Office real estate market

Uncertainty in the commercial real estate market increased in the fall, and the investment climate has clouded over in some areas. However, the latest figures from Hanover indicate an improvement in the office and retail segments.

Market sentiment and trends

A look at the last two years shows the dynamics of the Hanover market with its ups and downs. While the office market was able to build on the strong years of 2018 and 2019 with around 165,000 sqm of take-up in 2022, this was followed in 2023 by a significant slump of almost 50 percent to only around 85,000 sqm of office space.

However, Hannover was not alone in this - all major German office locations recorded sharp declines in sales last year. However, there are clear signs of recovery in 2024. With total take-up of 139,000 sqm, the figure for 2023 was exceeded by around 54,000 sqm.

Both prime rent and vacancy rate increase slightly

The market's focus on high-quality buildings in attractive locations, but also inflation and persistently high construction costs are leading to an increase in prime rents - despite the general restraint shown by real estate players in the previous year.

In city center locations, the prime rent already increased by EUR 2.20 in the course of 2023 to EUR 21.40 per sqm in 2024 .

In contrast to the city center locations, prime rents on the outskirts of the city and the arterial roads fell slightly from EUR 17.00 per sqm 204 to EUR 16.50 per sqm in 2024. Average rents also fell slightly compared to 2024.

High completion figures combined with low demand led to a slight increase in the vacancy rate in the city of Hannover to 5.3% in 2024 (2023: 4.9%).

Sharp slump in completions

With only 44,000 sqm of new build completions and refurbishments in 2024, there was a sharp drop compared to the previous year, when a record figure of over 100,000 sqm was achieved. The high level of completions in 2023 was mainly due to the completion of Continental's corporate headquarters. In 2024, just under 80,000 sqm of office space is expected to be added to the market through new construction and refurbishment. Looking ahead, the completion figures will tend to decline over the next few years and settle at a level of around 50,000 sqm per year in the medium term.

Investment market for offices picks up slightly

While the letting business picked up again significantly in 2024, the investment market for office properties is only slowly gaining momentum. The investment volume for office properties in Hanover rose from €85.5 million in the previous year to just under €107 million in 2024.

Institutional players in particular are acting very cautiously. A small number of newly initiated or as yet uncompleted sales processes are currently keeping transaction volumes low.

However, the price squeeze between buyers and sellers, which seemed to last the longest in the office submarket in particular, is likely to slowly dissipate. Market participants believe that a prime yield of 4.9 % is achievable in 2024.

Outlook: The changing world of work is drastically altering space requirements

The changing requirements for office space due to remote working reflect the new reality of work. Since the coronavirus pandemic, up to 70% of employees, particularly in typical office jobs, have been working at least partially from home or in third-party locations such as co-working spaces. Office occupancy in Germany is around 40 to 50% on average, around a third lower than before the pandemic (60 to 80% occupancy).

However, companies are increasingly striving to persuade their employees to return to the office more frequently in order to strengthen communication, knowledge sharing and identification, for example. The willingness to invest in attractive and high-quality real estate or rental properties is increasing. This has prompted large companies and institutions in Hanover in particular to reassess their space requirements and align them accordingly.

However, many small and medium-sized companies are still in the discovery phase. Strategies for the future use of office space that is no longer required in the medium term need to be developed. Conversion to residential space or so-calledserviced apartments arepossible approaches, but are often associated with high costs and challenges due to legal and structural aspects.

Focus on high-quality buildings in attractive locations

The changing requirements and expectations of companies and their employees with regard to office space are bringing the importance of ESG factors in connection with location, design, technology and space quality more into focus. At the same time, existing buildings of older standards in peripheral locations are coming under further pressure. The average rents shown in the report are no longer achievable everywhere.

Market environment remains tense - improved negotiating position on the tenant side

While older and lower-quality spaces, particularly in less attractive locations, are struggling with increasing vacancies, potential tenants of high-quality spaces are confronted with higher prime rents. At the same time, many companies are currently offering their space for subletting, which could strengthen the negotiating position of tenants. In Hanover, market participants are observing that incentives are being granted more frequently, with landlords seeking the longest possible contractual commitment in return.