Cologne office market, third quarter of 2022

(Cologne, October 1, 2022) The positive trend on the Cologne office property market continued in the third quarter of 2022. Letting performance and rental prices remained at a high level. The vacancy rate remains stable at a low level. However, the outlook for the future gives cause for concern.

Following the strong results of the first two quarters, space take-up at the end of the third quarter of 2022 did not continue at the same pace. The 215,000 square meters recorded at the end of the first half of the year were supplemented by around 22,000 square meters in the third quarter of 2022. The Cologne office real estate market thus closed the third quarter of 2022 with a result of 237,000 square meters of leased office space. This means that the result for the Cologne office real estate market is approximately 39 percent above the previous year's result (third quarter of 2021: 169,000 square meters).

The major factors influencing the rental market have become significantly more important in 2022. Complex issues such as the effects of the war in Ukraine in the form of gas and electricity supply, raw material shortages and supply chain disruptions are also affecting companies in the greater Cologne area. Although the coronavirus pandemic has become the "new normal," the knock-on effects, such as new regulations for working from home and the corresponding new working environments, are forcing companies to rethink their strategies. This process is often not just a real estate issue, but entails a comprehensive change management process to adapt the organization to the new world of work. Many companies are therefore currently still in an exploratory phase, searching for the best workplace model. The office will have to face these challenges, especially since many companies have realized after two years of the coronavirus pandemic that working from home is not the only solution. "That's why we remain convinced that working from home will not become synonymous with the office. Employees increasingly want to return to the office in order to significantly improve social contact, communication, and knowledge transfer," says Uwe Mortag, managing director of Larbig & Mortag Immobilien. This is particularly challenging in the current labor market, as not only recruiting new employees but also retaining existing ones is an important task.

In addition to these developments, the implementation of their own sustainability goals and ESG criteria is currently playing a major role for companies, albeit still predominantly for larger companies. The first companies are already looking to the future and aligning their business decisions with Article 8 of the Taxonomy Regulation, and they expect the same from future office properties.

All of these issues will have a significant impact on the local office space market in Cologne over the next 12 months.

The first effects are already noticeable. In the first nine months of 2022, a total of around 145 lease agreements were concluded (Q3 2021: around 260), representing a significant decline (-45 percent) compared with the same period last year.

However, a detailed analysis of the deals in the various size categories shows that in the 1,000 m² to 5,000 m² segment (27 deals compared with 21 in the previous year) and in the 5,000 m² and above segment (8 transactions compared to 6 in the previous year). In the large-scale rental segment of 10,000 m² and above, the public sector was the predominant source of demand. In the size category up to 1,000 m², a total of 127 deals were concluded, significantly fewer than in the previous year (200).

The public administration sector clearly dominated the overall market in the first three quarters with a market share of over 43 percent. This was followed by the education sector (13 percent) and services (6 percent).

The vacancy rate continued to fall year-on-year, closing the third quarter at around 4.1 percent (third quarter 2021: 4.5 percent). This 9 percent reduction is due to large public sector leases totaling over 100,000 square meters of office space. This means that the office property market in the cathedral city currently has around 340,000 m² (Q3 2020: 383,000 m²) of vacant office space available.

All key rental figures recovered within a year of the coronavirus pandemic. The most significant increase was seen in prime rents, which rose by 14 percent to €27 per square meter.

The maximum rent rose significantly in the same period to a record level of €36/m². The average rent also rose by 16 percent to €16.80/m² (Q3 2021: €14.00/m²).

The positive forecast for the end of the year remains unchanged. Developments in the first three quarters of 2022 and the search queries currently on the market indicate that the outlook remains positive.

"Larbig & Mortag can look back on a successful nine months in Cologne. With over 40,000 square meters of office space brokered, we were able to demonstrate our consistent strength. We are particularly proud of the relocation of Renault Deutschland AG from Brühl to Cologne. We were able to provide the company with comprehensive advice and broker approximately 4,400 m² of office space. We were also able to broker approx. 1,000 m² of office space for Rimowa. However, we are still looking ahead to the coming year with some concern due to the overall economic development and the threat of recession. The large-scale lettings by the public sector that took place in 2022 will not be repeated in this form. The post-coronavirus catch-up effects have been realized this year and companies will now act more cautiously. The first effects are already being felt on the Cologne office real estate market. The speed of transactions is slowing down significantly. Nevertheless, the Cologne office real estate market will also master this phase. Back in 2008/2009, Cologne demonstrated that its diverse mix of industries is a sustainable foundation. In addition, we assume that the coming wave of sustainability/ESG, combined with the expected increase in ancillary costs for older properties, will force some companies to rent modern office space," says Uwe Mortag.

The experts at Larbig & Mortag Immobilien expect total annual turnover on the Cologne office market to reach up to 280,000 square meters. The exact size will depend on whether rental agreements can be concluded overall and in the order of 1,000 square meters or more.

Market figures at a glance 3rd quarter 2022