Strong CRE Market Belies Germany’s Economic Slowdown

Many economies suffered a slowdown in the second half of 2018 but perhaps the biggest surprise was the sharp downturn in Germany. Having expanded by 2.5% in 2017, the German economy contracted by 0.2% in Q3 2018. The latest estimates show no growth in Q4, so it seems that Germany avoided a recession only by a hair’s breadth.

But it’s a very odd slowdown. As the economy was slowing, commercial property was booming. 2018 was a record year for investment, and the average prime office rent growth in the big five German cities reached the highest since 1999. Logistics rents also set new records.

Weaker auto production played big role in German slowdown

While overall German GDP increased by a modest 0.6% in 2018, manufacturing output fell by 2.3% and, within manufacturing, car production was down 6.0%.

Germany is the premier high-value car manufacturer in Europe and saw numerous shocks to that industry in 2018. A slowing economy and escalating household debt in China led to an abrupt slowdown in car imports. The introduction of new emission standards (WLTP) caused short-term closure of plants. It is also likely that the long, global upswing in new car buying fueled by cheap and easy credit is coming to an end. The emergence of electric vehicle technology also is a factor. Some consumers may be putting off new car purchases until electric vehicles and support services are more established.

Cars account for 20% of value added in German manufacturing and 4.5% of GDP (much more than in other European countries).  Moreover, extensive auto industry supply chains mean that there is a much bigger impact on the German economy. While December data indicated that the disruption caused by new environmental regulations might be over, January data confirmed that the German auto industry has still not recovered.

Nevertheless, improving financial conditions, continued employment growth, rising nominal wages and the boost to real incomes from lower oil prices, which are still 25% down on their October peak, should make 2019 a better year for the German economy.

German real estate performance remains encouraging

Regardless of uncertainty over the economy, optimism about commercial property in Germany continues. We expect the prime office rent growth in the big five cities to average 5% in 2019, slightly slower than in 2018.

The continued buoyancy of the real estate sector implies that recent weak GDP and manufacturing output figures give a misleading impression of the state of the German economy. Further, buoyant real estate demand and rising rents suggest that once the immediate problems of the car industry are remedied, the German economy will begin growing again.

By Neil Blake, Global Head, Forecasting and Analytics and Richard Barkham, Global Chief Economist, CBRE.

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