Analysis from leading real estate firms and investors shows demand and prime-rents in the Financial Centre Frankfurt reach record highs, while the vacancy rate steadily declines to its lowest point in years. Nearly sixteen months after the Brexit referendum, developments in the Frankfurt Office Market clearly reflect Frankfurt’s popularity amongst banks leaving the United Kingdom. As an estimated 10,000 jobs relocate to Frankfurt over the next four years, numerous construction projects will help to meet high demand for premium office space.
Increased demand in the market has driven investor confidence and analysts report a notable increase in transaction volume in comparison to 2016. Additionally, Frankfurt has also seen larger deals exceeding 10,000 square meters as firms seek larger, contiguous office space to accommodate their expanding operations and personnel. Despite increases in demand and prime-rents, the Financial Centre Frankfurt remains competitively priced relative to other European financial centres.
These developments are discussed in detail by the branch heads Frankfurt Main Finance member BNP Paribas Real Estate, José Martinez and Oliver Barth. Additional observations and perspectives are given by real estate experts from KGAL, Savills Investment Management, and Jones Lang LaSalle (JLL).
José Martinez and Oliver Barth, Managing Directors and Frankfurt Branch Heads of BNP Paribas Real Estate
The Frankfurt office market is continuing to expand rapidly. With a take-up of 477,000 square metres, it achieved its best result of the last 15 years. This outstanding performance puts the city third behind Berlin and Munich. Remarkably, demand is spread relatively evenly across all size classes and market segments, thus testifying to the broad basis for this demand. On a particularly encouraging note, several large-scale deals in excess of 10,000 square metres emerged again at last. After the shortage of the last few years, they are currently accounting for 20% of total volumes. One of the largest contracts (around 27,500 square metres) was signed by Helaba in Kaiserlei.
Supply is keeping pace with the robust demand of the last two years. Currently, 1.51 million square metres of office space are vacant, down 10% on the third quarter of 2016. However, only around half of this floor space, namely 749,000 square metres, exhibits the high-quality modern fittings being sought by tenants. At 9.8%, the vacancy rate across the entire market has now dipped below the 10% threshold. At this stage,
the extent to which Brexit leaves traces on future trends in the Frankfurt commercial real estate market still remains to be seen. The fact is that, although Brexit is being felt on the Frankfurt market, it is not a dominating factor. BNP Paribas Real Estate is in initial, good and promising talks with potential relocators. The fact that something is going on is also reflected in the deals by Morgan Stanley and Goldman Sachs that have secured substantial floor space in Frankfurt. If all current inquiries in the market coincide with signings by Brexit banks, this could theoretically cause a bottleneck situation in the Frankfurt CBD, where currently only 120,000 square metres of modern office space are available. In fact, in the banking district, only about 66,000 square metres are vacant. An estimated 150,000 square metres are required for the 10,000 employees expected to additionally come to Frankfurt. However, on the basis of total vacancies, Frankfurt would not experience any problem offering suitable office space if push comes to shove, although not all of this would be in the CBD. The situation will be eased by a number of attractive development projects that are currently under construction such as WINX, Omniturm and Marienturm, which will be completed in time in 2018/2019 and still have vacancies.
At this stage, all signs are pointing to continued brisk demand until the end of the year. Accordingly, total take-up for the year as a whole should come to between 750,000 and 800,000 square metres, resulting in one of the best years ever. Simultaneously, we expect vacancy rates to continue shrinking, meaning that rents will probably rise to some degree.
Frankfurt can strengthen its post-Brexit role as a leading financial centre and additionally enhance its appeal, as the decision made by a number of London banks to base their EU headquarters in Frankfurt shows. The airport is conveniently located near the city centre and is a genuine Frankfurt asset, the importance of which will continuously increase with growth in trade and European integration. Office buildings in Frankfurt in particular are rising substantially in value as a result. However, what we are also noting is that residential quality has improved in Frankfurt over the last few years and this is having a corresponding effect on the intrinsic value of residential real estate.
Andreas Trumpp, Savills Investment Management
From our point of view, Frankfurt offers a wide range of affordable office space both in the CBD and in B locations and could effortlessly absorb a further 10,000 office workers. The inflow could only be limited by the lack of available housing. In any case, the retail and food sectors would profit from the influx of well-payed bankers. As one of the world’s major financial centres, Frankfurt boasts outstanding accessibility, i.e. an airport which is close to the city and superbly integrated in the public transport system as well as the short routes within the city and the entire region. The local companies, political and research institutions attract highly qualified specialists from all around the world, thus contributing to diversity in the city.
Brexit has reached Frankfurt. Preliminary signings have been completed over the last few weeks.
JLL is in constant close contact with a very large number of companies that expect Brexit to impact some of their business segments. Service providers addressing the financial sector are also exploring the market for suitable floor space. However, the Frankfurt office real estate market is not an unknown quantity for most potential tenants as they already have at least a small representative office in the city.
In addition to an available selection of potential high-quality alternative spaces, they especially appreciate the excellent infrastructure, for example the airport.
After already becoming evident last year, one fact has been confirmed in our recent talks, namely that it is not a question of a full-scale relocation of a large number of jobs from London to Frankfurt but of incrementally building up the necessary capacity. And in the most important cities of Europe. Apart from Frankfurt, Paris, Amsterdam, Dublin and Luxembourg also play a role. We expect around 100,000 square metres of office space to be absorbed above and beyond customary market demand in the wake of Brexit.
True, there are some signs of a shortage of floor space in some parts of Frankfurt. For example, we can only offer a small selection of legacy properties in the traditional banking region. This particularly applies to high-quality contiguous floor space of more than 5,000 square metres. That said, the large number of new construction projects, such as OmniTurm, MarienTurm and the Four project at the former Deutsche Bank site, will push more than 250,000 square metres of new office space onto the market between 2019 and 2022. Accordingly, we do not expect the recent rise in demand to trigger any massive increase in prices in the Frankfurt market in the medium term. At the moment, the top rent is at EUR 37.50/m²/month, the highest among the Big 7 and at a vacancy rate of 8.2%, also the highest among the German real estate hubs. However, in the areas where the focus of the companies in question is located, it is significantly less. Depending on submarket and quality, it may currently only be 4-6%.
Hubertus Väth, Geschäftsführer, Frankfurt Main Finance e.V.
The availability of commercial real estate is the least of Frankfurt’s concerns. Over a period of 5 years, 250,000 square metres of new office space will be created in several new high-rise buildings. Currently, 19 buildings are under construction and 26 in the planning phase in Frankfurt. As it was, there was already need for action in the residential market. Now conditions have worsened. The situation with respect to micro-apartments for commuters and high-rise living is better than with affordable housing for the mass of interested parties. However, the problem is known and there is still some lead time. Accordingly, it should be manageable with combined forces.
The Financial Centre Frankfurt is in the pole position to win banking business from London following the results of the UK’s referendum. Noted for its strong economic and political stability, Frankfurt and the region offer a top infrastructure, a deep talent pool and an extremely high quality of life. Financial services moving to Frankfurt will find a competent, helpful and welcoming regulator in BaFin, who will accept large portions of applications in English. The Financial Centre is already home to more than 150 foreign banks and 75,000 people employed in financial services.