April 17, 2024
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The Hamburg real estate market in 2024:
Residential market under great pressure, logistics properties more popular than offices
- Industrial and logistics properties dominate transaction activity
- Hamburg office market: smaller spaces in demand, rents continue to rise
- Financiers act more restrictively
- Project developers are looking for solutions to realize affordable housing despite the challenging market environment
- Hamburg housing market: further shortage of housing supply causes rents to rise
Hamburg, April 17, 2024 - The Hamburg real estate market will remain under pressure in 2024, but is still in robust shape. On a ten-year average, total transaction activity in the first quarter of 2024 was down by around 58%. Industrial and logistics properties dominate the transaction market and are currently the strongest asset class. By contrast, there were no major lettings on the office market in the first quarter. Investors and tenants are generally looking for smaller office spaces - while rents are rising at the same time. In the current market environment, banks are considerably more reluctant to provide real estate financing and are demanding more collateral and ESG compliance for the properties to be financed. The expected end to the rise in interest rates will allow investors to make more reliable calculations again, meaning that interest in buying on the market will slowly increase. On the residential market, the declining number of approvals and the decreasing number of new apartments being completed are leading to an ever-increasing surplus demand. Project developers are looking for innovative approaches to realize affordable housing construction.
These are the key findings of the press conference "The Hamburg Real Estate Market - Outlook 2024", which was attended by Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank, Jörn Stobbe, Spokesman of the Management Board at Becken Holding GmbH, Sascha Hanekopf, Regional Manager in Hamburg at Colliers, and Tobias Kassner, Head of Research and Member of the Management Board at GARBE Industrial Real Estate.
Office market: Central location gains in importance
The Hamburg office market was subdued at the start of the year, with virtually no transactions in the large space segment. "We believe that a take-up volume of between 430,000 and 450,000 square meters is possible by the end of the year," says Sascha Hanekopf, Regional Manager in Hamburg at Colliers. The small-scale nature of space lettings is partly due to the coronavirus effect. "Since spring 2022, the home office ratio, i.e. the proportion of employees who work at least partly from home, has leveled off at around 25 percent," says Hanekopf. "With the decreasing demand for space and the ongoing difficult economic environment, more office space is gradually becoming available. The vacancy rate has risen by 11.3 percent compared to the previous year to currently 4.1 percent." Although the vacancy rate has been record-breakingly low in recent years, it still stood at 7 percent in 2013. At the same time, the demand for space itself is increasing: "Central locations have become enormously more important. There is a particular demand for modern space in A-locations where new work concepts can be realized," Hanekopf continues. The demand for contemporary offices is also causing prime rents to rise further, most recently by 3 percent year-on-year to EUR 34.5 per square meter. Average rents have risen by 1.9 percent to EUR 21.4 per square meter in the same period. "There has already been a 53.2 percent decline in office completions. This means that the supply of modern office space will become scarcer in the future, which will have a further effect on the development of rents," explains Hanekopf.
Logistics space is in short supply
Hamburg's logistics real estate market is one of the top five locations in Germany. Not only is space in the port and Hamburg city area attractive, but also in the immediate surroundings. However, demand continues to exceed supply: "Hardly any new space is coming onto the market. Accordingly, the vacancy rate is approaching zero," says Tobias Kassner, Head of Research and Member of the Management Board at GARBE Industrial Real Estate, "If we want to remain attractive as a business location, politicians urgently need to make changes to the allocation of new space. Logistics space is of central importance for the growth of companies, but also for new relocations. This potential should not be wasted."
Retail companies and logistics service providers are particularly keen to establish themselves in Hamburg. However, there is hardly any large space available in new properties, especially for logistics service providers. This is also evident in the letting sector. In recent months, new lettings have mainly been made in existing properties and smaller spaces. In addition, the cost of building new logistics properties has stabilized and even fallen slightly.
Kassner explains: "Rent increases have been among the highest in Germany in recent years due to the shortage of space and the reorganization of supply chains, especially in Hamburg. However, we have now reached the end of the line for the time being, partly due to the uncertain overall economic situation. Accordingly, the pace of rent increases has slowed. However, as there is hardly any construction going on, this will change as soon as the economy picks up again."
