James Lapushner, Managing Director - Morgan Stanley Merchant Banking, Frankfurt say: 

Attached is a research piece prepared by Morgan Stanley that reviews the economic stability of the top industrial countries - it is interesting to see how Germany continues to outperform the rest of the industrialized world economies including the USA, Canada, France and the UK.  Not only, does Germany continue to excel in GDP growth, but German relative unit labor costs fell by 15% since 1999 (page 5) due to massive corporate restructurings during the German recession of 2001-2006.  Even more interesting is that Germany continues to control inflation (page 6) and has one of the best global current account balances (page 22).  In addition, German unemployment dipped more than expected in August 2008 by a decrease of 40,000 and pay increased by 4.6% in the first half of this year on the back of strong labour performance wage deals.

Consequently, the positive influences of the economy and the lack of supply of new space over the last seven years (page 16) have translated into strong rental growth in the last 18 months and even more recently in the last 3 months.  We have seen construction inflation of 25% over the last two years and are expecting further construction inflation of 10% this year.  Accordingly, stronger than expected construction inflation combined with tougher lending standards will cause some of the lowest construction levels in Germany in the last 20 years.

Here is the Great news: In July, we executed over 50,000 square meters(525,000 square feet) of leases in Germany.  In Berlin we recently executed three leases with each lease being over 1,000 square meters and for rents of €26/sqm/month, €28/sqm/month and €33/sqm/month.  Each lease was (i) longer than 5 years, (ii) provided incentives that were lower than market standards, and (iii) set a new top rent in Berlin.  Accordingly, we also just signed 4 new leases in Hamburg for rents of €25.50/sqm/month, €27.20/sqm/month, €30/sqm/month and €32/sqm/month under similar terms as the Berlin leases.  Once again, each lease set a new peak rent in Hamburg.  We have also had similar successes in the remaining top 5 office markets.

Below is the Morgan Stanley market report

European Economics A Shift in the Growth Landscape?