Germany: Rental income must compensate for lack of appreciation in office properties

19 July 2023

– Rental market stabilised at low level, upswing in 2024 at the earliest
– Prime rents continue to rise, but at a slower pace
– For tenants, operating costs are coming to the fore in addition to basic rents
– Space utilisation can be optimised through conversion to multi-tenant structures and subletting

Increases in rental income are essential for investments in office properties to remain profitable in the current market situation, with property values remaining stable at best. Rents act as a key driver for the current yield of real estate investments and make an above-average contribution to securing the value of real estate investments. The higher current yields are in turn necessary to price in the increased rental and market risk. In this way, real estate remains competitive compared to other types of investment. At the same time, the location-related spread in the rental markets is increasing significantly and many tenants have become more cost-sensitive – an area of tension.

These are the key findings of today’s online press conference “Performance Factor Rents – Potentials and Adjusting Screws in Office Properties”, attended by Andreas Trumpp, Head of Market Intelligence & Foresight Germany at Colliers, Alexander Eggert, Managing Director of HIH Invest Real Estate, Harry Tettinger, Director Operations Germany at ISG, and Martin Ballweg, Managing Director of Scaling Spaces.

Colliers: Weak economy dampens office market

First, Andreas Trumpp, Head of Market Intelligence & Foresight at Colliers, analysed the market: “Currently, we perceive a stabilisation of the office market at a low level – however, we do not expect a recovery until 2024. Due to the economic environment, companies are still very hesitant when it comes to long-term decisions for a location. At the same time, many office projects are still being completed. The combination of user restraint and high space availability is driving the vacancy rate, although it remains in the market-neutral range at 5.3 per cent at present.”

Despite the rising vacancy rates, Andreas Trumpp continues to observe rising prime rents, albeit with a slowdown in momentum: “Users are increasingly focusing on more central urban locations with good connections. Here there is less demand for space, but of very high quality. The vacancies are therefore mostly in peripheral locations or in older existing buildings. In addition, the office space stock is coming under increasing pressure due to regulation and, above all, decarbonisation. There is a risk of obsolescence for up to 60 per cent of the office stock.”

HIH Invest: securing rent value is important, but with a sense of proportion

“For the office portfolios we manage, we see two adjusting screws for rental income,” reports Alexander Eggert, Managing Director of HIH Invest. “On the one hand, it is important to increase them sustainably. 93 per cent of all office leases managed by HIH are index-linked or staggered. The rent adjustments are usually carried out in accordance with the contract, but are checked individually beforehand. This is because it does not always pay to enforce the rent increase. If tenants do not support the increase and move out, this results in loss of rent as well as costs for renovation and marketing. For tenants, it is not only the development of the basic rent that is decisive, but increasingly also the amount of the operating costs. If the proportion of operating costs can be reduced, a higher basic rent can usually be generated. On the other hand, our goal is to avoid vacancies or to increase occupancy. HIH develops individual letting strategies for every large space that is up for letting, including location, site and market analysis. Our occupancy rate is currently around 97 per cent.”

ISG: Avoid vacancies by converting to multi-tenant and subletting

From the perspective of a construction services provider who optimises office space and designs it with the future in mind, Harry Tettinger, Director Operations Germany at ISG, reports: “One measure to reduce vacancy rates of office space is to convert a single-tenant property into a multi-tenant property and, in this context, to make it possible to sublet unused space. To do this, the compatibility for multiple tenants must first be examined: What general conditions does the location entail, are the tenants companies with conservative corporate structures or start-ups, what about ESG compliance? In the next step, we look at the structural feasibility for subletting, such as the presence of reception areas, staircases, security and access arrangements.”

According to ISG’s 2022 study “The Power of Place”, companies see a 23.5 per cent increase in turnover after investing in modern offices and flexible working models. “So to be ready for the ‘war for talent’ and to counter the home office trend, both single and multi-tenant models need to be contemporary,” concludes Tettinger.

Scaling Spaces: phantom vacancies add to nominal vacancies

Martin Ballweg, founder and CEO of Scaling Spaces, concludes: “Nominal vacancy rates continue to rise. Added to this is the vacancy in rented office space that is no longer needed by companies. Therefore, I would speak of a phantom vacancy here, which results from the now established home office in the working world and the difficult overall economic situation. In such unused spaces, we can make subletting possible quickly and easily with our Flex Office concept. Companies can then earn money with their rented space – also as a bridging solution in case they need the space themselves again later.”

Scaling Spaces’ subletting services range from management contracts with a fixed operator fee and a possible success component to turnover rental models. In the latter, Scaling Spaces leases the space as a subtenant and pays a rent to the primary tenant based on turnover. Scaling Spaces currently operates six locations in Berlin where flex office space and coworking spaces can be rented.

Note on image rights
The use of the image material sent is only permitted in the context of reporting on the companies Colliers, HIH Invest Real Estate, ISG and Scaling Spaces. Please cite the following source: Colliers (Andreas Trumpp), HIH Invest (Alexander Eggert), ISG (Harry Tettinger) and Scaling Spaces (Martin Ballweg). Editing may only be carried out as part of normal image processing.

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