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Capital Economics predicts German office downturn

German office completions (% of 2019 stock). Source: Capital Economics

Research firm Capital Economics foresees trouble ahead for Germany’s office markets and says that the Covid “second wave” confirms that there will be a downturn in the market.

In its European Commercial Property Update, Capital Economics says that German occupier demand has slumped during the pandemic and although office rents have so far held steady in 2020, demand is likely to remain weak with an overhang of supply in some markets meaning that declines are likely during the next 12 months or so.

“Our view since the onset of COVID-19 has been that German office performance would be more resilient than elsewhere in the euro-zone. This reflected a combination of a better economic outlook and that these office markets were in a very strong position before the virus struck,” author of the report chief property economist Andrew Burrell states.

Apart from Berlin, in which there was a modest fall during the summer, prime rents have moved sideways rather than down since Q1, the report states, “despite some eye-watering declines in takeup”.

New lockdown a further economic setback

Capital Economics said that even if Q4 2020 is not as bad as predicted, it is unlikely that the good news would continue for long. “Last week’s announcement of a temporary lockdown in Germany is a further economic setback.”

“While office occupiers will not bear the brunt of this, it will weigh on fragile rental prospects. Next year, we expected a mild rental contraction of around 1% y/y.”

However the firm adds that a better outturn this year may push more of the decline into 2021.

“While office occupiers will not bear the brunt of this, it will weigh on fragile rental prospects. Next year, we expected a mild rental contraction of around 1% y/y.”

However the firm adds that a better outturn this year may push more of the decline into 2021.

The bigger picture is that German office rents are still expected to hold up better than other euro-zone markets. However, Berlin is likely to experience the largest rental falls this year and next, while any recovery in Hamburg could also lag thanks to its less helpful sectoral mix.

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