compressed by 15 basis points to 2.75 per cent in the fourth quarter. Investors are seeking such assets even more ardently than before the crisis because of the secure rental income - also as a result of the foreseeable continuing lack of attractive interest-bearing investment alternatives to real estate."
In contrast, the situation developed very differently with regard to value-add assets. Here, more conservative letting assumptions for the future, i.e. lower rental growth and the granting of more incentives, led to a reduction in buyers' willingness to pay for properties that were not let long-term. Changes in debt financing conditions have also contributed to this. These have become more restrictive in the value-add sector, for example because only lower-risk loan-to-value (LTV) ratios are now accepted or, in some cases, interest rates have also risen.
In 2021, the public sector will probably continue to absorb large amounts of space in Berlin, which will further support the market. For the private sector, the outlook remains very uncertain, at least for the first half of the year. The number of active large-scale searches has been reduced, both via space search processes that have been discontinued since the beginning of the crisis as well as via leases that have recently been concluded. Christian Lanfer, Head of Office Agency Germany explains: "Many large companies are currently still considering their office use concepts for the future. Among these are some that want to take up less total space, but at the same time are setting higher demands on flexibility and quality in order to meet the new realities of their employees, while at the same time fully exploiting the advantages of working together in the office. The quality of offices will be even more crucial than in the past, with respect to the degree they foster formal and informal information exchange and the promotion of corporate culture. For the coming year, there are opportunities to build further momentum here as ever more companies finalise their new concepts and start implementing them as uncertainty levels decrease."