Outlook 2024: difficult year ahead for German office sector

Next year will be a difficult one for the German office sector, delegates heard at Real Asset Media’s European Outlook 2024: Focus on Germany briefing, which took place recently in Frankfurt, hosted by CMS.

“Transaction volumes have been declining across the board, but in 2023 we’ve seen a clear shift in asset allocation, with a focus on logistics, data centres, solar projects and other alternatives,” said Philipp Schönnenbeck, partner, CMS Hasche Sigle. “I think I only saw one office transaction this year.”

Market sentiment has turned against offices, as it is unclear to what extent the working from home trend will affect the sector post-pandemic.

“Offices were already becoming less attractive as an asset class before Covid,” said Barbara Lewandowicz, founder, Molveno Investment Partners. “But now they have the twin challenges of ESG requirements and remote working.”

There is still significant demand for ESG-compliant, modern offices in good locations that are well-connected to public transport hubs, but they are a small percentage of the total stock.

“Class A offices are booming, but there’s a real issue with B & C assets and repurposing them to resi is not always the solution,” said Thomas Veith, partner, global real estate leader, PwC. “The fact is that offices are a big chunk of our allocations so we need to deal with them, which will take years. Frankfurt is the worst case in Germany.”

The capital costs of upgrading old stock and turning it “green” can be prohibitive at a time of high inflation and high interest rates.

“ESG requirements will become even tougher,” said Schönnenbeck. “New buildings need to be net zero by 2030, public buildings by 2028, and the entire building stock by 2050. It’s a very big ask.”

There is a third challenge for offices aside from ESG and remote working, which is the economic slowdown that is hitting companies and forcing them to cut costs.

“Our clients are very afraid of offices”, said Schönnenbeck. “I predict 2024 will be a very difficult year, except for the very top end. But even there companies want to reduce their space. In Frankfurt there is a huge sub-leasing market and when renegotiation comes, the space is decreased.”

The trend seems to be hybrid working, as most people do not want to work from home all the time but they also do not want to be in the office all the time.

“Only a positive experience can motivate people to travel to the office,” said Veith. “It can be air conditioning or views over the city, and the office must also be in a vibrant place, with shops and restaurants and amenities nearby.”

The most successful assets are likely to be mixed-use ones, he said: “Putting together retail, office, resi and hospitality in the same building seems to be a winning combination.”