Munich Market Report
OFFICE LEASING AND INVESTMENT Q1 - Q3 2016
Demand on office leasing and investment market remains high Alexander de Oliveira Kaeding | Associate Director | Research Tobias Seiler | Associate Director | Research Karolina Belza | Junior Consultant | Research
Office Leasing
Take-up of Space (in 1,000 sqm) incl. Owner-occupiers and Forecast
The Munich office leasing market continued to experience high demand, posting 552,400 sqm in take-up during the first three quarters of 2016. The vacancy rate experienced a further drop to 3.1% by the end of September. This combination caused rents to increase, with average rent up 4% to €16.20 per sqm. The fact that businesses are doing well combined with the considerable number of companies looking for space could make 2016 the strongest year for take-up since 2011. Take-up on the rise Take-up on the Munich office market continues its growth trajectory, exceeding previous year results by 9% at 552,400 sqm. Excluding owner-occupiers, which accounted for 38,300 sqm, leasing activity brought in 514,100 sqm, up 11% yoy. Take-up was heaviest in the space segment of between 2,001 sqm and 5,000 sqm at 128,400 sqm, or 25% of total take-up. Activity among large-scale tenants leasing more than 5,000 sqm was lively as well with 13 leases signed, including two signed by owner-occupiers, accounting for 23% of total take-up. The largest-scale lease of Q3 2016 was signed for space in Unterschleißheim to the north of Munich where BMW subsidiary Alphabet took up 11,400 sqm. In total, Munich’s outskirts posted just shy of 22% of total take-up. In Q2 the Institute for Federal Real Estate (BImA) signed the largest-scale lease of the year for roughly 15,200 sqm in the district of Sendling. Demand for office space in central locations with good access remained high. Around 40% of leases were signed for space within the Mittlerer Ring central ring road (219,400 sqm).
Commercial Transaction Volume (in billions of €) and Forecast
Munich’s three main industries, the manufacturing industry, the IT sector and consulting firms, accounted for roughly 47% of total take-up. The remaining 53% can be attributed to other industries, reflecting Munich’s varied economic structure.
Vacancy Rate of Office Space (in %)
Drop in vacancy continues The trend toward a decrease in available office space persists with the vacancy rate dropping another 0.3 basis points from previous quarter results to land at 3.1% at the end of September. The amount of office space available for immediate tenancy has decreased by around 146,700 sqm yoy. The vacancy rate even fell to 2.2% within city limits while 6.3% of office space is available for immediate tenancy in the surrounding area. High-end space is especially scarce. Easily accessible, centrally located office locations such as Arnulfpark and Hirschgarten are basically fully let. And the future promises little improvement. Of the 185,600 sqm being added to stock space and completed or due for completion in 2016, 86% has already been taken up by tenants or owner-occupiers. A total of 172,300 sqm is currently in the pipeline for completion in 2017, 66% of which had already been taken up. That makes options limited both for tenants needing to move in within the next few months as well as for those who are willing to wait. In addition, tenants looking for new-build space are increasingly finding it necessary to sign leases earlier in the construction process in order to secure the quality of space they need. Despite lively demand and limited supply, completion rates for the coming years remain below average. Newbuild activity in the medium term is unlikely to reach the levels seen in the past decade, as large-scale commercial development sites within the city are practically nonexistent. Even though we are seeing the occasional large-scale development such as Bavaria Towers in the east of Munich, which encompasses roughly 65,000 sqm in three high-rise buildings, it is already apparent that the scarcity of office space is going to intensify over the next few years.
Prime and Average Rent for Office Space (in € per sqm)
Take-up according to Rent Price Segments Q3 2016
Prime and average rents on the rise Rents remained on an upward trajectory with high demand continuing to meet with limited supply. Average rent on the market as a whole recorded a yoy increase of 4% to €16.20 per sqm. High-priced leases in top locations signed for up to €34.20 per sqm caused prime rent to rise 2% yoy. However, rents are also on the rise outside prime locations, which is why tenants are paying an average of €17.60 per sqm for office space within city limits. Average rent in the surrounding area was recorded at €11.10 per sqm. This is the first time average rent has exceeded €11.00 per sqm since 2003, in which numerous newbuilds were available for lease in office parks located in Munich’s neighboring communities.
