The Cologne office rental market – first half of 2019

This development is particularly advantageous for providers of office real estate. As the supply of office space in Cologne has continued to decline sharply, office rents are now rising at the same rate. There were significant increases in particular in prime rents (EUR 25.60/m², +21.90 percent) and maximum rents (EUR 29.00/m², +28.90 percent). However, the average rent also rose by 11.70 percent to EUR 14.18/m².

The rent increases can also be explained by the continuing rise in construction costs. This development is once again a warning sign for all those looking for office space, as the market is not expected to change significantly in the next two to three years. Those looking for offices with a usable floor space of 1,000 m² or more should start looking more than 16 months in advance. Larbig & Mortag recommends that prospective tenants looking for space of 5,000 square meters or more allow 24 months for their search.

At 134,000 m², rental performance in the first half of 2019 was significantly above the previous year's figure of 105,000 m². Larbig & Mortag was able to secure three of the five top leases over 5,000 m² during this period. As a special deal, we were able to broker approximately 16,000 m² to Sparkasse KölnBonn in the new kite Butzweilerhof development project. Larbig & Mortag has therefore made a very successful start to 2019.

The vacancy rate continues to fall significantly to 2.51 percent (previous year: 3.60 percent). The increased potential of space under construction, which will provide new office space in the future, continues to be positive. New completions with space still available, on the other hand, remain in short supply on the Cologne office rental market. However, the completion rate will continue to rise in the coming years due to various construction projects.

This trend will continue until the end of 2019. Our recommendation to both our client groups (suppliers and seekers) therefore remains the same: landlords should realize project potential and bring it to market in a timely manner. Speculative construction of office buildings would be desirable. Tenants need to start looking for office space early to avoid finding themselves in a tight spot.

In a nationwide comparison of the top seven cities, Cologne remains in the lower third with approximately 134,000 square meters of office space brokered in the first half of the year. Prime and average rents on the Cologne office market have risen sharply, but the comparable markets are also on an upward trend. The vacancy rate, currently at around 2.51 percent, is steadily approaching the figures for Munich (2.10 percent) and Stuttgart (2.40 percent).

The Cologne office property market achieved office space take-up of approximately 134,000 m² in the first half of 2019, significantly exceeding the first half of 2018 (105,000 m²). Despite the continuing decline in vacancy rates and consistently high demand, a good result was achieved. Pre-letting rates and large deals of 5,000 m² or more in new construction projects contributed significantly to the positive result.

The number of transactions in this size category increased significantly compared with the first half of 2018, when only three transactions totaling approximately 16,600 square meters were completed. A total of five deals in the size range above 5,000 square meters were concluded in the first half of the year. The lease to Sparkasse KölnBonn alone, with approximately 16,350 square meters, matched the previous year's result. The four additional leases in the first half of 2019 bring the total leasing performance to just under 41,000 m².

In the core market of up to 1,000 square meters, which is traditionally strong, 161 of the total 188 leases were registered in the first half of 2019 (first half of 2018: 194 of 209). At approximately 53,000 m² and a share of 37.70 percent (first half of 2018: 62,500 m² and 60.00 percent), the letting performance in this segment is well below the previous year's figure, but also shows how large the proportion of large-scale lettings in the first half of 2019.

However, the SME sector (small and medium-sized enterprises with up to 60 employees) once again formed a solid basis for the overall market and repeatedly proved to be one of the most important and sustainable segments, with transactions involving local companies as well as national and international corporations.

Compared to the same period last year, the number of transactions between 1,000 m² and 2,000 m² increased (first half of 2018: 9 leases, 19,000 m²). The letting performance in this segment is positive and accounts for a total share of approximately 17.00 percent. Fifteen lettings with a letting performance of approximately 22,000 m² were recorded in the first half of 2019.

In this half-year, rentals in the 2,000 m² to 5,000 m² segment continued to decline. While 11 rentals in this segment contributed to the overall result in the first half of 2018, there were only seven rentals in the first half of 2019.

Due in particular to the high number of rentals in the segment above 5,000 m², there is often no space available for those looking for properties in the 2,000 m² to 5,000 m² segment. This trend had already become apparent in new construction projects in the first half of 2018.

