Berlin, March 30, 2023 - Rising interest rates, a sharp decline in investor interest, and ongoing uncertainty surrounding the trend toward remote work are leading to fewer offices being built in the future and placing the development industry as a whole in a difficult economic situation. This was confirmed by Reinhold Knodel, CEO of Pandion AG; Roland Köppe, authorized signatory and Head of Acquisition & Project Development Berlin at Becken Development GmbH, and Fabio Carrozza, Managing Director of BF.real estate finance GmbH, at a press conference organized by RUECKERCONSULT in Berlin. Alexander Fieback, Branch Manager Berlin at bulwiengesa AG, presented the latest figures on market developments.

According to the report, the trend towards declining office project volumes in Germany's A cities that began in 2021 will continue this year. Traditional trading developers in particular will build less. Ongoing problems on the exit side are making their calculations more difficult. Investors who develop for their own portfolio, on the other hand, would continue to realize almost constantly. In particular, players with a better equity base are still able to trade. As planning activity will decline after a peak in 2020, the amount of space under construction and completion will decrease noticeably in the future. As the current constellation will not change in the foreseeable future, he expects land prices to trend downwards, said Fieback.

Reinhold Knodel, CEO of Pandion AG, summarized the developer perspective as follows: "The industry is currently under great pressure. The market environment has changed radically within a very short space of time, both in terms of financing and demand. Purchase prices have fallen by around six annual net cold rents. This is offset by prospective rent increases due to the indexation of contracts. However, it will be some time before the difference is balanced out and the purchase price is mathematically the same. In the meantime, the transaction markets are at rock bottom. We assume that this situation will continue until next year. This is because interest rates will continue to rise and investors will buy low-risk bonds rather than increasing the already high proportion of real estate in their portfolios."

Roland Köppe, authorized signatory and head of acquisitions and project development in Berlin at Becken Development GmbH, agreed with this assessment and added: "Investors' willingness to pay is declining sharply due to the interest rate environment." For a trader-developer such as Becken, selling its project developments is expedient, but not at any price. Becken has a comfortable equity base and a well-filled development pipeline, enabling it to respond well to the challenges of project financing. "Those who are not forced to sell below production costs can keep projects in their portfolio for the time being through portfolio financing." Köppe added: "We will only make new acquisitions if the projects are economically viable under the current conditions. Market players with less equity will have to scale back significantly in this regard."

The assessment from the financier's perspective is virtually mirror-image: "The mood among real estate financiers is currently negative," said Fabio Carrozza, managing director of BF.real estate finance. "However, we are observing that market participants expect the interest rate situation to ease somewhat towards the end of the year. Project developers are therefore trying to buy time with bridge financing and take the properties off the market until conditions improve. In view of these expectations, bridge financing makes perfect sense."

The financing parameters of the latest BF Quarterly Barometer for the first quarter of 2023 reflect the current changes in the market: "Margins have risen significantly over the past two years. While they were just under 240 basis points in Q1 2021, they are currently around 340 basis points. This steep increase shows that banks are more aware of the risks. Banks are charging more for the higher risk. In return, average loan-to-costs (LTCs) fell from around 73 percent to about 69 percent. Here, too, lenders are more cautious than they were one or two years ago."

Despite the generally gloomy outlook, particularly in terms of interest rate trends, the participants at the press event were optimistic. "Project development is once again proving to be a volatile business," summarized Reinhold Knodel. "At the moment, hardly any new projects are being initiated, only completed. Speculative new construction is practically non-existent. In the medium term, all of this will lead to a supply bottleneck for modern office space in city center locations. At the same time, rising prime rents and barely declining letting turnover indicate that demand for high-quality space remains high. Centrality and the quality of the workplace remain important criteria in the battle for skilled workers, which is why many companies cannot afford to be frugal." Roland Köppe said: "Outstanding projects always enjoy stable demand. This is because the attractiveness of space for employees is still the top priority for tenants." This was also confirmed by Alexander Fieback: "Good locations and good quality remain in demand and rising rents there continue to enable adequate development business, while peripheral locations are increasingly under fire unless the micro-location has attractive special features, for example in terms of gastronomy or accessibility. " The trend towards higher quality is also leading to increased revitalization activity. "Without focusing on ESG when planning project developments, competitiveness is at risk. In principle, this is of central importance in new construction. At the Becken Group, sustainability is not interpreted as proof of certification, but as a social obligation for a future worth living," said Roland Köppe, adding: "In addition to the traditional project development business, we also see opportunities in the optimization and revitalization of aging properties. In this way, grey energy can be preserved and a sustainably optimized building can be returned to the market."