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Market Report | Q1-Q3 2016 | Office Leasing and Investment | Colliers International
Above-average take-up expected The Munich office market is currently characterized by two factors. The first is high demand driven by the solid development of the regional economy and strategic plans by German and international companies to expand their business activities to Munich. The second is increasingly limited supply during a time in which new-build activity remains below average. The Munich office market continues to move toward a more landlord-friendly environment with owners able to ask higher rents while providing fewer incentives and tenant negotiating leverage diminishing across all space segments. Due to the fact that several leases for large-scale space are expected to be signed in 2016, the Munich office market could bring in 700,000 sqm in take-up (excluding owneroccupiers), making 2016 the strongest year since 2011.
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Market Report | Q1-Q3 2016 | Office Leasing and Investment | Colliers International
Investment
Types of properties
Munich recorded a commercial transaction volume of €3.4bn during the first three quarters of 2016 as high-volume deals made for a strong Q3. Further yield compression can particularly be attributed to high demand from German institutional investors. We can expect activity on the investment market to remain lively in Q4 as well. High demand for office investments The €3.4bn in transaction volume generated on the Munich commercial market reflects a 14% decrease compared to an exceptional 2015. This result, however, is still higher than the long-term average. The seven highest-volume deals each broke through the €100m barrier, totaling at €1.3bn and accounting for more than one-third of total investment volume. The re-sale of the Karstadt building located between Munich central station and Stachus and the sale of the NOVE office new-build located at Arnulfpark in Q3 were among the highestvolume transactions this year to date. The sale of the BayWa high-rise at the start of the year was the only deal to bring in a higher purchase price. The highest-volume deals signed in Munich’s city center included the sale of the prestigious P56 office building on Prinzregentenstraße to Deka Immobilien. The office asset class led the pack by some distance in terms of transaction volume. Investors have poured just shy of 67% of total transaction volume, or €2.3bn, into office assets so far this year. Industrial and logistics assets as well as retail assets trailed at some distance, each with a 7.5% market share. Mixed-use assets and commercial lots also brought in more than €200m in transaction volume, or around 7% each. An increasing number of investors are also adding other asset classes to their investment portfolios, some of which promise higher yields than office assets. These activities are limited, however, by the supply bottleneck on the Munich market. The over 15 industrial and logistics deals signed in the first three quarters of 2016 are a strong indication that investors on the Munich investment market highly covet these types of assets. We continue to see an increase in the number of forward deals as investors are looking to snap up new assets as quickly as possible.
Transaction Volume by Buyers Group (in millions of €)
Prime yield development (in %)
Market presence of open-ended real estate funds and special funds remains strong Open-ended real estate funds and special funds accounted for just shy of €790m in total investment volume, reflecting a share of 23% as the largest investor group buy-side. They were followed by project developers, which purchased assets and lots valued at more than €720m.
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Market Report | Q1-Q3 2016 | Office Leasing and Investment | Colliers International
Insurance companies continued to be very active on the market, investing well over €0.5bn in commercial real estate. Not only are insurance companies participating as direct investors, they are also increasingly taking part in deals via institutional investors either indirectly or in association with other investors. The prices and low vacancy rates on the Munich market continue to put the brakes on investment activity by opportunistic investors. As a result, this investor group only generated a 5% share of total investment volume and focused on smaller stock properties in the areas surrounding Munich. Project developers were even more dominant sell side than in past years, coming in at €1.1bn well ahead of private investors, which sold assets of all sizes for a total of €470m due to the increase in value, e.g., Rock Capital’s sale of MyOffice in Munich’s Sendling district. Asset managers also sold assets for €400m. The Munich market remains highly fluid with investors continuing to shorten their holding periods. Investors were able to re-let, refurbish and again list some properties on the market within a short period of time.
