Stuttgart Real Estate Market Off to a Good Start in 2015

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1 STUTTGART Office Leasing and Investment Q MARKET REPORT Stuttgart Real Estate Market Off to a Good Start in 2015 ALEXANDER RUTSCH Research Analyst Stuttgart Office Space Take-up (in 1,000 sq m) > Take-up higher than Q1 2014; share of owner-occupiers remains high > Average leasing activity and leasing performance > Manufacturing companies are the motor driving leasing performance > Take-up is high especially in central locations; peripheral submarkets report heterogeneous quarterly results Commercial Transaction Volume (in billions of ) > Tenants continue to focus on small rental units > Top and average rents remain constant > Vacancy rate near all-time low > Completions are above average; occupancy over 70% > Transaction volume up on same quarter last year; number of transactions average > Large commercial buildings are a central factor in market activity > Open real estate funds and special funds as well as asset managers very active on both buyer and seller side > Demand remains high across all asset classes while supply is low > Yields are still on the decline, significant price increases noted especially in value add segment > International players are increasingly exploring the market

2 CityGate Stuttgart The Stuttgart real estate market got off to a good start in Q In contrast to previous years, activity was high right off the bat both in the office letting market and the investment market. While take-up in the office leasing market soared due to large area leases coming from the manufacturing sector, the investment market was impacted primarily by the sale of two commercial buildings. Yields dropped significantly and rents stayed high at 2014 levels. As in recent years, the significant excess of demand over supply continues. As a result, vacancies in the office leasing market dropped even further. RESEARCH CONTACT Stuttgart Alexander Rutsch Research Analyst alexander.rutsch@colliers,com Manufacturing Companies drive Take-up in Q1 The Stuttgart office leasing market (including Leinfelden-Echterdingen) began 2015 with above average take-up. With total leasing volume of 69,700 sq m, this was the best first quarter in ten years. The increase of more than 20% over 2014 (56,800 sq m) was driven mainly by manufacturing companies signing large area leases. More than half of total take-up relates to the manufacturing sector. Leasing activity was average with 81 leases signed while the share of owner-occupiers remained stable at the high level of 20% reached in The largest deal in Q for 9,500 sq m came from the group of owner-occupiers. Take-up was 56,600 sq m overall, an increase of 6,400 sq m over Q1 last year or an increase of 30% over the average of the last five years. 2 Market Report Q Office Letting and Investment Colliers International Stuttgart GmbH

3 As in 2014 large area leases took a large share of office space take-up. Four deals alone with more than 5,000 sq m each generated take-up of 30,600 sq m in this segment. Small area leases were also in focus. A total of 57 registered contracts resulted in take-up of 17,300 sq m. This is a 6% increase on the prior year Q1. Take-up in the middle segment was slightly down on the prior year. There was only one deal between 2,000 and 5,000 sq m, eight further deals that generated takeup of 11,000 sq m in the category between 1,000 and 2,000 and 11 deals in the segment between 500 and 1,000 sq m. Development of the Office Market Vacancy Rate (in %) The largest deal closed in the first quarter, not pertaining to owner-occupiers, was the spaced brokered by Colliers International to Robert Bosch GmbH for 9,237 sq m in Zeppelin- Carré. Furthermore, Daimler leased 6,200 sq m of office space in the Bürocampus Wangen (an office complex Wangen). Vacancy Rate Continues to Dive After a short period of stagnation during the second half of 2014, the vacancy rate continued its downwards trend at the beginning of Vacant office space of 314,200 sq m was registered at the end of 2014 which dwindled by an additional 9,600 sq m to 304,600 sq m at March 31, Given total office space stock of 7.5 million sq m, this equates to a vacancy rate of 4.0%. This is the lowest vacancy rate in more than 13 years in the Stuttgart office leasing market, an additional decrease of 60 basis points over Q Decreasing vacancy is visible in almost all of the Stuttgart submarkets, however, the highest impact has been seen in the submarket Vaihingen with a net decrease of 4,100 sq m during the past three months. This is due to the low volume of new construction combined with high leasing performance in Vaihingen. Current project completions in Stuttgart continue to remain at a high level. We expect an additional 98,000 sq m of office space to come on the market in 2015 alone. The increase in 2016 will be even higher at 140,000 sq m. Since almost 90% of the 2015 additional space and 70% of the 2016 addition are prelet, we expect the effect on vacancy development to be minimal. Important office space additions this year include the Daimler office building 128 in Stuttgart-Untertürkheim with 40,000 sq m and Oasis II on Heilbronner Strasse. The Oasis II project encompasses more than 15,000 sq m which are 100% prelet. Top- and Average Rents at a Constantly High Level The limited supply on the office leasing market is directly linked to noticeably rising prices. Substantially fewer leases were signed at rents under per sq m at the beginning of Only 10,800 sq m were registered in this price segment, which translates to 50% less than in the same quarter last year (about 20,600 sq m). The In contrast, take-up in the middle price segment between and per sq m rose significantly. The share of take-up in this market segment was up to 59% from 36% last year. Tenants were more hesitant in the market segment over Development of Top and average Office Market Rents (in per sq m) 3 Market Report Q Office Leasing and Investment Colliers International Stuttgart GmbH

