Investment versus office space market: Absurdity or the new reality?

Markus Reinert FRICS

We are currently experiencing a highly unusual and perhaps even paradoxical situation on the German commercial real estate markets: while users remain sceptical, are reducing their spaces and in part already negotiating more favourable conditions for lease agreement extensions, among investors in the broadest sense we can still see considerable activity.

This seemingly contradictory situation is also underlined by the latest quarterly figures as of the end of September 2020. For the first three quarters of 2020 there has been a downturn of ca. 40 per cent in office space earnings from new rentals in the TOP 7 real estate markets. In contrast, the transaction volume for commercial real estate in Germany in the same period was ca. 41 billion euros, and thus only slightly lower year-on-year. Office real estate is still the most important asset class by far in the real estate markets.

More than just a weak phase in the office leasing market?
How will the industry deal with this situation? At present at least the various specialist debates are being dominated by a form of self-imposed optimism. But whether the results for the leasing markets are actually just a temporary depression is doubtful. On the one hand we are currently seeing a stabilisation and even a marginal increase in the number of infections, something which is associated with a renewed phase of mobile working for a lot of companies. A lot of the consequences of the coronavirus recession will not be seen until 2021 and 2022 (insolvencies, increase in unemployment rate etc.). In addition, the constant and rapid change in the working world will possibly be accompanied by a reduction in office space, something which is becoming apparent in the current situation with the increasing number of sub-lets. Although this does not mean that there is cause for pessimism and gloominess, the future is less transparent than ever before, and thus it is very difficult to make robust prognoses.

If the demand for space for the coming years – and thus the potential stability of the cash flow of each and every investment – may only be forecast with difficulty, why does investment activity remain at a high level? An answer to this question requires a differentiated appraisal of the general economic starting position. For although the real estate markets here in Germany are being affected by the current crisis more strongly than they were by the last economic crisis from 2008 onwards for example, my thesis from our previous newsletter in July 2020 is proving to be true: the German economy as a whole, as well as the commercial real estate markets in particular, are in a very robust state in an international comparison. And the quality of German properties is also among the highest in the world.

Investment market: Shift away from routine?
How will the market actors adjust and reconsider their investment strategies with a view to the diversification of allocations for the various asset classes? This is also one of the subject matters for philosophical discussion in the regular specialist debates.

Naturally we hear and read every day about the “winners in the crisis” and lauded asset classes such as residential, logistics, care homes, health care properties, and the retail trade sector with its focus on local supply and retail parks.

Personally I can only recommend that it is more than advisable not to lose sight of the biggest and most important asset class – office real estate – and at the same time devote considerable time and attention to the excellent potential that already exists.

About: Markus Reinert FRICS is the Chairman of the Board and CEO of IC Immobilien Holding GmbH.