For one year now, Germany has been living with and suffering from the coronavirus, with economic output plummeting by 5 % in 2020. However, what is the pandemic’s effect on real estate markets?
In the summer, we compiled initial tendencies for the office, hotel, and retail market segments. Considering the low infection figures at that time, market participants’ forecasts were cautiously optimistic—a V-shaped economic recovery did not seem unlikely. By now, however, it is more evident that neither the pandemic nor the economic recovery will proceed as quickly as hoped—a stress test for the real estate markets, too.
Let's start with the largest segment, the office market: in March, employees across Germany abruptly worked from home. In the summer, many returned to their offices, but some companies stuck with telecommuting: for example, according to a survey conducted by the Research Institute for Digital Transformation in October, the majority of O2’s employees still work from home, a maximum of 10 % work in their office in the O2 Tower in Munich. According to Savills, in 2020 the top six German office markets reported a downturn in space take-up by around 33 % (most affected are Düsseldorf with 47.9 % and Frankfurt with 41.9 %). Spaces over 10,000 m² even saw a drop by as much as 45 %. The vacancy rate has risen to an average of 3.5 %. The prime rent has increased to 35.73 euros per square meter, while the average rent has risen to 19.63 euros. However, the numbers can provide a false sense of security: although a temporarily lower capacity utilization will not have an immediate impact on office space demand, Savills’ experts expect that in the medium term the vacancy rate and the proportion of unused office space will converge. Capacity utilization will therefore be relevantly lower after the pandemic than before. “For the next few years, a high demand for new construction, modernization and reconstruction is expected,” comments Matthias Pink, Head of Research Germany at Savills.
The situation is even more difficult for retail properties: BNP Paribas has observed that retail parks with grocery stores as anchor tenants as well as specialty and supermarkets are highly attractive to investors—no wonder, as providers of daily necessities are largely exempt from closures during the pandemic. According to BNP Paribas, overall take-up in city locations slumped by around 40 %. However, the investment volume withstood the pandemic: “With a total of 12.3 billion euros, the result with plus 4 % is slightly above the long-term average and with minus 5 % only slightly below the previous year's figure,” Christoph Scharf, BNP Paribas, explains. A new record figure of 7 billion euros was achieved by the specialty stores segment. “Both the extension of the lockdown and the continued high incidence of infection create uncertainties that are likely to continue to have a noticeable impact on the retail investment market in the first half of 2021,” Scharf warns.
The hotel industry has been significantly affected: although tourist travel is only temporarily banned and is likely to experience a significant catch-up effect after the restrictions, in the business travel sector there are signs of a permanent downturn. Currently, the cancellation of trade fairs, events and conferences is causing a painful slump in the number of overnight stays; in the long term, the need to save money after the crisis is likely to lead to video formats becoming at least partially accepted as a substitute for physical meetings. 57 % of German companies surveyed by the Ifo Institute in the summer expect a permanent reduction in business travel. As reported by Immobilienzeitung, the hotel investment market declined by more than half in 2020 and, with a transaction volume of around 2 billion euros, is about one third below the ten-year average. Colliers expects a return to pre-crisis levels in 2023 at the earliest. It is no surprise that individual inner-city hotels have begun to rent out their rooms by the hour as a quiet alternative to the office at the kitchen table at home. Savills’ experts have similar expectation for vacant retail spaces that could be converted into flexible workspaces.
However, in the future, we could experience even more frequently what we have already discussed here: the transformation of unused offices into apartments. Residential real estate is completely unaffected by the pandemic: “There is a consistently high demand from users that is encountering a supply that continues to be too low, particularly in the metropolitan areas,” Christoph Meszelinksy, Head of Residential Investment at BNP Paribas, sums up. Consequently, in 2020 the German residential investment market once again outperformed its strong prior-year result by a good 7 %, and empirica identifies rising prices for residential real estate by 11.1 % throughout the nation, thus emerging from the crisis as a winner.
The logistics segment, which is benefiting from the pandemic-driven trend towards online shopping, is similarly strong. BNP Paribas calculates a 2020 transaction volume of more than 7.9 billion euros, up 5.5 % compared to the strong previous year’s result and up 56 % compared to the long-term average. Only individual sectors such as the automotive industry have seen a drop in demand, but the booming food logistics and e-commerce sectors easily make up for this.
In that sense, the trend from the summer is clearly confirmed. The extent to which the hard-hit hotel and non-food retail sectors can recover quite strongly depends on how quickly the pandemic can be contained sustainably. Hence, “stay at home” still holds true!