4 No deals were realized in this segment during the first quarter. The segment directly below, priced at between and per sq m increased almost fivefold as compared to Q At per sq m, average rent remained stable at the high level of Q Quarter on quarter, this is an increase of 5% from This is the highest average rent recorded in the Stuttgart office leasing market for more than five years. Even though no leases were signed in the upper price segment starting at per sq m, at per sq m, top rent (for which the calculation basis is the lease contracts signed during the past 12 months) remained at the Q level. This was the highest value ever recorded in the Stuttgart office leasing market. Quarter on quarter, top rent is up by.70 per sq m as compared to Brisk Leasing Activity in City Center Locations; Manufacturing Companies Dominate the Market A total of 48 leases were signed in the submarkets City and City Center during the first quarter. Central locations made up 60% of total leasing activity. At 33,800 sq m, central locations also accounted for almost 50% of total take-up. Stuttgart Submarkets Fast Facts Office Leasing Take-up Leasing take-up 69,700 sq m 56,500 sq m Top Rent Vacancy Rate 4.0 % Office Space Stock 7.5 million sq m Take-up in the decentrally located submarkets varied widely. While take-up was low in Degerloch (one lease for 200 sq m), Fasananhof (two leases for 600 sq m) and Leinfelden- Echterdingen (one lease for 800 sq m), Möhringen outperformed total 2014 take-up by 90% in the first three months of 2015 alone. This was due to the owner-occupier mentioned earlier, who took-up 9,500 sq m. Submarket Vaihingen also performed better than the same quarter last year with 8,700 sq m taken under lease (3,400 sq m in Q1 2014). Vaihingen also posted the most leasing activity among decentralized submarkets with eight deals closed. The trend toward smaller units (up to 500 sq m) in City Center location continued in Q This segment accounted for 86% of leases signed in the submarket City Center and more than 60% of the leases signed in the submarket City. With take-up of 40,100 sq m and a share of about 58% of total market take-up, manufacturing companies dominated leasing activity during Q All leases signed for more than 5,000 sq m were in the manufacturing sector. In addition, government agencies (6,400 sq m) and consulting firms (6,300 sq m) were especially active. Outlook As a result of the brisk activity in the manufacturing sector, the Stuttgart office leasing market began 2015 with the highest take-up ever registered during the first quarter. Despite high completion levels, vacancy dropped again significantly in Q and rents remained at the high levels reached at the end of We expect demand to continue to be high for the remainder of the year, reaching a total annual result of 200,000 sq m. 4 Market Report Q Office Leasing and Investment Colliers International Stuttgart GmbH

5 Stuttgart Office Leasing Market Q Market Overview Submarket Data Location Take-up (including owneroccupiers) Leasing Performance (excluding owneroccupiers) Rents 1 Average Rents Vacancies (including sublease space) 2015 Completion (1) City center 23,000 sq m 23,000 sq m /sq m (3) 14.90/sq m 53,900 sq m 7,200 sq m (2) Inner city 10,800 sq m 9,600 sq m /sq m (3) 12.30/sq m 59,400 sq m 10,000 sq m (3) Zuffenhausen (4) Feuerbach 2,600 sq m sq m /sq m (3) 14.40/sq m 13,000 sq m 23,200 sq m (5) Weilimdorf 2,200 sq m 2,200 sq m /sq m (2) 8.40/sq m 24,600 sq m 0 sq m (6) Bad Cannstatt (7) Wangen 9,900 sq m 8,400 sq m /sq m (2) 10.30/sq m 24,300 sq m 40,000 sq m (8) Vaihingen 8,700 sq m 7,700 sq m /sq m (3) 11.20/sq m 25,400 sq m 6,000 sq m (9) Degerloch 200 sq m 200 sq m /sq m (2) 10.00/sq m 10,500 sq m 0 sq m (10) Möhringen 10,900 sq m 1,400 sq m /sq m (2) 9.30/sq m 31,500 sq m 0 sq m (11) Fasanenhof 600 sq m 600 sq m /sq m (2) 9.90/sq m 16,000 sq m 0 sq m (12) Leinfelden- Echterdingen 800 sq m 800 sq m /sq m (2) 8.90/sq m 46,000 sq m 11,300 sq m Gesamtmarkt 69,700 sq m 56,500 sq m 12.60/sq m 304,600 sq m 97,700 sq m (1) Rents achieved in /sq m during the last 12 months (2) Achieved in existing buildings (3) Achieved in existing buildings and new construction 5 Market Report Q Office Leasing and Investment Colliers International Stuttgart GmbH