Logistics properties were able to assert themselves as an asset class for investors in 2023. With low vacancy rates, demand that is still high in relation to supply in many regions and the prospect of further potential for rent increases, they are performing significantly better than office and retail properties, for example. In the first quarter of 2024, this attractiveness is reflected in a strong start to the year. Kassner adds: "The Hamburg logistics market has proven to be robust and resilient in recent years. Despite the weakening economy, we expect a further recovery."
2024 will remain a transitional year for financing
Peter Axmann, Head of Real Estate Clients at Hamburg Commercial Bank (HCOB), expects the current interest rate level to remain in the ten-year range in the medium term and construction costs to consolidate at the current high level. Axmann explains: "We see 2024 as a transition year. Property values have fallen across the board, but should have largely bottomed out by now. Older offices in secondary locations are the exception, where values could fall by a further 10 to 15 percent."
Banks are clearly more cautious when it comes to real estate financing and are demanding more equity as a buffer in view of further uncertain developments. Overall, interest rates have quadrupled in the past 24 months and capital servicing has doubled. Due to the increased probability of default on real estate loans, higher risk costs are also being applied - with correspondingly rising margins.
Peter Axmann explains: "Financiers are currently restrictive when it comes to project developments, and new business as a whole is still restrained. Generally speaking, more equity is required on the customer side, regardless of whether it is project or portfolio financing."
However, investors are able to make more reliable calculations again and there will be a gradual increase in purchases. However, the HCOB does not see a significant increase until 2025.
The sustainability and therefore future viability of properties has become a key priority for financiers, also in order to support the transition of the economy to greater sustainability. Banks are also obliged to evaluate and improve the financed portfolios according to ESG criteria.
Axmann explains: "For the entire real estate sector, achieving the ambitious climate targets and the associated costs are among the biggest challenges." According to a study by McKinsey, the investment requirement for commercial real estate in the EU is around EUR 3 trillion by 2030.
The general conditions for the Hamburg real estate market are comparatively stable: "The Hamburg real estate market is less volatile than the markets in many other major cities in Germany, which is why it is popular with investors, especially in times of crisis," explains Axmann.
Strong excess demand on the housing market
"The effects of the 43% decline in approvals in 2023 compared to the previous year will only become apparent in completions over the next few years," says Hanekopf. An improvement in approval figures is not in sight. Approvals peaked in 2017 and have been declining ever since. "We are seeing strong excess demand on the housing market in Hamburg. In the last six months, there were only 29 rental apartment offers for every 1,000 apartment requests in Hamburg. By comparison, in less tight housing markets such as Dresden, we registered around 74 offers per 1,000 apartment seekers in the last six months," continued Hanekopf.
The shortage of supply is reflected in the rental trend: new rents for first-time lettings rose from EUR 17.3 per square meter in the previous year to EUR 18.3 per square meter in the fourth quarter of 2023. The average rent for existing properties rose from EUR 13.1 per square meter in the fourth quarter of 2023 to EUR 13.9 per square meter. At the peak, residential tenants currently pay EUR 19.0 per square meter in existing properties and EUR 24.4 per square meter in new builds.
Developers are looking for innovative solutions to the housing problem
Project developers are caught between the difficult market and interest rate situation and the urgent need to create affordable housing. Jörn Stobbe, CEO of Becken Holding GmbH, says: "In a dynamic city like Hamburg, we as project developers are constantly faced with the challenge of mastering the balancing act between sustainability, profitability and social responsibility. In the residential construction sector in particular, we see significant potential to achieve a substantial reduction in construction costs through innovative approaches such as the standardization and optimization of construction processes. This will enable us to create high-quality living space while keeping rents down, even in a challenging market environment." Stobbe sees leaseholds as a key to this: "The allocation of land on the basis of leaseholds is another key factor here. We are aware of the debates surrounding leaseholds. However, it is important to recognize that leaseholds, when used correctly, offer enormous opportunities - as the example of London impressively shows." In the UK, the concept of leasehold is widespread.
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