City Survey

Q1 2024

Chapter 2Macroeconomic environment

2.1The German economy has hit a rough patch

The German economy is off to a cautious start to the new year. The growth outlook for 2024 has recently been revised downwards and the Consenus forecast now expects only minimal growth of 0.1 percent. The ifo Business Climate Index has improved slightly in the last two months since a low in January 2024 and returned to the level of mid-2023 in March 2024 at a value of 87.8. Despite the slight brightening, the index remains in negative territory and thus does not signal any noticeable recovery. In the second half of the year, a slight improvement in the economic environment seems possible, which will continue in 2025. For the coming year, the Consensus forecast expects economic growth of 1.1 percent for Germany.

The subdued economic development will therefore slow down demand for space on the commercial markets in the coming months. On the positive side, the labour market remains very stable. The unemployment rate is expected to rise only marginally in 2024. With falling inflation rates, the current wage settlements are leading to a positive development in real wages, which will support private consumption and also have positive effects on the housing market. 

Economic growth and inflation (in percent y-o-y)

Sources: Oxford Economics (March 2024), Colliers
Forecast from Q1 2024

Inflation rates in both Germany and the eurozone have recently continued to move towards the 2 percent mark, even if this has not yet been reached. In the market, most market participants are currently expecting the ECB to cut interest rates for the first time in June, which could be followed by 2 to 3 further interest rate hikes later in the year. This will bring key interest rates towards 3.50 percent to 3.75 percent at the end of 2024. However, uncertainty remains high and a later and weaker interest rate cut by the ECB is also within the realm of possibility.

Interest rate trend (in percent)

Sources: Oxford Economics (March 2024)
Colliers forecast from Q1 2024

The interest rate environment was comparatively stable in the first three months of the year. The 10-year SWAP rates are in a narrow corridor between 2.50 percent and 2.75 percent, and the 10-year German government bonds have recently fluctuated between 2.25 percent and 2.50 percent. If doubts about an interest rate cut in June grow, an upward movement in interest rates cannot be ruled out. In its forecast, Oxford Economics expects a stable level within the range of the current corridors. For the real estate market, this situation does not result in any positive impetus from significantly declining financing conditions, but it does provide better predictability with lower volatility than in the course of 2023.

The upward pressure on initial yields persists in this environment, but has eased somewhat recently. At the end of Q1 2024, the risk premium for prime office properties in the top 7 (unweighted gross prime yield of just under 4.85 percent) was around 250 basis points. As a result, real estate investments currently appear more attractive than a year ago (spread: 180 basis points). A further slight adjustment of initial yields with increases towards 5.00 to 5.25 percent until Q3 2024 seems possible in the current environment.

Bond and real estate yields (in percent)

Sources: Oxford Economics (March 2024)
Colliers forecast from Q1 2024

2.2ESG – 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:

  1. 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.
  2. 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.
  3. Construction designs and techniques support circularity by integrating design concepts for adaptability and dismantling.
  4. In the case of renovations, at least 50% of the original building must be preserved.
  5. 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.
  6. 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.  

Chapter 3 Leasing market