Especially in metropolises
Commercial real estate market is getting rougher
By Jannik Tillar
5/21/2023 1:03 p.m
The home office has prevailed, online trading has long been part of everyday life – and now interest rates are also rising. Demand for commercial real estate is falling. This shows an evaluation for “Capital”.
The market for commercial real estate is also suffering from the rise in interest rates in Germany. However, the individual areas are affected in extremely different ways, as an evaluation by the Immoscout24 portal for “Capital” shows. Above all, the top locations such as Berlin, Frankfurt and Munich are among the clear losers, while poorer locations are even making gains.
Experts have long been warning of a global financial crisis that could be triggered by the commercial real estate market. Since the corona crisis, more and more employees have been working from home, which means that less office space will be required in the long term. In addition, construction projects are becoming less attractive in an environment of rising interest rates, rising construction prices and economic uncertainties. This is particularly evident in the USA, where the prices for commercial real estate have already fallen by 14 percent in the past year according to the Commercial Property Price Index.
However, it is worth taking a closer look both in the USA and in Germany: Commercial real estate is a collective term that encompasses office, retail and restaurant space.
Downtrend in retail
It is becoming clear that Germany is less affected than the USA. According to Immoscout24, the prices for particularly relevant office space are even increasing – albeit at different rates. In the metropolises, where many startups and tech companies are located, the higher interest rates have a greater impact than in rural areas. While companies in metropolitan areas pay around 2.7 percent more than at the beginning of the previous year, rents in rural areas have risen by as much as 3.5 percent. The development in demand is even clearer, which collapsed by 25 percent in top locations – but rose by seven percent in rural areas.
According to the society for real estate research, the overall vacancy rate in metropolitan areas only increased from 2.8 to 4 percent. “That’s still less than the 5 percent that we consider healthy,” says real estate professor Susanne Ertle-Straub from HAWK Holzminden. In 2011, for example, this value was 8.8 percent. To a certain extent, the commercial real estate and labor markets are similar here. In both markets, some delta is considered healthy to respond to economic changes.
The logistics industry seems to continue to benefit from this development. Here, prices and demand rose in all locations, while supply fell at the same time. These are clear indications that the market is picking up. Immoscout24 blames so-called “microhubs” for this. These are set up by logistics companies on the outskirts of a large city in order to supply them later. However, Immoscout has also recently recorded a slight decrease in demand there, which could indicate the end of the corona hype in e-commerce.
The slight downward trend of recent years for retail space has accelerated. Although the corona restrictions have been gradually decreasing since January 2022, many people seem to prefer to shop online. Accordingly, 24 percent more retail space is available in metropolitan areas. This value was significantly lower both in the periphery (13 percent) and in C-cities such as Osnabrück or Rostock (18 percent). The difference could result from the fact that smaller cities have been in crisis for many years and there is correspondingly less downside potential. That’s not surprising, says real estate professor Florian Hackelberg, who also teaches in Holzminden. “Anyone who walks through the inner cities can see that retail has challenges in many places.”
Restaurateurs are looking for better locations
Another beneficiary is obviously the gastronomy, whose space is in greater demand in almost all locations. Here, too, the D locations benefit more than large cities, where demand has even fallen again recently. At the same time, supply increased in all locations – but especially in C and A locations. This indicates that the market is on the move – old concepts are being replaced by new ones or restaurateurs are looking for better locations. Increased demand in rural areas (10 percent) could indicate changes in lifestyle. Because many people moved from the city to the country during the Corona crisis and are looking for a gastronomic offer there.
Overall, Germany does not appear to be threatened with an acute commercial real estate crisis. “At best, we’re seeing a return to normality. There may be devaluations, but not a bubble bursting,” says Ertle-Straub. Her colleague Florian Hackenberg shares this assessment: “For a long time, real estate investors could do little wrong. Now the situation is not critical across the board, but it is much more differentiated than before Corona.”
This text appeared first at “Capital”.