The Cologne office rental market is surprisingly lively in the first half of 2024, albeit at a lower level than in previous years. This is the assessment of the office experts at Larbig & Mortag Immobilien, after expectations for new office rentals had already been sharply revised downward in the run-up to the year. Modern offices in the city center are the winners. This is boosting the market for office space in the city center. Mortag Immobilien after expectations for new office leases had already been sharply revised downward in the run-up to the half-year. Modern offices in the city center are the winners. As a result, the prime rent has risen to over €32/m² and the maximum rent to just under €40/m². With around 52,000 m² of office space, approximately 25% less was let in Cologne in the first half of 2024 than in the same period last year.
- Space turnover of around 52,000 m² (25% less than in the first half of 2023)
- Prime rent rises by approx. 5 percent to EUR 32.62/m² (first half of 2023: EUR 31/m²)
- Vacancy rate rises to 4.6 percent
- Modern offices in central locations are the winners
- Demand remains buoyant at a low level
- Healthcare sector dominates small-scale demand below 500 m²
With around 52,000 square meters of office space leased, the Cologne office rental market closed the first half of 2024. This represents a decline of 25 percent compared to the same period last year and 60 percent compared to the five-year average (127,000 square meters). The most significant deals were the leases signed by Ströer for approx. 3,500 m², SVA for approx. 2,500 m², and Worley Projects for approx. 2,340 m², all three in Ehrenfeld. In addition, the Vella Group leased approx. 1,269 m² in Zollstock and Cannamedical Pharma leased approx. 1,039 m² at Butzweilerhof. Two event/sports concepts were also included in the market figures: BuddyBash with approx. 2,579 m² and Element Boulder with approx. 1,500 m². As of mid-2024, no contracts for more than 5,000 m² have been signed in the market. However, these are expected to be concluded in the course of 2024. For example, the city of Cologne is currently reviewing the entire use of the Rossio new construction project in MesseCity with approx. 25,000 m².
At 52,000 m², demand is at its lowest half-year level in 15 years. The second quarter of 2024 contributed only 23,000 square meters of brokered office space to the half-year result. The long decision-making processes on the tenant side are also slowing down transaction activity. The current recession and inflation continue to play an important role in location decisions, but above all the labor market, NewWork, digitalization, and the threat of disruption from AI. The labor market is the most difficult factor to weigh, as it has a direct impact on companies' value creation and ultimately on their space requirements.
In the second quarter of 2024, demand in the small-scale segment below 500 m² will be dominated by the healthcare industry. There is increasing demand here, particularly from physiotherapists, orthopedists, dentists, and concepts from the fitness sector. As there are hardly any approved and vacant practice spaces in Cologne, users must expect long approval processes of up to 12 months. To counteract this, Larbig & Mortag has worked with the owner of the property at Arnikaweg 3 in Cologne to push ahead with plans to convert it into a medical center.
The vacancy rate rose slightly from 4.3 percent to 4.6 percent in a half-year comparison. This brings the vacancy rate closer to the 5 percent mark, which is considered the ideal basis for sufficient relocation activity in a large city. Furthermore, the vacancy rate varies depending on size and location. Companies are struggling to find attractive and modern office space in central downtown locations. Supply bottlenecks in the high-quality office segment are particularly evident in the 100 m² to 300 m² and 700 m² to 1,000 m² ranges in city center locations. Supply will continue to decline significantly here until the end of the year. In contrast, the supply of office space in some other sub-locations and especially in suburban areas is more diverse.
The proportion of sublet or re-let space has risen slightly again and accounts for around seven percent of the market supply. A further increase is to be expected as home working has become established in companies and some surplus rental space is to be vacated. In central locations and in certain size categories, these sublet or re-let spaces could be a welcome offset to the low supply. In peripheral locations, where landlords often have to contend with large vacancies anyway, these reductions in space are increasingly fueling vacancy rates.
In terms of construction activity and project development volume, the current pressure on the commercial real estate market is also being felt as a result of the changed market parameters. The majority of office building projects are being postponed, recalculated or rescheduled due to changes in interest rates, the current high construction costs and lower demand. As a result, completion volumes for the years 2025 to 2027 will be further delayed. The lack of new construction will be felt on the supply side when demand rises, and the vacancy rate will continue to fall. As a result, companies will have to reckon with rising rents.
The average rent closed at around €18.00/m² at the end of the first half of the year. This means that the forecast increase compared with the previous year's result (first half of 2023: €17.00/m²) has been achieved. At around €32.62/m², the prime rent is once again above the previous year's figure (first half of 2023: €31.00/m²). The maximum rent rose by 10 percent and is now approaching the €40.00/sqm mark (first half of 2023: €36.00/sqm).
a total of 115 lettings were recorded and evaluated in the first half of the year (first half of 2023: 125). This marks the fourth consecutive decline in the number of transactions in the Cologne office rental market.
The further development of the Cologne office real estate market will depend on a variety of factors. These include economic growth, a decline in interest rates for real estate financing, investments by foreign real estate investors to stimulate new construction, modern workplace concepts and increased office utilization, sustainability and modernization, and the expansion of digital infrastructure.
Modern and centrally located office space will continue to be the winners. The competition for new employees (war for talent) is fueling this trend and will continue to intensify. Companies are therefore currently tending to reduce their space requirements in favor of central offices with urban infrastructure. Despite low transaction figures, rents will therefore remain stable at a high level. Rents of over €30.00/m² will become the norm in central downtown locations.
The experts at Larbig & Mortag Immobilien expect office space turnover to be well below 200,000 m² by the end of 2024. This means that space turnover will remain significantly below the 10-year average (approx. 283,000 m² p.a.).
Larbig & Mortag Immobilien will determine the final figures for the first half of 2024 in calendar week 28 and then publish its comprehensive market report at https://www.larbig-mortag.de/marktberichte.html.
