Munich Office Market Q1 2025

Overview

Last year's economic environment left its mark in the first quarter of 2025. Although the wait-and-see attitude of many user groups is gradually easing and there are more active occupier enquiries on the market again, the actual office take-up realized in the first quarter still fell short of expectations. Structural demand trends such as the consolidation of office space (right-sizing) and the implementation of new workplace strategies (return-to-office) characterized letting activities in the spring. Examples of this were the recent large-scale agreements concluded by Siemens in the Werksviertel district with 33,000 sq m in Pandion's new BEAT building and Novartis at the main railway station with 4,800 sq m in Accumulata's development The Stack.

The increase in the vacancy rate slowed down as expected. At 7.6% in the overall market, it is 1.3%-points above the previous year's figure, the same level as the previous quarter and slightly below the peak of the previous market cycle in 2011 (7.8%). Differentiated between submarkets, a two-tier market becomes clear: the rate is 12.4% in the periphery, 6.4% in the urban area, 3.9% within the middle ring road and only 2.1% in Munich's city center.

The rise in prime rents continued: the lack of adequate alternative space in the grade A segment, particularly for occupiers such as lawyers, tax consultants, banks and financial service providers in the central locations within or on the Altstadtring, as well as the increase in construction costs, caused the nominal prime rent to rise to €58.00/sq m/month (+12% year-on-year). More recent rental agreements and asking rents in newly built projects within and around the Altstadtring indicate a further increase - Munich thus has one of the highest growth rates in Europe.

Trends

• The number of deals and more enquiries for more than 5,000 sq m has gradually increased again, which, together with the increase in active market enquiries, suggests a positive demand dynamic for the rest of the year
• Diversified occupier structure, with companies from industry/construction (46%) dominating due to the Siemens deal, followed by consultants (13%), IT companies and the property sector (7% each)
• The weighted average rent rose to €26.34/sq m/month in the overall market, stood at €33.75/sq m/month within the Middle Ring Road and €16.70/sq m/month in the periphery
• At 659,700 sq m (63% of which is speculative), the pipeline under construction until the end of 2027 is almost 20% below the average for the same ex ante observation period in the last three years
• Correction in valuations and net initial yields can be considered complete thanks to the gradual improvement in the outlook in the interest rate and capital market environment and the positive future return expectations; net initial yields for core CBD assets are 0.2%-points below the previous year's level at 4.60%

The speed of recovery on the letting market is still largely dependent on the overall economic environment. The return of larger requests for office space provides reason for an optimistic outlook for the rest of the year. Office space take-up totaling 550,000 to 600,000 sq m appears realistic.

The increase in supply will reach its cyclical turning point in 2025. After years of above-average completion volumes and selective new construction activity, the supply side will normalize in the medium term. In the locations within the central ring road and fungible micro-locations such as the Werksviertel, Maxvorstadt and Nymphenburger Straße, vacancy rates are below 3 %, meaning that a sustained undersupply can be perceived. The upturn in asking and asking rents in project developments in these locations, as well as in under-rent situations in existing properties, is therefore justified in the long term.

There are significantly more leasing alternatives for tenants and therefore less favorable fundamentals for rental growth in decentralized locations in the city and surrounding areas as well as in outdated properties with below average quality and a lack of ESG criteria. Increased vacancy risks and, in some cases, rising incentive packages for owners are the result of this. From the occupier's perspective, however, existing properties with high fit-out standards, good public transport connections and functioning micro-locations offer more favorable alternatives to high-priced city center locations.

In addition to long-term income and value retention in the core segment, the investment market also offers attractive upside potential and new entry points for the implementation of active asset management and manage-to-ESG strategies in the value-add segment. The forecasts up to 2029 for key indicators such as take-up, vacancy rates and rental growth point to a gradual improvement in market conditions and a positive outlook for capital value growth – but not in all segments.