The average rent rose by 3.90 percent to EUR 13.21/m². The prime rent (EUR 23.10/m²) and the highest rent (EUR 24.50/m²) have now risen significantly as expected due to the shortage of office space. The letting performance remained virtually unchanged at 283,000 m². In 2018, three lettings of over 10,000 m² were recorded. The vacancy rate continued to fall significantly to 3.20% (2017: 3.60%). The most popular districts in 2018 were the city center, Mülheim, and Ehrenfeld/Braunsfeld.

Furthermore, space of 1,000 m² or more in central locations is hardly available at short notice. This continues the trend of recent years. As a result, companies have to accept significantly higher rents, relocate to decentralized locations, or wait up to 2.5 years to move into a new building (depending on the length of the building permit process). Switching to flexible workplace concepts (e.g., coworking) only solves this problem temporarily.

Another positive development is the increase in space under construction, which will provide new office space in the future. New completions, on the other hand, with space still available, remain in short supply on the Cologne office rental market. The occupancy rate for projects under construction is 60.00 percent. However, the completion rate will continue to rise in the coming years due to various construction activities.

This development in 2018 reflects our experts' expectations, as the significant reduction in vacancies and the lack of project developments in recent years are now also reflected in the shortage of available rental space. In addition, the positive trend on the labor market means that companies are almost exclusively expanding their space. Therefore, our recommendation to both of our customer groups remains the same as in 2017: landlords should realize project potential—this strategy is already proving successful for some landlords. Tenants need to start looking for offices early to avoid finding themselves in a difficult situation.

City comparison

In a nationwide comparison of the top seven cities, Cologne is once again in the bottom third with approximately 283,000 square meters of office space brokered. Although the Cologne office market saw an increase in prime and average rents, it remains well below the figures for the top three cities in these segments (Frankfurt, Berlin, and Munich). At around 3.20 percent, the vacancy rate is in line with Hamburg at around 3.80 percent and Munich at around 2.30 percent. The vacancy rate is thus significantly lower than in the state capital and neighboring Düsseldorf, for example, where it stands at around 7.20 percent.

Strong second half

After a subdued rental performance in the first half of the year (105,000 m²), the Cologne office property market posted a good full-year result of 283,000 m² thanks to an above-average second half and a large number of deals exceeding 5,000 m². Letting performance is in line with the average for the last 10 years, falling just short of the previous year's figure. Once again, public-sector leases and co-working providers made a particularly strong contribution to the good result.

Three deals over 10,000 m

As in the previous year, three leases in excess of 10,000 m² were concluded in 2018. These were to Design Offices GmbH for approximately 13,000 sqm on the I/D Cologne development site in Cologne-Mülheim, to the North Rhine-Westphalia Regional Finance Office for approximately 10,600 sqm in the Altstadt-Nord district and another lease on the I/D Cologne site with approximately 10,500 m² to Siemens AG, a total area of approximately 34,100 m² was brokered through these three leases alone.

The number of other large leases in the range of over 5,000 m² is also positive at seven. These include, for example, leases to the City of Cologne for approximately 8,500 square meters (renovated existing building) and to the LVR Landschaftsverband Rheinland for approximately 7,900 square meters (new construction project).

Share of rentals in the 2,000 m² to 5,000 m² range declines

Compared to the previous year, the number of rentals in the 2,000 m² to 5,000 m² range has decreased again. While there were 14 rentals in the previous year, only 11 rentals contributed to the overall result this year. This decline is even more pronounced when compared to 2016, when 25 rentals were recorded in this segment.

This decline in rentals is due in particular to the low vacancy rate in this size category. In addition, the focus in new construction projects was initially on rentals in the 5,000 m² and above category in order to achieve a certain pre-letting rate. As a result, those looking for space in the 2,000 m² to 5,000 m² range were often left empty-handed. This trend was particularly noticeable in the city center.

Leases between 1,000 m² and 2,000 m² slightly down

Compared with the same period last year, the number of transactions between 1,000 m² and 2,000 m² declined slightly (2017: 29 leases, 42,000 m²). The rental performance in this segment also declined slightly, but still accounted for a good share of around 14.00 percent. 24 leases with a rental performance of around 39,000 m² were recorded in 2018. Notable leases include approximately 1,100 m² to the city of Cologne and approximately 1,300 m² to the Rhineland Regional Council (LVR).

