In the first quarter of 2021, office take-up in Berlin totalled 201,200 square metres. This is 54 per cent above the weak first quarter of the previous year and roughly in line with the average of the last five years. Given the still ongoing uncertainty about the course of the pandemic and its impact on the economy as well as office use, this is a surprisingly good result.
Take-up in the first quarter at the five-year average
Take-up was mainly driven by transactions in development projects. All leases signed for 10,000 square metres or more were for development projects or recently completed properties. The reasons for this are the still limited supply of large spaces in the city’s office stock and tenants’ requirements for high quality space. The extensive development pipeline in Berlin can meet this demand for a long time. The six transactions of 10,000 square metres or more totalled 93,000 square metres, thus accounting for 46 per cent of total take-up. It is apparent, however, that compared to previous years the number of deals has significantly reduced.
By far the largest lease was concluded by DKB in the “upbeat” project in Europacity with 33,500 square metres. Together with the owner-occupier deal of Berlin Hyp (B-One project) and other smaller lettings, this resulted in banks and financial service providers generating the largest proportion of quarterly turnover at 24 per cent. The ICT sector took second place, although the 13 per cent of total turnover was below average by Berlin standards compared to the five-year average of 23 per cent. Christian Lanfer, Head of Office Agency Germany at Cushman & Wakefield explains: "Since the start of the Covid-19 pandemic, take-up by IT companies in Berlin has declined considerably. A significant proportion of these companies had already secured sufficient space for their predicted rapid growth in business and staff before the crisis. The companies that have been renting since the beginning of the crisis are usually not doing so as 'stockpiling', especially as the home office quota is currently particularly high in these companies. On the other hand, one hears ever more voices from large IT companies emphasising the great importance of personal and informal exchange in the office for the innovation processes that are so important in the industry. Subsequently to the pandemic, we therefore expect demand for space from this sector to pick up again."
In most of the recent large deals, tenants were under pressure to act due to expiring leases. Overall, however, there is still a rather wait-and-see attitude among private sector companies towards decisions regarding the amount and type of office space they will need in future. As the measures to contain the pandemic in Germany have recently been tightened again and further tightening is being discussed in the political arena, also with regard to office use, the uncertainty remains for the time being.
However, there are still large space requests from the public sector that have a good chance of being concluded this year. Since the beginning of the pandemic, the public sector has benefited from the fact that competition for large spaces has been reduced. However, the record take-up of 211,200 square metres by the public administration sector in 2020 will probably not be matched this year.
Overall, we expect annual take-up to be at a similar level to last year at around 750,000 square metres.
Nominal rents stable
The sustainable prime rent and the area-weighted average rent remained static compared to the previous quarter at 38.00 euros per square metre and month and 26.90 euros. Compared to the previous year, however, the prime rent is 2 euros lower, but the average rent is 15 cents higher. The further slight increase in average rent is mainly due to the fact that the take-up share of very cheap space has continued to decline over the last twelve months. For example, proportion of take-up generated by spaces with rental prices of between 10 and 15 euros per square metre has almost halved compared to the previous twelve-month period. Rental incentives, such as rent-free periods, are granted more often on average than before the crisis, although this depends on location and space quality. In addition, owners are willing to invest more in fit-out. Although nominal contract rents have remained stable, this led to slightly declining effective rents.
Vacancy rate rises again
In spite of respectable take-up, the supply of space available for immediate occupancy again increased by 44,500 square metres compared to the previous quarter. A total of 564,400 square metres of office space is available for occupation in the next three months, which corresponds to a vacancy rate of 2.9 per cent. A year earlier it was still at 1.6 per cent. As much as 45 per cent of current vacancy is in properties in central office locations. The supply of sublet space increased by 14,200 square metres to 89,800 compared to the previous quarter. At mid-year 2020, there were only 30,000 square metres available.
High supply in development projects
671,900 square metres of new and core refurbishment office space is expected to be completed in 2021 - 44 per cent more than last year. Of this, 106,200 square metres was already completed in the first quarter. In the projects not yet completed for 2021, 238,400 square metres is still available for rent. If two-thirds of this were to be let by the end of the year, the remaining space would still increase the vacancy rate by about 0.4 percentage points without taking other factors into account.
In subsequent years, even more space will come into the market. A total of 1.7 million square metres is currently under construction, the completion dates of which can be estimated relatively well. A not insignificant share of the projects that are only in the initial or more advanced stages of planning so far are less certain in view of the changed market situation in terms of completion date as well as whether they will go ahead at all. The proportion in advanced planning alone adds up to 1.9 million square metres. However, the willingness to speculatively commence construction has recently decreased. If the pre-leasings do not materialise, some of these plans could remain shelved for a long time.
Low office investment volume, but more activity in sight
Berlin’s office investment volume in the first quarter was 320 million euros. This was 85 per cent less than in the very strong first quarter of 2020. The last time there was a similarly subdued quarterly result was in 2014.
Clemens von Arnim, Head of Capital Markets Berlin at Cushman & Wakefield, commented on the market situation: "The low number of concluded transactions came about due to a lack of portfolio deals and a lack of attractive products. Sellers and buyers acted cautiously and, in view of the uncertainty, preferred to wait and see in which direction prices would develop. Marketing was also restricted by more difficult conditions for travel and viewings. Towards the end of the quarter, however, the momentum on the market increased. Owners are again increasingly initiating preparatory processes for sales, which is why an accumulation of transaction closings can be expected in the second half of the year at the latest when there is more sustained easing."
Despite the adversities, a further compression in the prime yield, by 10 basis points to 2.65 per cent, would then be likely in the course of the year. Investors currently attach particular importance to secure cash flows. The Berlin market offers particularly good conditions in this respect, due to the high proportion of public administration in the tenant mix. On the other hand, value-add products remain under pressure because the changed letting assumptions are priced in and the debt financing conditions in this segment remain challenging.