Cologne, October 1, 2023 The Cologne office space market recorded one of its lowest results in the last 15 years in the third quarter of 2023, with only 115,000 square meters of office space turnover.
But it's not all bad: thanks to the decline in construction activity and changes in the world of work, rents are remaining stable at a high level and the increase in vacancies is low. Most Cologne residents see themselves as Rhinelanders: they are open, tolerant, enjoy community life, are outgoing, and love to talk. It's the Rhineland cheerfulness. The various advantages of good communication, including in the office, are reflected in the working atmosphere, productivity, and quality of work. "As a result, we see Cologne, the Rhineland, and the Cologne-Bonn metropolitan region as a perfect base for companies. The mentality, creativity, and economic strength of the region have produced many exciting and leading companies over the past 15 years. The real estate market has grown exponentially with these companies and is now one of the top seven locations in Germany. At Larbig & Mortag Immobilien, we are monitoring the current downturn very closely and see exciting opportunities for the market and companies in the region," says Uwe Mortag, managing partner and co-founder of Larbig & Mortag Immobilien, a partner of the NAI apollo Group.
Space turnover at the end of the third quarter of 2023 continued in the same vein as the first two weak quarterly results. The 70,000 m² achieved in the first half of 2023 will be supplemented by a further approx. 45,000 m² in the third quarter of 2023. The Cologne office property market thus closed the third quarter of 2023 with a result of approximately 115,000 m² of leased office space. The result for the Cologne office property market is thus around 55 percent below the previous year's result (third quarter of 2022: 257,000 m²) and approximately 50 percent below the 10-year average.
The vacancy rate remained unchanged year-on-year, closing the third quarter at around 4.1 percent. This means that the office property market in Cologne currently has around 343,000 m² of vacant office space available. The lack of new construction in recent years is keeping the vacancy rate at a moderate level below the important 5 percent fluctuation reserve.
All key rental figures remained stable over the course of the year. The prime rent is around €33.70/m². The highest rent was concluded at a record level of €36.00/m² in the same period. Similarly, the weighted average rent rose to just under €19.00/m² (third quarter of 2022: €16.80/m²).
Overall, approximately 140 rental agreements were concluded in the first nine months of 2023 (Q3 2022: approximately 145), which is similar to the number of agreements concluded in the same period last year. In the large-scale rental segment (10,000 m² and above), there were no deals concluded, while two to three larger deals (totaling approximately 23,000 m²) are still awaiting conclusion and will be included in the fourth quarter.
The transaction figures reflect the current mood in the Cologne economy. Decision-making processes are particularly protracted among supraregional companies. This is due to the diverse challenges of the current times: workplace requirements due to home offices and flexible working, employee retention and recruitment (war for talent), as well as sustainability and the mobility transition. These factors often entail a fundamental and comprehensive change management process to realign the organization with the issues of the current times. As a result, many companies are currently still in an exploratory phase. Or, in other words: wait-and-see.
On the other hand, the experience gained over the last three years in dealing with home office plays a major role and also influences decisions. The first companies are bringing their employees back to the office – partly because the current economic situation requires everyone to pull together. "We remain convinced that home office is not synonymous with office. We are seeing that young employees in particular are increasingly keen to return to the office in order to significantly improve social contact, communication, and knowledge transfer," says Mortag. This is a particular challenge in the current labor market, as not only recruiting new employees but also retaining existing ones is one of the most important tasks in a company.
In addition to these developments, the implementation of their own sustainability goals and ESG criteria is playing an increasingly important role for 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. The office product must adapt and be a pioneer in this regard. "Our customers on the project development side understood these trends years ago and are bringing modern and trend-setting projects to market. In Cologne, for example, the "kite Butzweilerhof," "The Ship," "I/D Cologne," and "Messe City" have been created. All of these are important projects with modern office space offerings," says Mortag.
These comprehensive topics are now influencing the local office space market in Cologne. As a result, leases are being signed for shorter terms and demand for space is significantly lower due to more desk sharing and working from home. NewWork is also influencing workplace design. However, the square footage saved is now benefiting the quality of the office, so that companies are more likely to rent modern office space in central locations.
The effects of these trends are now becoming particularly apparent in older office space, as it will become increasingly difficult to let this space in future by adjusting prices. This space must be converted and, if necessary, its use as office space must be reconsidered. However, suburban locations will not be able to score points in the foreseeable future, even with changes in space quality, and will continue to lose ground. Landlords are already reaching their limits here, as refurbishment is not always feasible. Problems such as ceiling heights, structural integrity, building depths, or simply the location no longer allow for good market positioning, resulting in a so-called "stranded asset"—a product that is no longer marketable. Owners should consult appropriate experts and explore alternative options to address these issues. In case of doubt, selling such a property is an option that should not be overlooked.
The supply market in Cologne is currently under the most pressure. The interest rate turnaround and the still high construction costs are weighing on sentiment. The first project developers have had to file for insolvency. Important: Insolvency is not the same as bankruptcy. While bankruptcy colloquially refers to the end of business activities, insolvency is a declaration of the current business status that makes measures and restructuring absolutely necessary. And this is currently necessary and appropriate for many project development companies. Ultimately, however, the majority of project developments are currently being put on hold and are no longer being offered on the market. Approximately 290,000 square meters of office space is currently under construction. This includes five projects over 20,000 square meters, such as Friedrich + Karl, Rossio, Sachs, LVR-Haus, Centraal, and the WDR film studio. The pre-letting rate for all projects is currently 54 percent.
Despite the current difficult market phase, the experts at Larbig & Mortag Immobilien are confident about the future. "The upcoming market consolidation will further strengthen the market. Cologne has already developed very well over the past 15 years and has become very professional. We started Larbig & Mortag Immobilien in the midst of the global financial crisis and already experienced what a crisis feels like back then. This gives us the opportunity today to position our company accordingly. And we also learned to "work hard," as the Immobilienzeitung newspaper put it, and are a very good partner for our customers. With over 30,000 square meters of office space brokered, we have achieved good results in Cologne so far," says Mortag.
The forecast for the end of the year: Developments in the first three quarters of 2023 and the current noticeable reluctance of prospective tenants in the local real estate market allow only a subdued forecast for the Cologne market as a whole. The experts at Larbig & Mortag Immobilien expect total annual turnover on the Cologne office market to be less than 200,000 m², thereby significantly revising their total forecast for 2023 from 270,000 m².
Read the entire office market report from Cologne for the third quarter of 2023 now and download the PDF file!
