View of Potsdamer Platz: The new old centre of Berlin is one of the city’s major office locations.
Getty Images

Capital of hope

For many years, Berlin’s office market was characterised by high vacancy rates, low rents and dashed hopes. Now, though, the German capital’s economy is beginning to recover. This is creating opportunities for investors – but they have to get to grips with the peculiarities of the Berlin market.

A cool early summer’s day at Kurfürstendamm 170 in the Berlin district of Charlottenburg. Christoph-Marc Pressler, Head of the Holler-Stiftung from Munich, has invited guests to the laying of the foundation stone for the Palais Holler. This renowned boulevard is witnessing the birth of a new office building to take the place of a previous structure, which had seen better days and had therefore been demolished. “We are celebrating the start of the construction of the first complete newbuild on the Kurfürstendamm for many years,” Pressler says happily. The Palais Holler, with just about 6,000 square metres of office space, is not a particularly big project. Nevertheless, it is still noteworthy, because it is representative of the upturn in the Berlin office property market. In any event, increasing numbers of observers have been coming to the conclusion for some time now that it is worth getting involved in this market. For example, the Japanese think tank, the Mori Memorial Foundation’s Institute for Urban Strategies, places the German capital in its top group of the most important cities because of its economic attractiveness: in its latest rankings, Berlin came eighth, beaten only by major cities such as London, New York, Paris and Tokyo. Meanwhile, on the basis of a survey of professional investors, the accountancy firm Pricewaterhouse Coopers (PwC) and the Urban Land Institute actually regard Berlin as the most attractive property market in Europe. 

In the opinion of those surveyed by PwC, there are two reasons for this good result: the city’s excellent fundamentals and its favourable price levels. Berlin’s economy is indeed growing significantly. In spring 2015, the number of employees subject to mandatory social insurance contributions had risen by 3.1 percent compared with the previous year. “Services sectors are among the main job creators,” says Cornelia Yzer, Berlin’s Senator for Economic Affairs. In addition, gross domestic product in Berlin – a noteworthy 2.2 percent in 2014 – is growing more quickly than the national average, which is reflected in the office market. “Since 2010, vacancy rates have been falling, and annual letting performance has stood consistently at between 500,000 and 600,000 square metres,” says Peter Starke, Head of the Berlin Office of the Aengevelt consultancy. This view is shared by foreign investors. “The German capital has demonstrated impressive development in recent years,” observes Ernst Vejdovszky, Chairman of the Management Board of the Austrian company S Immo, which has recently acquired several commercial properties in Berlin. “We expect further increases in the next few years, too, especially in the office sector."

Berlin is fundamentally different from the other prime office locations in Germany, in that there are several office sites within the city achieving peak rents.
Timothy Horrocks, Head of Germany at TH Real Estate

However, the favourable price levels identified by investors highlight one of the city’s weaknesses: although Berlin is the capital and, with 3.5 million inhabitants, by far the biggest city in Germany, it is still suffering economically from the consequences of the country’s division. “The fact that Berlin, as the political centre, is not the most important city in the country economically makes it a special case in international terms,” says Olaf Janßen, Head of Research at Union Investment Real Estate GmbH. At around 10 percent, the unemployment rate is significantly higher than the German average, and not a single one of the 30 major companies represented in the German share index, the Dax, has its headquarters in this city on the River Spree. Accordingly, the peak office rent of €23 per square metre per month lags a long way behind the levels for Munich (€33.50) and Frankfurt/Main (€35.50). One significant difference between Berlin and those cities is cited by Andreas Schulten, a member of the Board of Directors at the bulwiengesa consultancy. “In Berlin, there are only a small number of big users from the bank, consultancy and accountancy firm sector. This means that large-scale lettings are rarer.” Indeed, in the first quarter of this year the international real estate service provider Jones Lang LaSalle (JLL) recorded an average letting area of only 756 square metres.

