"Particularly in the 1,000 m²+ segment, there are hardly any short-term vacancies in central locations. Companies must therefore either accept higher rents, relocate to decentralized locations, or accept a lead time of up to 2.5 years for moving into a new building (depending on the duration of the building permit process). Switching to flexible workplace concepts (e.g., coworking) only solves this problem temporarily. Newly completed buildings with vacant office space remain in short supply on the Cologne office rental market. The occupancy rate for projects under construction is 60 percent. In 2018, less than 60,000 square meters of new office space will be completed, which is another historically low figure.

This development reflects our experts' expectations, as the significant reduction in vacancies and the lack of project developments in recent years are now also manifesting themselves in a shortage of available rental space. In addition, the positive trend on the labor market means that companies are almost exclusively expanding their space. Our recommendation to both of our customer groups is therefore as follows: Landlords should realize projects even without a pre-letting quota – this strategy is already proving successful for some landlords. Tenants need to start looking for office space early to avoid finding themselves in a difficult situation."

Brief overview of the first half of 2018

City comparison

In a nationwide comparison, the Cologne office rental market performed poorly in the first half of 2018, with 105,000 m² of office space let, the lowest figure in the last five years. Neither the letting performance nor the average rents, and in particular the prime rents, can compete with the top seven cities. The vacancy rate is continuing to converge with the market conditions in Munich, Stuttgart, and Berlin.

 

Stagnating office property market!

The Cologne office property market ended the first half of 2018 with a 51 percent decline in results (first half of 2017: 158,500 m²) compared with the same period last year. The significant decline in vacancy rates, which had already been foreseeable in previous years, continues to be met with high demand that can no longer be met. Few large leases exceeding 5,000 m² characterized the historically low letting performance in the first half of 2018.

Three deals over 5,000 m²

In the first half of 2018, only three leases over 5,000 m² were recorded. This is one of the factors contributing to the low overall letting performance. In total, approximately 16,600 m² were let in this size segment. This corresponds to a letting share of around 16 percent. The largest deal was concluded at the beginning of the year with a new building for the company Grüner Punkt covering 6,000 m² in the AirportBusinessPark on the right bank of the Rhine in the Gremberghoven district. This was closely followed by the signing of a new lease agreement with Design Offices GmbH for 5,600 m² in the new "Kaiserhof" construction project opposite the Mediapark and the start of the new "The Ship" construction project in Cologne Ehrenfeld, which will be occupied by Fond Of as the main tenant with approximately 5,000 m² of space.

Three leases between 2,000^m² and 5,000 m²

In the segment between 2,000 m² and 5,000 m², only three leases with a total volume of 6,448 m² were recorded. This corresponds to a total share of only 6.1 percent. This segment, which had been very strong in previous years, initially lost ground in the first half of 2018. Many office seekers in this segment were unable to find suitable office space on the office property market and are still searching or have had to consolidate and optimize their existing space for the time being. The three deals were concluded by BG ETEM with 2,300 square meters in Bayenthal, Align Technology GmbH with 2,148 square meters in Marsdorf, and Ströer SE with 2,000 square meters, also in Bayenthal.

Hardly any deals between 1,000 m² and 2,000 m²

Compared with the previous year's results (first half of 2017: 25 leases, first half of 2016: 22 leases), the nine transactions recorded in the first half of 2018 are historically low. With a total leasing performance of approximately 15,500 m², , they still contributed 14.68 percent to the half-year result. Notable deals here include the leases signed by Bank für Sozialwirtschaft for just under 2,000 m² in the Rheinauhafen and IBM Deutschland GmbH for 1,900 m² in the city center.

Strong core market up to 1,000 m²

The well-known strong core market up to 1,000 m² contributed an astonishing 53.78 percent to the overall result in the first half of 2018. Even more impressive is the number of individual leases counted in this sub-market. With 194 out of 209 leases, the importance and influence of small and medium-sized enterprises (SMEs with up to approx. 60 employees) is once again evident. However, well-known companies such as Deutsche Post, Lanxess AG, and Birkenstock GmbH & Co. KG also contributed to this segment by signing lease agreements.

Vacancy rate continues to fall!

Despite subdued letting performance in the first half of the year, which was well below the 10-year average, the vacancy rate continues to fall steadily and currently stands at 3.6 percent.