Summary and Outlook The Munich market is slowly running out of core assets, a development that can be seen in the lower yoy transaction volume recorded in the first three quarters of the year. However, this result is still considerably higher than the long-term average, and the drop in transaction volume cannot be attributed to demand. Quite to the contrary, demand has again increased over the past few months leading to further yield compression. As a result, investors are facing intensified competition not just in the city center but in the city periphery and outskirts as well. Based on the assets currently available on the market and the fact that the market remains highly fluid with pressure to invest still strong, we can expect to see a very lively Q4 leading to a satisfactory end-of-the-year result of roughly €5bn.
Yield compression ongoing Yields in all asset classes have continued their downward trend over the past 12 months. The Munich market remains the most expensive and, second only to Berlin, most coveted prime location in Germany thanks to its stability and high tenant demand. Gross initial yields for office buildings came in at 3.4% at the end of Q3 and even lower at 3.0% for space in buildings featuring an office-retail mix in central locations. Yields for good quality office assets in city periphery locations recorded a particularly steep drop over the past 9 months to below 5% in some cases. Nevertheless, the yield gap is still relatively high compared to 10-year German government bonds, and we can expect yields to drop further in light of the current interest environment. International investors increasingly hesitant International investors accounted for roughly 30%, or €1bn, of total transaction volume. They snapped up considerably fewer assets than 12 months ago when their investment volume came to €1.7bn. International investors poured an average of more than €33m into each transaction whereas German investors committed more than €36m per transaction. Eight of the ten highestvolume deals involved German investors buy-side. A total of roughly €760m in foreign capital was invested in office buildings, putting this asset well in the lead. Investors worldwide continue to look to Munich due to the city’s excellent economic fundamentals and well-known tenants. The pressure to invest currently being experienced by German institutional investors has further increased, causing them to pursue even more aggressive acquisition strategies.
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Market Report | Q1-Q3 2016 | Office Leasing and Investment | Colliers International
Office Leasing Market Munich (Q1-Q3 2016) Market Overview
Location
Take-up incl. owneroccupiers in sqm
Leasing Take-up in sqm
Rent level in €/sqm
Average rent in €/sqm
Vacancy rate in %
Vacancy in sqm
Office space completions 2016 in sqm
(1) Centre
57,976
57,976
15.40–40.50
27.95
2.7
53,137
8,760
(2) Centre NW
42,128
42,128
12.50–26.50
20.02
0.9
21,311
35,523
(3) Centre NE
16,977
16,977
13.00–33.50
21.75
2.2
22,846
2,176
(4) Centre SE
41,872
41,321
10.90–23.80
15.57
1.6
23,942
10,999
(5) Centre SW
60,416
47,616
10.50–25.50
15.08
0.8
19,001
1,300
(6) City NW
45,285
45,285
10.00–19.00
16.01
1.0
20,499
34,094
(7) City NE
53,814
53,247
9.00–25.00
16.89
3.0
71,726
40,042
(8) City SE
45,611
42,272
7.00–16.00
13.49
3.8
69,026
24,391
(9) City SW
63,577
58,094
7.00–21.80
11.44
4.6
73,887
0
City Limits
427,655
404,915
7.00–40.50
17.56
2.2
375,375
157,285
(10) Periphery SW
30,917
22,840
7.80–16.90
13.40
2.0
8,985
0
(11) Periphery NW
27,567
26,217
5.75–13.50
11.43
6.5
31,733
6,095
(12) Periphery NE
52,177
49,177
6.00–12.90
10.54
6.8
210,902
21,520
(13) Periphery SE
14,074
10,904
7.00–13.00
9.54
6.7
86,150
670
Total Market
552,389
514,052
5.75–40.50
16.24
3.1
713,145
185,570
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Market Report | Q1-Q3 2016 | Office Leasing and Investment | Colliers International
Munich Submarkets
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Market Report | Q1-Q3 2016 | Office Leasing and Investment | Colliers International
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Authors:
Alexander de Oliveira Kaeding Associate Director | Research Tobias Seiler Associate Director | Research Karolina Belza Junior Consultant | Research
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Photo Credit: Page 1: Highlight Towers, München © Thomas Lehmann/137222931/Thinkstock Page 3: P56, Prinzregentenstraße 56 © ADRIAN BECk PHOTOGRAPHER Copyright © 2016 Colliers International München GmbH. This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s). © 2016. All rights reserved.