Several strong office sites

Another distinctive feature is identified by Timothy Horrocks, Head of Germany at the investment company TH Real Estate, which operates globally: “Berlin is fundamentally different from the other prime office locations in Germany, in that there are several office sites within the city achieving peak rents.” In fact, Berlin does not actually have one central business district. Rather, the prime locations are considered to be City-East (Gendarmenmarkt, Unter den Linden), Potsdamer Platz and City-West (Kurfürstendamm). This is where the Upper West office building is being developed by Strabag Real Estate. This spectacular high-rise will boast 19,000 square metres of office space, as well as shops and a hotel.In addition to these, another two high-price locations are currently emerging: the district around the central railway station (Europacity) and an area by the Spree in the Friedrichshain district, which is being marketed under the name of Mediaspree. The petroleum group Total and the accountancy firm PwC, for example, have chosen the location near the central station; the latter moved into Humboldthafen Eins, a newbuild developed by the Dutch company OVG, in the summer. Martin Rodeck, Managing Director of OVG Real Estate, also regards the Südkreuz area as “highly exciting”. This is one of Berlin’s main-line railway stations, which so far has barely registered in people’s minds as an office location. Rodeck is certain that this will change, considering the location’s excellent transport connections. This wide variety of office locations offers opportunities for completely different types of investor. As in all major cities, core properties are especially sought-after. Rodeck puts it this way: “New, fully let office buildings are currently as precious as gold dust.”

Since these properties are rare, their initial yield has fallen to 4.7 percent. “For this reason, investors are becoming more willing to take risks,” says the Aengevelt expert Starke. Investors with a value-added or opportunistic approach, in particular, are also venturing into properties with high vacancy rates or buildings in peripheral locations. For instance, Aengevelt has arranged the sale to a foreign capital investor of an office building around 20 years old in the Berlin district of Reinickendorf with a gross initial yield of well in excess of 7 percent. The bottleneck in new office space is being exacerbated by the failure of the construction of newbuilds to really take off. Although, according to a forecast by JLL, about 300,000 square metres of new office space will come onto the market in 2016, 60 percent of this has already been allocated to tenants or owner-occupiers.

Since the headquarters of major corporates are missing from Berlin, office developers need to deal with new companies from the internet sector.
Martin Rodeck, Managing Director of OVG Real Estate

“At the moment, it is a struggle to meet tenant demand,” observes Marcus Lehmann, head of office letting at Colliers International Berlin, referring to a vacancy rate now standing at only around 5 percent. Against this background, a lot of project developers are willing to take greater risks. “With regard to some tenants, who either want or have to plan on a very short-term basis, speculative building will certainly be an option for us for selected projects in the future,” says Thomas Hohwieler, Managing Director of Strabag Real Estate. However, he is convinced that the micro-location for this has to be “especially attractive or interesting”. In Marcus Lehmann’s opinion, this assessment is especially true of Alexanderplatz. He expects the construction of a mixed-use tower with an office share of 26,000 square metres to start there soon. Other observers are more sceptical. “Building high-rise office complexes is an expensive business,” warns bulwiengesa’s Andreas Schulten. “That is why you need tenants such as banks and accountancy firms to fill them” – in other words, the very same capital-rich tenant groups that are in short supply in Berlin.

“Creative hub for start-ups”

Or is there another group that will fill the gap? Berlin boasts a high proportion of TMT (technology, media and telecommunications) companies. According to the CBRE consultancy, these were responsible for almost one-quarter of all office-space lettings between 2010 and 2014, and this is set to increase. One of this year’s biggest deals has also been accounted for by a TMT firm: the German internet group Rocket Internet has rented a 22,000-square-metre high-rise complex previously used by the GSW housing company in Berlin’s Kreuzberg district. Naturally, this demand group is also gaining in importance for developers. “Since the headquarters of major corporates are missing from Berlin, office developers need to deal with new companies from the internet sector,” says the OVG chief Rodeck. “Otherwise, the market will become very tight. ”The growth of internet-oriented start-ups, which in some cases has been dramatic, is also being watched closely by investors. 

