City Survey
Q3 2024
Macroeconomic environment
Uncertainty remains; growth not expected until mid-2025 at the earliest
The German economy is not gaining momentum at the beginning of the second half of the year either. On the contrary, the leading economic institutes have recently further reduced their growth forecasts for 2024. The current consensus forecast expects stagnation, with only a few institutions still up slightly with their forecasts at a maximum of 0.4 percent. A slight recovery is still expected for 2025, but at 0.8 percent (consensus forecast), it will also be weaker than previously expected. The development of the ifo Business Climate Index underlines these forecast adjustments. In September, the index recorded its fourth consecutive decline and, at 85.4 points, is at the level of the beginning of 2024.
The subdued economic development will slow down the demand for space on the commercial markets in the coming months. The stable labour market continues to be viewed positively. The unemployment rate is expected to rise only slightly, but the decline in job advertisements and the sharp rise in insolvency figures show the risks for the labour market. In addition to a slowing effect on demand for space, the increased uncertainty may also lead to increased consumer restraint and thus create further headwinds for economic development.
Economic growth and inflation (in percent y-o-y)
Sources: Oxford Economics (September 2024), Colliers
Forecast from Q3 2024
Inflation rates reached and fell below the 2 percent threshold in the course of the third quarter. After slowing to 1.9 percent in August, inflation fell again to 1.6 percent in September. The ECB has also followed up the first interest rate step in June 2024 with another interest rate step in September. In the fourth quarter, one or two further interest rate hikes appear possible.
Interest rate trend (in percent)
Sources: Oxford Economics (September 2024)
Colliers forecast from Q3 2024
Long-term interest rates in the eurozone have reacted only slightly to this development. Since the beginning of July, the 10-year SWAP rates have fallen by 50 basis points to around 2.4 percent. Yields on 10-year German government bonds showed a comparable development and yielded around 2.25 percent at the beginning of October. In its forecast, Oxford Economics expects a stabilized level slightly above the current values. Although this situation does not result in any positive impetus for the real estate market due to significantly lower financing conditions, it does result in better predictability with lower volatility than in the course of 2023.
The upward pressure on initial yields remains in this environment, but has recently eased somewhat. The risk premium for first-class office properties in the top 7 (unweighted gross prime yield just under 4.88 percent) is around 260 basis points at the end of Q3 2024. This means that real estate investments currently appear more attractive than in the previous year (spread: 200 basis points). A further slight adjustment of initial yields with increases towards 5.00 seems possible in the current environment by mid-2025.
Bond and real estate yields (in percent)
Sources: Oxford Economics (September 2024)
Colliers forecast from Q3 2024
ESG – EU Taxonomy’s Standards are completed, defining the real estate sector’s “circular economy”
The European Union already adopted the EU Taxonomy in 2020, together with the Technical Screening Criteria (TSC) for the first two environmental objectives “Climate adaptation” and “Climate mitigation”.
Now, on 21.11.2023, the Technical Standards of the remaining four objectives, “Sustainable use and protection of water and marine resources”, “Transition to a circular economy”, “Pollution” and “Protection and restoration of biodiversity and ecosystems”, have been adopted. These standards will apply to all EU member states on the 1st of January 2024.
While the first two objectives affect all industries equally, the remaining four are not equally relevant for all industries. For the construction of new buildings and the renovation of existing buildings, the primary objective “transition to a circular economy” has been defined. Nevertheless, the other environmental objectives must also be considered within the framework of “Do-Not-Significant-Harm” (DNSH).
As a primary objective, the environmental objective “Transition to a Circular Economy” includes the following six TSC:
- At least 90 % (new construction) / 70 % (renovations) of the non-hazardous construction and demolition waste generated on the construction site shall be prepared for reuse or recycling, except for backfilling.
- The life-cycle global warming potential of the building (new construction & renovation) has been calculated for each phase of the life cycle and will be disclosed to investors and customers upon request.
- Construction designs and techniques support circularity by integrating design concepts for adaptability and dismantling.
- In the case of renovations, at least 50% of the original building must be preserved.
- The use of primary raw materials is minimized by the use of secondary raw materials. The following maximum quantities of the primary raw material used must be complied with:
- Concrete, natural stone or agglomerate stone: < 70 % (new construction) / < 85 % (renovation)
- Bricks, tiles, and ceramics: < 70% (new construction) / < 85% (renovation)
- bio-based plastics: < 80 % (new construction) / < 90 % (renovation)
- Mineral wool glass and insulation materials: < 70 % (new construction) / < 85 % (renovation)
- non-bio-based plastic: < 50 % (new construction) / < 75 % (renovation)
- Metal: < 30% (new construction) / < 65% (renovation)
- Plaster: < 65% (new construction) / < 83% (renovation)
If no information is available on the recycled content of a construction product, it can be assumed that it consists of 100% primary raw materials.
- The operator of the activity shall use electronic tools to describe the characteristics of the building in its constructed form, including the materials and components used, for the purposes of future maintenance, recovery, and reuse. The information is stored in digital form and made available to investors and customers upon request.
This environmental objective also focuses on information transparency, which is why any findings must be written down and published on request.
The DNSH criteria for the primary objective “Transition to a circular economy” are similar to the existing criteria for the first two objectives and will therefore not be discussed further here.
These high requirements can have a deterrent effect on investors and owners, which is why the primary target may be “climate change” or “adaptation to climate change”. However, even then, the DNSH criteria must be considered, which includes the obligation to prepare at least 70% of the general construction and demolition waste for reuse, recycling, or other recovery.
With this new appreciation of building materials, a reconsideration of the construction industry is to be expected in the medium term. The increasing demand, and thus value, of recyclable building materials as well as the already noticeable shortage of primary raw materials will permanently change the question “Demolition or renovation?”. Today’s construction standards, for example due to the use of composite materials, which make recycling more difficult, are unlikely to be able to meet the increasing demand for these materials. In the medium to long term, this will push the industry to set new building standards and make recycling a matter of course.