Office property is the most common asset class in commercial real estate. Usually, the market development of office properties indicates the general development of an economy. Consequently, office properties also play an important role at EXPO REAL. The office property trade fair brings together all the relevant players from the commercial real estate segment—from planners and project developers to financiers and investors, from consultants and brokers to facility managers and potential users. Also, the trade fair for property and investment will highlight and discuss trends and developments in office real estate. Advances in technology and the ever-changing needs of users do not spare office properties.
Everyone has an image in mind when it comes to the word “office,” with a desk being its dominant element. However, that is merely the lowest common denominator the various types of offices and workspaces can be reduced to. For a long time, individual cellular offices, occupied by one to three people, and open-plan offices, with numerous workstations spread across a large area, were the prevailing models. Distinct differentiation can now be observed here, primarily characterized by the desire and need for more flexibility in the organization of work. Nowadays, shared offices, where teams collaborate closely, and private offices, where individuals can retreat for confidential discussions or tasks that require high levels of concentration, are combined. There are also combinations of cellular and open-plan offices, where the “cells” surround a communal space equipped with meeting facilities, service amenities and kitchenettes. Other variations include open office landscapes (open space) and multi-space offices. In open space landscapes, different work options and communication zones are combined, allowing employees to choose the most suitable environment for their respective tasks. In multi-space offices, larger shared offices are typically combined with a smaller number of individual or multiple-person offices. And there is another significant change:
In the past, every employee had an assigned workstation, whereas now non-territorial workspaces predominate. This means that employees have to find an available desk and work there. This allows employers to have fewer workstations, reducing the number of unoccupied spaces when employees are on vacation, business trips or are working from home.
Offices are also changing due to the increased demands of the younger generations for social and creative opportunities, as well as recreational and sports areas. In an era where skilled workers are scarce, employers are compelled to adapt to these evolving expectations.
The market for office real estate is as diverse as the forms of offices themselves. It ranges from modern “state-of-the-art” new buildings in prime locations to more conventional structures situated on the outskirts of cities or in small to medium-sized towns. It can also include renovated older buildings or repurposed properties transformed into office spaces. Additionally, combinations of office areas with publicly accessible spaces like retail, dining or other amenities are possible. Whereas in the past the user was often also the owner of the office building, this connection has since been severed in many cases, making office real estate increasingly appealing as investment asset. This shift has granted occupants greater flexibility in adjusting their required space, allowing for expansions or reductions as needed. Consequently, investments in office real estate have long held an uncontested position at the forefront of commercial real estate transactions.
Despite a 28 % decrease in office investments compared to 2021, uncertainties persisted in 2022. According to BNP Paribas Real Estate, approximately €22.3 billion were invested in this asset class in Germany. However, what became apparent in the fourth quarter of 2022—a significant decline in transaction volume—continued into this year. In the first quarter of 2023, the investment turnover in the office property sector reached €1.27 billion, representing just under 25 % of the total investment volume. Nevertheless, transaction volume in the first quarter of 2023 decreased by two-thirds compared to the same period last year. Uncertainties regarding economic and interest rate developments, as well as divergent price expectations between buyers and sellers, have acted as a drag. This effect is particularly evident in the office sector for large-scale core assets in prime locations (A locations), which have contributed disproportionately to positive results in recent years. Transaction volume for such properties experienced an almost 78-% decline, while in smaller cities with populations of up to 250,000, the decrease was only 8 %.
In the face of the Ukraine conflict, energy crisis, uncertain economic outlook and inflation, the rental markets in Germany managed to maintain a relatively stable position in 2022. The total leasing activity across the eight largest office markets reached 3.4 million square meters, in line with both the previous year and the ten-year average. However, the results for the first quarter of 2023 were below average, with leasing volume amounting to approximately 621,000 square meters. This marked a 20 % decline compared to the same period in the previous year.
But there are significant differences among the prime locations: Berlin continues to hold the top spot in terms of leasing performance, even though its decline aligns with the average. Munich follows in second place, albeit experiencing a leasing volume decrease of over one-third compared to the previous year. Hamburg, ranking third, proves to be the most resilient with a modest 11 % decline. Similarly, there are notable variations in vacancy rates. Overall, there are 5.4 million square meters of available space in the eight largest office markets, resulting in a slightly increased average vacancy rate of 5.5 %. Berlin stands at the forefront once again with a moderate rate of 3.2 %, followed by Hamburg at 3.9 % and Cologne at 3.3 %. Munich, although experiencing a slight increase in vacancy rate, still remains below the average at 4.8 %. Conversely, Frankfurt and Düsseldorf exhibit above-average vacancy rates of 10.8 % and 8.8 % respectively. Nevertheless, rents have increased in most of these office strongholds, with some experiencing double-digit percentage growth.