6 Stuttgart Investment Market Benefits from Strong Tailwinds The Stuttgart real estate investment market performed above average again in Q The institutional transaction volume reached 220 million (including residential investments). The ongoing favorable economic environment boosted investment willingness by both national and international buyers. Transaction volume in the Stuttgart market was up in Q1 overall by 20% (plus 180 million) on the prior year. The number of transactions was average at 15. A large amount of the volume transferred pertains to commercial real estate investments. This segment accounted for 182 million, which is an increase of 14% over the good Q results. The transaction volume related to institutional residential investments more than doubled in the first three months of the year as compared to Q The Stuttgart real estate investment market continues to suffer from a lack of new projects, investors focused on existing buildings in the first quarter. The largest share of overall transaction volume related to city center properties; the sale of a prime commercial building on Königstrasse and the sale of the Tübinger Carre to UNION Investment Real Estate. The purchase price for Tübinger Carre was more than 50 million. This prime property on Christophstrasse has more than 16,700 sq m of total office, retail and restaurant space. The Milaneo residential portfolio was sold to PATRIZIA Deutschland GmbH for 30 million. Transaction Volume by Buyer Segment (in millions of ) OI/SF = Open Real Estate Funds/Special Funds / PI = Private Investors / IM = Real Estate Companies / EN = Owner- Occupiers / SO = Other With the acquisition of the two commercial buildings in Stuttgart, national and international open real estate funds and special funds had the largest share of investment volume in Q This investor group became increasingly active in recent years and accounted for almost 50% total investment in commercial real estate properties in Private investors and family offices made up an additional 20% of commercial transaction volume. Transaction Volume by Seller Segment (in millions of ) Commercial buildings accounted for more than 50% of the commercial transaction volume in early The asset class office came in second place at 26%. Large volume transactions were missing among the other property types during Q This is due to the continued low supply of attractive properties in asset classes such as logistics and hotel. We see far more demand than supply of investment properties in these segments. OPF = Opportunity Funds and Private Equity Funds / PI = Private Investors / PE = Project Developers / IM = Real Estate AGs / EN = Owner Occupiers 6 Market Report Q Office Leasing and Investment Colliers International Stuttgart GmbH

7 On the supply side, private equity funds and opportunity funds accounted for a significant share of commercial transaction volume. On the seller side they took in 50% of total transaction volume or 94 million. Strong Interest Shown by International Investors Declining money market and pension yields combined with low-cost financing led to higher demand for investment real estate in Stuttgart by both national and international investors market in Q International players on both the buyer and seller sides accounted for more than a third of total transaction volume. Portfolio deals took an average share of transaction volume at 10 %. One example in this sector this was the sale of a B&B hotel complex to the French REIT Fon Foncière des Murs by the Carlyle Group. Yields Continue to Drop, Low Supply in the Core Segment A moderate decline in yields across all asset classes was recorded at the beginning of the year. Top yields in the core segment for office buildings dropped to 5.0%, for city center retail properties to 4.0% and for logistics properties to 6.5%. Investor demand for properties in the risk-averse core segment remained high, while supply in this segment continues to be low. Development in Top Yields by Type of Use (in %) Despite low inventories, the largest acquisitions made in Q1 were in this low-risk segment. Due to the lack of available properties for sale and significant price increases in the riskaverse core segment, investors widened their focus to include riskier opportunities. Office buildings in peripheral locations traded hands often during the first three months of the year resulting in an even bigger dip in yields than in the core segment. Fast Facts Investment Transaction Volume Largest Buyer Group: Open Real Estate Funds and Special Funds Largest Seller Group: Opportunity and Private Equity Funds Most Important Type of Real Estate: Retail million 58.1 % 30.9 % 58.1 % Top Yield Office 5.0 % Outlook Transaction volume in the Stuttgart real estate investment market took over in Q where 2014 left off. Demand for good investment product continues to outpace supply, resulting in increasing prices across all asset classes. We do not expect this excess demand to decrease allowing an increase in yields. Portfolio managers are taking advantage of the favorable market environment to divest properties in order to improve overall performance. Pressure to reinvest, however, keeps the supply of attractive investment opportunities low. In view of the interest-driven investment pressure and upcoming large volume divestitures, Colliers International expects investment volume to top 1 billion in Market Report Q Office Leasing and Investment Colliers International Stuttgart GmbH

8 502 offices in 67 countries on 6 continents United States: 140 Canada: 31 Latin America: 24 Asia/Pacific: 199 EMEA: 108 Author: Alexander Rutsch Research Analyst Stuttgart alexander,rutsch@colliers,com Colliers International Stuttgart GmbH Königstr Stuttgart Germany TEL $2.1 billion in annual revenue 1.46 billion square feet under management 16,300 professionals and staff About Colliers International Colliers International is a global leader in commercial real estate services, with over 16,300 professionals operating out of more than 502 offices in 67 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owner and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the secondmost recognized commercial real estate firm in the world. colliers.com Photos: CityGate Stuttgart, The Carlyle Group Copyright 2015 Colliers International Stuttgart GmbH, The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report,