Vacancy rates have fallen steadily since 2010 and will continue to decline in the second half of 2018 and 2019. The reduction in space continues to focus on inner-city locations and good locations close to the city center, such as the well-connected commercial areas of Technologiepark in Ehrenfeld/Braunsfeld, Butzweilerhof in Ossendorf, and AirportBusinessPark in Gremberghoven.

The office buildings currently under construction will also not lead to a sustained increase in the amount of space available. The number of new office properties planned for the first half of 2018 is a positive sign, which will lead to a positive trend in the vacancy rate and higher letting performance in the next three to five years. In particular, the courage of project developers who are now also placing speculative new office buildings on the Cologne market will be rewarded in the future.

Industry distribution TOP 3

The service sector in particular, in first place with 17.67 percent and 18,553 m² of leased space, once again demonstrates the importance of this industry for Cologne. In 2017, around 84 percent of Cologne's workforce was employed in the service sector. The retail sector ranks second with 10,411 m² of leased office space and a share of 9.91 percent. Among other things, the large-scale lease of approximately 5,000 m² by Fond OF in the new building "The Ship" in the trendy Ehrenfeld district. The real estate sector also performed unexpectedly strongly with 8.55 percent and 8,979 m², but is benefiting primarily from the coworking trend and the leasing of approximately 5,600 m² by the provider Design Offices in the new Kaiserhof project. The sectors that have traditionally occupied the top spots, public administration, consulting, and media/advertising, are ranked behind these top three and are set to grow further at the end of the year, changing the sector distribution.

Locations: Location ranking

Unattractive Rhine side or lack of space? Compared to the same period last year, demand for space has shifted significantly to the left bank of the Rhine, where the city center continues to function very well. This increased for the third time in a row, accounting for 82 percent (2017: 65 percent, 2016: 54 percent). The so-called Schäl Sick (right bank of Cologne) currently lacks available large-scale office space. In this statistic, too, a more balanced result than in previous years can be expected at the end of 2018 and in the coming years, as construction activity is increasing steadily in Mülheim, for example, while the range of properties on offer on the left bank of the Rhine remains better in terms of breadth.

In the ranking of office market locations within Cologne, the city center is far ahead with 42 percent, followed by Ehrenfeld/Braunsfeld with 16 percent and the AirportBusinessPark in Gremberghoven on the right bank of the Rhine with 10 percent market share. In the Deutz and Mülheim districts, only 4,425 m² of space was let in the first half of the year (first half of 2017: two large leases in Deutz totaling 37,000 m²). This corresponds to a market share of only 4.4 percent.

Construction activity insufficient!

In Cologne, approximately 206,000 square meters of office space is under construction as of the first half of 2018, which will be completed in the second half of 2018 and 2019. The space under construction remains above the average for the last five years (approx. 147,000 m²). However, due to a high pre-letting rate, the buildings currently being completed will once again be unable to offset the excess demand.

The largest construction volumes are currently in the city center, Deutz, and Kalk. It can be assumed that further selected projects will be added in the second half of the year, which will be built on a speculative basis without the otherwise necessary pre-letting rate.

Outlook for 2018

The office rental experts at Larbig & Mortag Immobilien expect the year-end result to be around 288,000 m² in line with the 10-year trend. However, the number of large and medium-sized properties currently on the market between 2,000 m² and 5,000 m² and over 10,000 m² also allow for a higher forecast for rental performance. The valuation of a transaction will depend largely on whether construction for a project development will start in 2018. It can be assumed that various project leases will be signed in 2018, but that the office market will not be boosted until construction starts in 2019.

Due to the vacancy trend and the lack of speculative new construction, rents will continue to rise over the course of the year. The prime rent will be just under EUR 22.00/sqm and the average rent will be EUR 13.00/sqm. As a result of this development, companies with leases expiring between 2008 and 2013 will have to accept significant rent increases or relocate to decentralized city locations.

Demand will focus primarily on the office market zones in the city center, Ehrenfeld/Braunsfeld, Mülheim, and the Butzweilerhof and Airport Business Park industrial parks.

The office property market will continue to experience a landlord-friendly trend, which is set to continue over the next two to three years. Economic changes could influence this trend in either direction, depending on whether the economy takes a turn for the better or worse. Project development will continue to be driven by strong demand and, in turn, limited by rising construction costs in the required rental prices.

Larbig & Mortag expects Brexit & Co. to have little impact on the local office real estate market in comparison to the rest of Germany. Cologne's stable economy and broad sector distribution have provided a constant real estate market base for years.

 

Download the Cologne office market report now as a PDF: Cologne office market report 2018 – 1st half-year (2.4 MB)