Market Trends of Germany Office Real Estate Industry
This section covers the major market trends shaping the Germany Office Real Estate Market according to our research experts:
Prime Rents Continue to Rise Due to Rental Adjustment Clauses in Leases
Indexation clauses in leases have become a matter of discussion in the current market scenario, as they allow owners to protect themselves from potential value declines.
Rental adjustment clauses are present in 90-95% of all office leases signed in the last few years. Although some of these take the form of rental escalations, most of these agreements include indexation clauses to allow for rent adjustments depending on the overall cost of living index (inflation).
Indexation clauses in leases can take a lot of different forms. The most typical mechanism for a 40% share entails raising the rent each year at the same rate as the percentage increase in the cost-of-living index, or inflation. This kind of legislation has grown more common in recent years. However, it has been noted that there has been a partial move away from indexation clauses as of this year.
Due to the significant uncertainty surrounding the direction of inflation, many tenants are finding that the risk of being unable to pay their rent in the future is becoming too big. In contrast, landlords still need to preserve value. Thus, many agreements, particularly those involving long leases, are based on rental escalation, which means that rent will climb in accordance with previously agreed-upon set rate increases. In terms of their calculations, this gives owners security while lowering the risk for tenants. Rent escalation and indexation clauses contribute to underlying rental growth when used to increase rents.
Office Market Braces Itself Against Recessive Trends
Demand is still very strong, especially for upscale space. As the market for new-build space is still very competitive, making it difficult to pre-let space, and because there is growing pressure to get rid of outdated premises, many occupiers, particularly larger corporates, are currently moving forward with planned moves and new leases by up to two years.
Most businesses are looking for office space with excellent standards to recruit and keep employees. An appealing work environment increasingly influences a company's business performance. About 43% of businesses intend to increase investment in a sustainable and flexible workplace between now and 2025.
Trends also suggest that far larger sums than in the past must be invested in existing stock due to a drop in new construction activity and to meet market demand. Most businesses are still prepared to pay a higher rental rate for space that has been sustainably renovated and complies with ESG standards.
According to estimates, by 2030, over one-fifth of Germany's total office stock will no longer comply with European ESG requirements, demonstrating the urgent need for proactive responses.
