The Bonn office rental market – first half of 2019

"We are pleased to present the current figures for the first half of 2019 for Bonn. We entered the next 12 months with great momentum and dynamism after a record year in 2018. The start of 2019 was significantly more subdued. Admittedly, 2018 was marked by the one-off effect of the large-scale lease of around 40,000 m² of office space by Postbank. We have often discussed the critical development of the vacancy rate in our previous market surveys – the Bonn office market is now clearly feeling the effects of this development.

The first half of 2019 should not be viewed negatively, but we believe that the Bonn office market has significantly more potential. Companies looking for space are becoming more modern and following the latest trends in new working environments – keyword: "New Work." Today's modern working environments require a high degree of flexibility, starting with the company's own employees. In order to attract people to a new working environment, companies must meet today's technical requirements, which include modern equipment and an attractive appearance. And this is precisely where the search for new office space in Bonn often ends. Even after extensive renovation, many of the vacant spaces cannot meet these requirements. Companies are inspired by the start-up culture of the Berlin scene or by impressions of the office environments at Facebook, Google, and other companies.

Bonn also has a very high density of start-ups. These are emerging, among other things, from the support provided by Digital Hub Bonn, a central point of contact for digital start-ups. In the past, many of these companies have already grown out of their infancy and into their own premises and are expanding rapidly. It is precisely these companies that are oriented toward modern working environments and can be persuaded to remain in Bonn by the creation of such office space.

I look forward to meeting you again, and our entire team is available to answer any questions you may have about the Bonn office market. "

The federal city of Bonn continues to perform well in a nationwide comparison of cities in the first half of 2019. Compared to the top seven cities, Beethoven's hometown has significantly less office space. In terms of prime rents, the Bonn office market is on a par with the neighboring cathedral city of Cologne and the city of Stuttgart, and significantly above the office markets in the Ruhr area. In terms of average rents, the market is comparable to the cities of Essen, Mannheim, and Heidelberg. In terms of vacancy rates, the second political center of the Federal Republic ranks among the tightest markets in Germany.

Following a record year in 2018, market development in the first half of 2019 can be described as subdued. Compared with the first half of 2018 (88,300 m² Of rental performance), rental performance in the first half of 2019 amounted to only around 35,600 m² of office space. This is the lowest half-year result in the past five years. The previous year was significantly influenced by the large lease to Postbank (40,000 m²). No lease agreement for a similar property was concluded in the first half of 2019. Due to the very low availability of suitable office space in the top submarkets, only a small number of lease agreements for more than 1,000 square meters were evaluated. Vacant space was quickly absorbed by the market. In addition to new space requests, existing tenants are expanding very rapidly into vacant rental space.

The office market in the federal city of Bonn experienced a large number of inquiries in the first six months, with requests for space for 50 to 200 employees. With vacant, modern space in the sought-after submarkets, leasing quickly turned into a race with other interested parties and existing tenants. Rental space of this size in office buildings from the 1960s and 1970s is frequently offered on the office market, but is finding significantly fewer takers these days. The requirements of tenants for new and modern working environments play a key role in this. Modern office space in project developments is only available with around two years' notice, unless it has already been let before completion.

Prospective customers requiring modern office space larger than 1,000 m² can hardly be served at all. The picture is the same for spaces between 500 m² and 1,000 m². Only four leases were signed here, corresponding to a market share of around 8.40 percent (first half of 2018: seven leases). Companies often postpone relocations due to a lack of alternatives. The relocation budget is often used to upgrade existing properties. However, there are limits to this, and certain characteristics of a property, such as low ceiling heights, cannot be changed. In times of the "war for talent," the creation of modern workspaces is an important part of companies' arguments for retaining and attracting new employees.

In recent years, companies requiring space of 2,000 square meters or more and with sufficient lead time have been able to secure rental space in new developments through lease agreements. Since smaller companies usually start their search at shorter notice, project developments are not an option for them. However, the Bonn office market currently offers only a few new spaces available at short notice, and these can therefore rarely be considered for requests up to 1,000 m². . In addition, rents for vacant space are significantly above market levels and are not acceptable to those looking for space. In 2014 and 2015, there were some new developments that offered smaller units for rent within four months. This meant that even companies requiring around 500 m² of space were able to rent new office space at a reasonable rent. Developments in the sought-after submarkets
of this kind would be well received by the market.

With a total of five leases in the range between 500 m² and 2,000 m², rental performance in this segment amounted to approximately 5,400 m² of office space for the first half of 2019. We see significantly more potential in the search requests between 300^m² and 2,000^m². This is due to the sustained demand situation. Modern, adequate, and in some cases unusual office space—for example, for young, dynamic companies—is in short supply in Bonn. The consistently positive letting performance and low completion rate in recent years are not helping to ease the situation. This situation can be seen in the total number of rental agreements concluded. In all size segments, fewer rental agreements were concluded compared with the same assessment period in previous years. In the first half of 2019, a total of 49 rental agreements were concluded. In the first half of 2018, a total of 59 leases were signed at the same valuation date, and the number of deals for the whole of 2018 was 100 rental agreements.

Due to the aforementioned situation, only seven rental agreements were concluded for properties larger than 1,000^m². At the same point in time, 12 leases had been concluded in the first half of 2018, and a total of 18 leases were concluded for the year as a whole. In the first half of 2019, only one major lease for 5,000 m² was reported. Due to the current vacancies of properties with a total size of over 10,000 m², isolated leases in this size range are foreseeable by the end of 2019. These properties do not offer any alternatives for new company headquarters for interested parties requiring space of 1,000 m² or more. The respective owners are seeking total leases and are already in advanced negotiations.

