We are currently experiencing a phase of weak economic growth, rising inflation and increasing pressure on key interest rates. The Cologne office market traditionally reflects conditions in the economy as a whole, with rents rising in line with inflation or, very rarely, falling in the opposite direction.
The Cologne office real estate market has always been a fundamentally sound business location with a strong macroeconomy and a regulatory environment, international business relations, access to talent, infrastructure, and a good reputation.
This makes the office market increasingly robust, but will the economy still be delivering these values in 2023?
The uncertainty caused by the COVID-19 pandemic, the war in Ukraine, and the cost-of-living crisis has also affected the Cologne office real estate market in recent months. The Covid-19 pandemic and the war in Ukraine brought about the most severe recession in decades, so one would have expected a corresponding decline in prime rents. However, this was not the case. On the contrary, the prime rent (€29/m²) and the maximum rent (€39/m²) reached record levels. Why is this?
We see a clear differentiation between the demand for the best office space and the rest, which is reflected in what both investors and users are willing to pay high prices to secure their preferred options and offer a corresponding working environment/NewWork in the "war for talent." Sustainability, comfort, and communication are now just as important to most decision-makers as office amenities, and we expect this to remain the case in 2023.
So what has changed and how will this affect rent prices in the future? There are three factors influencing the current market that will help maintain first-class rents.
The flight to quality
Office demand is increasingly focused on prime space, as it meets ESG sustainability goals, attracts and retains the best talent, and occupies real estate that fits a company's brand. This has led to a split in the office market, with prime rents exceeding those for secondary and tertiary stock. Compared to the supply situation after the global financial crisis, there has been an imbalance between supply and demand in recent years, with tenants competing for many high-quality properties. This has been exacerbated by the lack of availability of debt capital for speculative office developments since the financial crisis and will continue to be a problem in the foreseeable future, especially in view of rising borrowing costs, high construction costs, falling yields, and declining profitability. We expect pre-letting activity to increase in 2023 as rising construction costs weigh on speculative development and users look to the pipeline to ensure they successfully secure their preferred options.
changes in lease structure and occupancy strategy
Before the global financial crisis, it was common for users to lease excess office space in anticipation of future staff growth. This is one of the main reasons for the dramatic decline in prime rents in the early 2000s, after significant amounts of vacant, high-quality space were returned to the market following the bursting of the dot.com bubble. The widespread introduction of flexible space on the market and the introduction of options for additional space in traditional leases has reduced the risk of large-scale tenant vacancies during downturns and helped maintain stable prime rentsthis will be taken into account much more by users in the coming years, who will demand corresponding flexibility in lease agreements.
NewWork/ Flexible working
In today's working world, flexible working conditions and the concept of New Work are the focus of many companies. These changes are primarily due to the new wishes and needs of employees, which have changed significantly over time. In the past, work was primarily about securing a livelihood. But now the role of work in people's lives has changed. Many employees strive for a balance between work and leisure, for more self-fulfillment and personal growth. They no longer want to be stuck in a rat race, but want to work flexibly and be able to organize their working hours themselves. Companies are increasingly responding to these wishes by offering their employees flexible working hours, home office options, and other opportunities for self-determination. Many companies have recognized that satisfied employees are more productive and motivated, and that flexible working conditions can help attract and retain talent.
Another important aspect of New Work is the opportunity for further training and personal development. Many employees are looking for jobs that offer them the opportunity to learn new skills and develop themselves further. Companies that offer their employees this opportunity often have a competitive advantage because they can attract and retain talented employees.
Overall, it can be said that the world of work and the wishes of employees have changed significantly over time. Companies that recognize these changes and respond to them will be successful in the future and will be able to attract and retain talented employees. Flexible working conditions and new work concepts are an important step in the right direction.
