Take-up of space has declined, but the market is kept stable by the premium segment. The latest office space market report by Greif & Contzen features a special analysis of the high-price segment.

Around 75,000 square metres of office space were taken up in Cologne in the first half of 2023. This corresponds to a decrease by about two thirds compared to the first half of 2022. Nevertheless, Greif & Contzen’s researchers do not see a crisis scenario. “The economic downturn can be felt in Cologne’s office space market, but the market is characterised by some stabilising factors,” says Andreas Reul, Head of the Office Properties Division at Greif & Contzen Immobilienmakler GmbH.

Rising demand for premium-quality office space
“First of all, we should bear in mind that the office space market has developed very favourably in recent years. You could say that we are standing on top of a mountain, observing the situation,” Andreas Reul explains, adding that the bottom of the valley was relatively far away. Another aspect that has a positive effect is that, regardless of the overall economic downturn and decrease in demand, there are still office users in Cologne’s diverse and multifaceted business world who are enjoying steady development and are even expanding. Those who are looking for space are increasingly interested in units from the premium segment, and this is also a stabilising factor. This segment is well-established in Cologne with one or two dozen rental contracts concluded every year. In the first half of the current year, the premium segment accounted for around a quarter of all space taken up. 

Special analysis of the past five years
In consideration of the growing importance of the premium segment, Greif & Contzen is taking a closer look at this aspect in its latest office space market report. To this end, the property experts from the long-standing Cologne-based company analysed more than 80 rental agreements with rents at the top end that were concluded in the past five years. In the context of this analysis, the high-price segment includes rental agreements in which the rent agreed upon was no more than ten percent below the prime rent of the year in question.

Consultancy companies are the top demander group for premium-quality space
“Consultancy companies were the most prominent demander group for high-quality office units with a very high fit-out standard that allow for modern layout concepts. Several large transactions were realised here, such as the space let to KPMG in 2020 or the unit taken up by Boston Consulting Group this year,” Andreas Reul points out. Consultancy companies, including law firms for the purpose of Greif & Contzen’s analysis, represent some 32 percent of the organisations that have taken up space in the premium segment. Public sector users account for a share of around 20 percent, and coworking providers took up large amounts of top-quality space in 2018 and 2019. About a third of the demand is shared by a wide range of other industries. “This shows,” Reul explains “that when it comes to competing for qualified staff, modern workplace concepts that cater for the wishes of employees by facilitating flexible work, communication and productivity in an attractive environment, are key across all industries”.

Emphasis on the city centre
Geographically, the premium segment is focused in the city centre where 80 percent of the space taken up is located. A particular focus has been on the submarkets Innenstadt Nord, Kölner Ringe and Deutz. Individual high-price transactions were also realised in Ehrenfeld and Mülheim. At around 70 percent, the majority of contracts concluded were for space from construction and refurbishment projects, while the rest was accounted for by high-quality existing buildings. 

Rents on the rise
Tenants are willing to accept higher rents if new working environments can be realised and their high demands with regard to layout concepts and fit-out quality are met. This is reflected in the considerable increase of the prime rent and the average rent weighted according to unit size. The prime rent rose to EUR 30.00 per square metre over the course of this year to date, and the highest rent realised was EUR 35.00 per square metre. The average rent weighted according to unit size increased from EUR 18.50 to around EUR 19.50 per square metre.  Owing to the economic situation, some companies are currently struggling to pay higher rents, but it is even more difficult to identify potential for savings. Construction costs and financing interest are rising and will prevent a decrease of rents for new buildings. “Rent increases are going to lose some momentum, but further more moderate increases are still possible,” Reul says. The tenants’ willingness to pay high prices, he adds, would depend on the development of the economy as well as on possible further inflation-based index adjustments of rents for existing buildings. 

There is potential for expanding the premium segment in Cologne
“The premium segment could be expanded further,” says Andreas Reul in view of the future. The shortage of qualified staff is intensifying, and more and more companies aim to attract talent with modern and appealing office space that is designed to promote productivity and a pleasant working atmosphere.  Reul recommends that landlords should keep an eye on the rising sustainability requirements and the standards expected by users, examine the space they own, and develop strategies to ensure they continue to meet these expectations. This includes modernisation measures, as well as higher requirements with regard to building standards, in particular ESG issues that include sustainability and social responsibility aspects. 

Slower construction activity
The cranes are still moving in Cologne and Greif & Contzen’s researchers believe that this will continue to be the case. However, investors are acting with a little more restraint than in recent years, and construction activity is on a slightly lower level than was the case in 2021 and 2022. Nevertheless, around 15 office buildings with a total of 90,000 square metres of office space are scheduled for completion in the current year: a considerable number. 

Little stimulus for economic growth
The economic environment is going to be challenging over the next few months, and it is unlikely that there will be any strong impulses for economic growth. Greif & Contzen’s experts expect that many decisions concerning the take-up of space will be postponed due to this overall situation, and that the amount of space taken up will fall short of last year’s result. It is conceivable that take-up will reach around 230,000 square metres by the end of the year, but this result would be below the ten-year average. “As said before, we are standing pretty high up on that mountain, observing the situation from above,” Andreas Reul points out. After all, the office space market of the city on the Rhine has demonstrated its resilience in the past few testing years that were characterised by the COVID-19 pandemic, the war in Ukraine, supply shortages and rising construction costs.