According to the report, preliminary data for the first quarter of the year shows that office take-up across the four major German cities was 20% lower than the same quarter a year ago.

Moreover, prime office rents moved sideways, marking the end of the strong upward trend in all cities except Hamburg. And given that strict lockdown measures were only enforced on March 21st, the data for Q2 will surely be worse.

Yet Capital Economics' analysts believe that German offices will outperform many other Eurozone markets, due to supply-side factors and the country's response to the Covid-19 crisis.

For example, the country’s high testing and low fatality rates have meant that it has been able to ease lockdown measures earlier, which will allow some parts of its economy to recover quickly, the report suggests.

As a result, Capital Economics' forecast for the decline in GDP and employment growth in Germany is smaller than the falls expected elsewhere in the bloc.

Employment issues
Despite the good news, Germany's unemployment rate is likely to rise by at least 3% this year. The government has tried to mitigate job risks with a short-term working scheme (kurzarbeit), but data shows that the unemployment rate shot up from 5.0% in March to 5.8% in April alone. It is expected that further weakness in the labour market will weigh on prime office rents.

However, the outlook for the second half of the year is considerably more cheering, if it can be assumed that lockdown restrictions will relax further. Capital Economics anticipates a significant rebound in employment, and rents thereafter.

Supply-side
The office market in Germany was very tight pre-crisis. While vacancy rates in Berlin, Munich and Frankfurt nudged up in Q1, they are still at multi-year lows, according to the data. Moreover, Frankfurt aside, vacancy rates in Germany are some of the lowest in the euro-zone.

And while construction activity has been excluded from the lockdown measures, the decline in the commercial property construction Purchasing Managers' Index (PMI) in March to an eight-year low suggests that it has still taken a hit, meaning some developments could be pushed back.

Overall, Capital Economics predicts that prime office rents in Germany will be about 1% lower by the end of 2020, marking the abrupt end to a strong five-year period where rental growth averaged around 7% per annum. Meanwhile, rents could rise by nearly 4% next year, in line with the economic rebound.