The vacancy rate in Bonn's office market rose slightly compared with the previous year. Due to the availability of larger properties, the vacancy rate in the Bonn office market stood at 2.40 percent in the first half of 2019 (2018: 1.60 percent). This figure corresponds to a vacancy of around 95,400 square meters of office space (2018: 62,000 square meters). The big caveat here is the forecast temporary increase in the vacancy rate. The vacancy rate will fall below the 2.00 percent mark again at the end of 2019. This is due to the expected letting of properties with large, contiguous vacancies in the second half of 2019. The letting of older existing buildings remains challenging. These properties can only be let after extensive adaptation/conversion work. Due to the drastic rise in construction prices, this results in correspondingly high rents. However, prospective tenants are often unwilling to agree to rents significantly above the average rent for existing buildings in their lease agreements.

The Bonn office market currently has only around 15 properties available that offer rental space of 1,000 square meters or more. However, this also includes properties that offer a larger amount of vacant space, but which is spread over several unconnected floors. A handful of these properties are located in submarkets with low demand.

There will be no sustained easing of the vacancy rate in the coming years. In our estimation, the office market needs a vacancy rate of at least 5.00 percent. This is the figure that companies looking for space need – regardless of size – in order to conduct a sustainable and targeted search for a new corporate headquarters.

In the first half of 2019, the service sector reported a turnover of approximately 18,400 m² of brokered office space. This corresponds to a market share of around 51.80 percent. In 2018, the service sector had a market share of 6.50 percent. Public administration, which had been clearly dominant in recent years, was more cautious in the first half of 2019. With a rental performance of around 8,600 m², public sector users achieved a market share of around 24.20 percent (2018: 31.50 percent). The science/education sector followed in third place in the first half of 2019. In total, users in this sector secured around 2,500 m² of office space (6.90 percent) through rental agreements. In 2018 as a whole, this sector still had a market share of 1.90 percent.

As in previous years, Bonn's federal district was the most sought-after submarket. A total of approximately 20,100 m² of office space was brokered in this location (2018: 89,800 m²). This corresponds to a market share of around 56.50 percent. The largest lease agreement in the federal district submarket was concluded by Design Offices for around 8,000 square meters (Neuer Kanzlerplatz).

In second place is the traditionally strong submarket of the city center, consisting of the Zentrum, Nordstadt, Südstadt, and Weststadt districts. A total take-up of around 11,300 m² resulted in a market share of around 31.80 percent in the first half of 2019 (2018: 16.81 percent). The most popular submarket within the city center was once again the Nordstadt district of the federal city of Bonn with around 21.20 percent. The Bad-Godesberg submarket rounds out the top three. Around 1,900 m² of office space was brokered here in the first half of 2019 (5.40 percent/2018: 5.37 percent).

At the end of the first half of 2019, approximately 119,000 square meters of office space were under construction. The new construction projects can be found in many different segments of the Bonn office market. The largest project is undoubtedly the "Neuer Kanzlerplatz" district development with a total area of around 66,000 m² – thanks to the high pre-letting rate, 18,000 m² of office space is currently still available on the market. Office space still available on the market. Furthermore, the first construction phase of the "Rhein-Palais-Bonner-Bogen" project, with around 14,300 m² Of office space is currently under construction – no leases have been announced for this project yet. The third construction project is the property at Godesberger Allee 138, which comprises around 10,700 m² Of office space. This property has been fully let since December 2018. In the north of Beethovenstadt, a new construction project with around 6,100 m² was launched at the beginning of 2019. Around 50.00 percent of the space has already been pre-let.

After a record year in 2018, the Bonn office market will close 2019 with figures comparable to those of 2016 and 2017. Taking into account current market trends, we at Larbig & Mortag Immobilien expect rental performance of around 90,000^m2 for 2019 as a whole. Major deals exceeding 5,000 m² are necessary for the forecast year-end result – two to three deals of this size can currently be expected.

The expected large deals will cause the average rent to rise again, reaching around EUR 12.50/m² by the end of 2019. A larger increase in rents is not expected, as there is still a large number of existing properties available for rent at below EUR 12.50 per square meter. The aforementioned transactions will not affect prime and maximum rents, which will end 2019 at a similar level to the first half of this year.

The leasing activity for the property "An der Kuppe 2" in Bonn Beuel will be exciting to watch in the second half of the year. Following the departure of the current tenant in summer 2019, the approximately 9,000 m² of office space will be extensively revitalized and put back on the market. In addition, numerous project developments are still in the pipeline. A few other projects will be launched in the second half of 2019. However, these new spaces will not ease the situation, as they will not be completed until 2020 to 2021. We expect a high pre-letting rate for these projects as well until the new construction projects are completed.

looking beyond 2019, we eagerly await further developments in the framework planning for Bonn's federal district. This is because the availability of development sites in this submarket is extremely low and the federal district currently has the lowest vacancy rate of the top submarkets. Office high-rises could be a solution. Where these high-rise buildings will be constructed will determine the densification and creation of new office space in Bonn's most sought-after location.

Download the Bonn office market report now as a PDF: Bonn office market report 1st half of 2019 (2.3 MB)