To a certain extent, the market for office property is an indicator of macroeconomic development. Currently, the outlook for Germany is not overly optimistic. According to the latest economic forecast from the ifo Institute in March 2023, the German economy is stagnating at the level of the previous year and is projected to show only a slight recovery in the coming year. This sentiment is reflected in the expectations of businesses regarding their future performance and, importantly, their willingness to expand not only their operations but also their physical office space. On the contrary: the need for office space is rather being reassessed. The proportion of people working from home has increased due to the impacts of the COVID-19 pandemic. As a result, companies need to allocate less space for their employees.
A trend that has been gaining momentum for years is the rise of flexible office solutions. Especially for those in need of additional space on a short-term or foreseeable temporary basis, opting for such a solution has become preferable over committing to long-term lease agreements. Flex offices are also frequently chosen by small and medium-sized companies that may not necessarily wish or have the means to afford their own dedicated service areas and facilities. This trend will continue, because particularly digital solutions are also increasingly opening up opportunities for flexible arrangements.
Economic uncertainties and significantly increased financing and construction costs are causing project developers to proceed with much more caution. While approximately 4 million square meters of space are still under construction, there is no uniform trend in new projects, according to BNP Paribas Real Estate, not least because vacancy rates in the top locations vary widely.
For the first time in a long while, market reports also mention sublease spaces. Approximately 1 million square meters of office space are currently available for subleasing, with the majority concentrated in the Frankfurt (300,000 square meters), Berlin (290,000 square meters) and Munich (200,000 square meters) markets.
It is important to note that the future of office property depends on various factors (including digitalization and different working models) and there may be regional variations. A comprehensive understanding of market dynamics and a careful analysis of specific locations and demand factors are essential for investment decisions.
For a long time, the mantra for an office property has been “location, location, location,” which still holds true. Established office locations in the top five or top eight cities in Germany continue to command the highest prices and rents. However, it is no longer just about the location. It is becoming increasingly clear that buildings should have a Green Building certification to be attractive to investors and tenants. In 2022, around 46 % of the total investment volume in office properties was accounted for by certified buildings—compared to 34 % in 2020 and 38 % in 2021. This is likely related to the ESG taxonomy and the fact that, since January 1, 2023, Germany has imposed a carbon tax on commercial uses as well. Another factor is the EU’s plan to require energy-inefficient buildings to be upgraded to a higher level of efficiency.
But energy-efficient, certified buildings are often a “must” for occupiers, too, as larger companies in particular are also subject to ESG requirements. According to CBRE’s analysis, office properties with a Green Building certification in Europe achieve an average of 6 % higher rents, and the average vacancy rate is approximately 2 % lower. The competitive advantage over non-certified buildings lies in lower operating costs and the enhanced reputation the tenant gains.
The requirements for office properties are highly individual and can vary. They particularly relate to factors such as location, space configuration, infrastructure, flexibility, sustainability and security.
The further economic development poses a challenge for the office property market. In addition, the increased adoption of remote work, whether from home or elsewhere, at least does not amplify the space requirements. Moreover, employees’ expectations of their work environment are also evolving. Office buildings located on the outskirts of the city, lacking any surrounding amenities and without convenient public transportation access, are considered a deal-breaker, particularly among younger individuals. The “traditional” office concept is also becoming outdated. There is a growing demand for diverse types of collaborative spaces, as well as an increasing emphasis on sports and recreational facilities. While until recently parking spaces were indispensable for office properties, today it is electric vehicle charging stations, bicycle parking, along with shower and changing facilities.
Gone are the days when large companies would sign long-term lease agreements. Contract terms are becoming shorter as companies seek to respond flexibly to changing circumstances. Similarly, employees prefer flexible work models. Consequently, the number of flexible office solutions is on the rise, with operators leasing spaces and offering not just workstations but also a suitable environment and services for different tenants. Although prices for individual office spaces in flex offices are 10 % to 15 % higher than in the traditional office market, this particular market is experiencing significant growth and dynamism.
A topic that is currently being widely discussed in the residential sector equally applies to older office buildings: adapting to higher sustainability standards. This non-solely energy-related refurbishment is essential for maintaining attractiveness and preserving the respective property value. Particularly in terms of sustainability and considering the “embodied energy” within a building, demolition and new construction are often not the best solution. Given the possibility that not all spaces are needed anymore, it is also conceivable to repurpose these buildings, i.e., convert them into residential units. Determining the best potentials to realize and achieve a long-term increase in value is a task currently facing many asset managers.
Exhibitors dealing with office real estate form the largest group at the international trade fair for property and investment. The spectrum ranges from planners and architects, project developers, project managers and building technicians to financiers and investors, consultants and brokers, and facility and property managers responsible for smooth operations. All major players in the office property market are represented at EXPO REAL in Munich, as are the locations where office properties exist or are being developed.
Accordingly, the industry’s pressing topics are also featured at EXPO REAL’s varied conference program. Last year, the question “Back to office—why should we still go to the office?” was on the agenda, along with the overarching topic of the impact of new work models on office space requirements in general and how office property owners are dealing with it. Experts discussed tenants’ expectations of office real estate. And last but not least, the topic of ESG took center stage, gaining significance for all participants in the office real estate market.