As already forecast in the office market report for the full year 2018, the vacancy rate fell significantly again and stood at 2.51 percent at the end of the first half of 2019. Compared with the first half of 2018 (3.60 percent), the vacancy rate has thus fallen by a further 1.10 percentage points.

The vacancy rate is expected to continue to decline in the second half of 2019 and settle at just above the 2.00 percent mark by the end of the year.

The top three sectors, real estate, banking/finance, and information/communication, account for approximately 45.00 percent of total rental performance with approximately 60,000 m² of office space leased. Leases in the real estate industry (especially co-working providers) and the banking/finance sector are neck and neck at the top of the industry distribution with approximately 20,700 m² of office space brokered each. This corresponds to a market share of approximately 15.50 percent each. The average rents achieved of EUR 17.38/m² and EUR 18.23/m² and the maximum rents of EUR 25.00/m² and EUR 26.00/m² are also noteworthy. The trend among coworking providers to continue leasing large, high-quality spaces in very good locations continued in the first half of 2019. The two leases to WeWork in the Haus am Friesenplatz property with approximately 5,200 m² and in the Wallarkaden on Rudolfplatz with approximately 7,000 m² contributed significantly to the approximately 20,774 m² of space leased in this sector. The third strongest sector in the first half of 2019 was the information and communications sector with a leasing performance of approximately 19,209 m² and a market share of 14.34 percent.

The services and consulting sectors, which have generally been strong in the past, follow in the rankings.

In terms of weighting of the Rhine sides, the locations on the left bank of the Rhine (80.50 percent) maintained their lead over those on the right bank (19.50 percent) compared with the first half of 2018, when the left bank accounted for 82.00 percent and the right bank for 18.00 percent. Due to the continuing high level of construction activity in the Mülheim area, an increase on the right bank of the Rhine is to be expected. However, this could be offset by future completions of new construction projects in the Ossendorf area.

As of mid-2019, approximately 202,000 square meters of office space is under construction, which will be completed between 2019 and 2020. Compared with the same period last year (approximately 206,000 m²), construction activity remains at the same level despite falling vacancy rates and consistently high demand. This continues to be attributable to the sometimes limited selection of available sites and the resulting limited development opportunities. Increased construction costs also necessitate certain pre-letting rates, which often delay the start of construction.

The largest construction volumes are located in Deutz and Mülheim on the right bank of the Rhine and in the Ehrenfeld and Ossendorf submarkets on the left bank. Due to various project developments, particularly in the Ossendorf area, it can be assumed that construction activity will remain at the same level until the end of the year. The low completion rate to date will be revised significantly upward by the end of the year as various construction projects are completed.

In the second half of 2019, rental performance is expected to remain at the level of the first half of the year, allowing a good result for the year as a whole to be forecast. Based on the 10-year average, total rental performance of approximately 290,000 square meters of office space is expected to be achieved this year.

As forecast, the vacancy rate was already well below 3.00 percent at the end of the first half of the year. This trend will not change in view of the letting performance and the upcoming completions of new construction projects. A vacancy rate of just over 2.00 percent can therefore be expected at the end of the year.

The highest rent was already recorded in the first half of the year and it is not expected that the EUR 29.00/sqm will be exceeded in the second half of the year. The prime rent also rose sharply in the first half of the year and is therefore expected to remain at EUR 25.60 per square meter until the end of the year. The average price per square meter for office space will continue to rise until the end of the year. An average rent of approximately EUR 14.50/sqm is forecast.

In addition, further large deals in the range of over 5,000 m² are expected, which will contribute significantly to achieving the forecast total rental result. Demand remains high in the segment up to 2,000 square meters, so the number of leases in the first half of the year will double by the end of the year.

The properties completed in the first two quarters are far from sufficient to improve the current demand and supply situation. Completions will increase significantly in the second half of the year, but this will not ease the supply situation due to the high pre-letting rate for new buildings.

Due to the continuing stable economic situation, no negative effects on the Cologne office market are expected.

 

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