Deutsche Pfandbriefbank : 23.02.2023 Office space and office investment markets continue to drift apart

• pbbIX index slightly down at year-end, but remains above the zero line, at 0.38 points

The pbbIX real estate index declined for the first time after five quarters of growth, but continues to hover slightly above the zero line. Reasons for the decline were the overall subdued macroeconomic development - but above all, the very weak investment market. Even though pessimism has eased somewhat, the macroeconomic environment is set to remain challenging. Next to a tighter monetary stance, this will lead to caution amongst tenants and investors alike, placing pressure on both space and investment markets.

The markets for office space and office investments are diverging. While the market for office space is being driven by relatively high demand and rising rents for first-class properties, investment market players are decidedly reticent against a backdrop of higher capital market interest rates. The development of initial yields, which had been trending upwards since the second quarter of 2022 and gained momentum in the last quarter of the year, demonstrates that price expectations of buyers and sellers still do not match - but they have started moving, on the back of weak investment demand.

The market for office space showed good demand in the past year, driven by a stable labour market and solid pre-letting rates. A total of 3.5 million square metres was taken up in the big 7 markets over the year, of which 20 per cent was seen in the fourth quarter. Only in the boom years of 2016 and 2019 were higher annual takeups achieved. Demand in the past year focused increasingly on quality, especially on office space in central locations with good public transport connections and low energy consumption. In line with this, rents for first-class properties in prime locations trended upwards, finishing the fourth quarter of 2022 around 10 per cent higher than in the previous year. However, it is very likely that the office space market will deteriorate in the near term given high cost pressures and flexible working models.

Meanwhile the investment market in 2022 produced the lowest numbers since 2014. In absence of the usual year-end rally, investments in the past year amounted to only €16.5 billion, of which around two thirds came from domestic investors. This decline in demand is closely linked to the significant interest rates hikes and high prices being sought for office real estate.

The individual markets continue to present a very mixed picture. While the Berlin, Hamburg and Dusseldorf sub-markets performed well, Cologne and Munich remained below the zero line. Frankfurt continued to trade above the zero line, but saw high vacancy rates as well as a sharp 50% decline in investments during 2022.

The complete report for the fourth quarter 2022 is available at pbbIX.com

Note to editors:

The pbbIX (pbbix.com) index family comprises the composite index, as well as seven individual indices tracking the key German office property markets of Berlin, Cologne, Dusseldorf, Frankfurt/Main, Hamburg, Munich and Stuttgart, including their respective catchment areas. The pbbIX index describes the economic performance of office markets, with the zero line corresponding to the long-term trend. If the index is quoted below the zero line, the office property market is in a worse state than its long-term average. A value below -1.0 points indicates a crisis.

The indices, which pbb provides in cooperation with vdp Research, offer investors and lenders comprehensive information on the current performance of office properties in Germany.