Core market up to 1,000 square meters remains the mainstay

In the core market of up to 1,000 m², which is strong based on experience, 386 leases were registered in 2018 as a whole (2017: 380, 2016: 451). At approximately 129,000 m² and a share of 46.00 percent (2017: 112,000 m² and 39.00 percent), the letting performance in this segment was above the previous year's figure. The SME segment (small and medium-sized enterprises with up to 60 employees) thus once again forms the solid foundation of the overall market and repeatedly proves itself to be the most important and sustainable segment with transactions involving local companies as well as national and international corporations.

Vacancy rate at an all-time low!

At the end of 2018, the vacancy rate on the Cologne office property market was at a historic low of 3.20 percent (previous year: 3.90 percent). The vacancy curve is therefore still in free fall and is not being halted by current construction activity. Massive space absorption is continuing, particularly in the city center and the surrounding districts. Vacancies have fallen steadily since 2010 and will continue to decline.

The vacancy rate is expected to fall below the 3.00 percent mark in the first half of 2019 and is likely to be between 2.40 percent and 2.80 percent at the end of 2019.

Industry distribution TOP 3

As expected, public administration leases occupy the top spot in the industry breakdown. With 41,343 m² of office space leased and a share of 14.61 percent, the public sector has overtaken the real estate sector by almost 4 percentage points. The decisive factors here are the long-term large-scale leases in the second half of the year in the "Dominium" (Tunisstraße 19-21) with approximately 10,600 m² and in the "OneCologne" (Venloer Straße 151-153) with approximately 8,500 m² were decisive factors here. The high average rent of EUR 16.31/m² is particularly noteworthy. The real estate sector, which ranks second, confirms the continuing trend among coworking providers to continue leasing large, high-quality space in very good locations. Of the 30,776 m² of space let in this sector, the leases to Design Offices in the I/D Cologne properties in Mülheimer Schanzenstraße with 13,000 m² and in the Kaiserhöfe (Erftstraße 19) with approximately 5,600 m² . The third strongest sector for 2018 as a whole is
the consulting industry with 17,519 m² and a share of 6.19 percent.

The services sector, which has been a strong tenant in the past, was unable to assert itself this year and ranks at the bottom of the list with just under 9,000 m² of office space let. A redistribution of sectors is expected in 2019.

Location ranking

The distribution of properties on both sides of the Rhine recorded at the end of the first half of 2018 eased only slightly. The left bank of the Rhine lost "only" 9.00 percent and continues to hold a very remarkable share of 73.00 percent compared to the right bank of the Rhine with 27.00 percent. The previous year's figure (65.00 percent to 35.00 percent) could not be achieved. In the future, however, the right bank of the Rhine could gain ground due to the continuing high level of construction activity in Mülheim. Ossendorf also has a large number of projects in the pipeline that can be built at short notice once the pre-letting quota has been reached.

In the ranking of office market locations within Cologne, the city center is, as expected, well ahead in first place with 46.00 percent, followed by Mülheim (Schanzenstraße) and the Ehrenfeld/Braunsfeld submarket with a market share of 8.00 percent

Construction activity remains unchanged

At the end of 2018, approximately 229,000 square meters of office space was under construction, which will be completed in 2019 and 2020. Compared with the previous year (approximately 221,000 m²), construction activity rose by only around 8,000 m² despite the falling vacancy rate and consistently high demand.This is partly due to the limited selection of available land 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 currently 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 a comparable level.

Outlook for 2019

The trend of the past five years is expected to continue in 2019. A decline in vacancy rates is therefore also expected to continue, falling below the 3.00 percent mark in 2019. This, combined with continued stable demand, will lead to another significant increase in prime, maximum and average rents.

Due to the availability of high-quality office space in the city center, prime rents will be just under EUR 24.00/m², while maximum rents will reach a new high. Values of EUR 25.00 to 26.00 per square meter can be achieved.

As the space under construction increased by only 8,000 m² compared with the previous year, completions in 2019 will not lead to any increase in available space. In addition, it can be assumed that most of the new construction projects will be fully let by a maximum of two to three tenants, as demand in the 5,000 m² segment remains high. Business center operators and the public sector will play a key role here, as they continue to have a high demand for space exceeding 5,000 square meters.

Taking the above conditions into account, space take-up in 2019 is expected to return to the 10-year average of around 290,000 m². It can be assumed that the majority of space turnover will be generated by new construction projects in the districts of Mülheim, Ehrenfeld, and Ossendorf. Despite the declining supply, the city center will continue to account for a significant share of the overall market.

Larbig & Mortag continues to expect Brexit and other factors to have little impact on the local office property market in Cologne. Despite the city's ongoing economic stability, we anticipate that companies will be more cautious in the office market at the end of 2019.

 

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