“We expect those markets that now have a high share of TMT companies to be better equipped for the future than those with a smaller presence from this innovative business sector,” says Timothy Horrocks of TH Real Estate. In his opinion, Berlin’s “image as a creative, hip hub for start-up companies” is also contributing to the perception abroad of Germany’s capital as an attractive place to investment. “Berlin is one of a small number of cities that have a truly international DNA,” declares Simon Schaefer, founder of Factory Berlin, a start-up campus in the Mitte district, which is well-known far beyond Germany’s borders. This is also attracting global players such as the IT operator Cisco, which chose Berlin as the site of its innovation centre in 2014. According to Bernd Heinrichs, Managing Director at Cisco, “Berlin offers the perfect environment” for this “with all its universities, research institutions and start-ups”. Olaf Janßen at Union Investment is also convinced that “Berlin will expand its focus on TMT in the future” (see interview on page 9). But will Berlin’s office market overtake that of Frankfurt/Main one day? The expert is rather sceptical on this score: “For that, we would have to think in terms of a period of at least 20 years.”


Olaf Janßen, Head of Research at Union Investment Real Estate GmbH.

“The Berlin market has normalised”


Mr Janßen, from the point of view of an institutional investor, what are the arguments in favour of the Berlin office market?
The Berlin market enjoys a very healthy supply of new office space. In addition, the vacancy rate has fallen significantly, especially in the recent past, and is now at a 20-year low. We are also very positive as regards the prospects for the coming two years: the reduction in vacancies will continue, and the bulk of the projects that are due to be completed in 2016 have largely been let already. What this shows is that after the extraordinary consequences of the period immediately following German unification – which include, in particular, the impact of tax incentives for newbuilds and the government’s move from Bonn – the Berlin market has normalised. It is now beginning to catch up with the other German office markets.

On the other hand, not a single Dax company has its headquarters in Berlin, and economically strong sectors such as banks and accountancy firms have only a small presence on the River Spree. Surely this is a considerable disadvantage?
That is true. However, with a peak rent of €22 to €23, this weaker economic structure is priced in. The reason why rent levels in Berlin are much lower than in Munich or Frankfurt/Main is that financially strong sectors are less well represented here and that companies from the technology, media and telecommunications (TMT) fields, which have a substantial presence in Berlin, tend to be rent-sensitive. However, it is in this very sector that significant companies such as Zalando and Rocket Internet are emerging.

But how sustainable is demand from the TMT sector?
After all, one new economy bubble has already burst, at the beginning of this century. Of course, it cannot be ruled out that, in a sector with strong growth, one company or another will have to cut jobs. However, I regard it as very positive that firms in this field are growing especially dynamically. The comparison with the earlier new economy boom is inappropriate: the internet is now 15 years older, a whole range of business models have become established, and it is no longer a fad. Many of these companies will be posting profits soon, if they are not doing so already. Besides, even consultancies and banks give up space during a crisis.

How do you rate the potential of the new Berlin office market locations near the central railway station and at Mediaspree?
Mediaspree is a particularly interesting location with some very exciting buildings. Union Investment has already acquired a property there: the headquarters of Mercedes-Benz Distribution Germany. However, as an investor, you always have to make sure that the project pipeline in developing sectors is not too long, because there is a great risk in such locations that periods of weaker economic growth will result in high vacancy rates. During price correction, sites that are still developing are harder to market than established office market locations such as City-East and City-West.

Nevertheless, would you consider investments in development projects or in properties with a lower occupancy rate in Berlin?
We are open to projects with letting potential and to projects that are going to be completed in the next 18 months. This is because, in the coming two years, we expect vacancy rates to continue to fall and rents to continue to rise. However, every cycle is finite, and this is why, as far as our readiness to take marketing risks is concerned, we are mainly confining ourselves to a two-year period.

The interview was conducted by Christian Hunziker.


More about these topics: