No signs of slowing – strong first half year for Frankfurt Office Market

Following 2017’s record results, the office market in the Financial Centre Frankfurt continues to boom with take-up in the first half of 2018 reaching third highest level of the past ten years and the best first quarter since 2000. According to experts at BNP Paribas Real Estate, CBRE, Savills Investment Management and Jones Lang LaSalle, the high level of activity in Frankfurt is leading towards the lowest vacancy rate in 15 years which will continue to fall in the latter half of 2018.

As a result of Brexit, 25 financial services firms have declared intentions to expand or move operations to the Financial Centre Frankfurt. Frankfurt Main Finance expects about 2,000 Brexit related positions will be relocated to Frankfurt by the end of 2018 and still holds its estimate of up to 10,000 potential positions in the medium-term, which have yet to impact demand on the real estate market to their full-extent.

Financial services firms affected by Brexit can still expect to find ample, modern office space in the city centre. Frankfurt remains affordable in international comparison, despite the waning vacancy rate now at 8.3% and Prime Rents increasing to 43 EUR/m2/month, according to data published by BNP Paribas Real Estate. In fact, the Financial Centre Frankfurt is just a fraction of the price of London or Paris. In the second quarter, prime rents in London and Paris topped 118 and 71 EUR/m2/month, respectively. Both cities have a vacancy rate below 6%.

These developments are discussed in detail by the Managing Director and branch head of BNP Paribas Real Estate, José Martínez, and Carsten Ape, Managing Director of CBRE, Andreas Trumpp of Savills Investment Management and Markus Kullmann of Jones Lang LaSalle (JLL), as well as Managing Director of Frankfurt Main Finance, Hubertus Väth.

The deviations in the data concerning vacancy rate, take-up or prime rents between the participating real estate firms result from the varying collection methodoligies or populations. Frankfurt Main Finance does not weight or value the individual methods, but instead presents them transparently.

José Martínez, Managing Director of BNP Paribas Real Estate GmbH and Frankfurt Branch Manager

“The upward trend in the Frankfurt office market continues. With a take-up of 273,000 m2 in the first half of 2018, the result is just under 14% above the ten-year average. Compared nationwide, take-up was higher only in Munich and Berlin.

In no other city are the results distributed so evenly across the various industry groups as in Frankfurt. First place is taken by banks/financial services with a share of 14.5%. Second place is taken by co-working providers, which contribute just over 12 % and are gaining increasingly in importance as a demand group in Frankfurt as well. The top three is completed by the group media and advertising, which is responsible for 12%. Places four to six are filled by three industry groups, which each have a share in take-up of just under 11%. These are public administration, ICT firms and consultancies. This even distribution of the result underlines impressively the very broad demand base and lively market activity. Among the most important deals were the leases of 24,000 m² by the FAZ newspaper in Europaviertel, 8,300 m² by the German Finance Agency in Heddernheim/Mertonviertel and 8,000 m² by the Bethmann Bank in the Banking District.

The reduction in the amount of vacant space has continued and currently stands at 1.28 million m². This is the lowest volume in the last 15 years. Of the total vacancy, however, just under 48% (611,000 m²) has the modern quality preferred by occupiers. The vacancy rate in the overall market has fallen to 8.3%. The biggest problem remains the shortage of space in the central, highly-sought-after locations. Due to the strong demand and inadequate supply of high-quality space, construction activity has increased. A total of 592,000 m² is under construction, but only about half of it is available to the market; the rest is already pre-let. It also needs to be taken into account that most of the supply is only concentrated on a few projects, which in some cases will not be available until 2023. As a result of the relationship between supply and demand outlined above, the top rent has increased compared to the previous year by 12% to 43 €/m². A similar dynamic upward trend has also been recorded for average rents, which have risen by just over 8% to currently 18.30 €/m².

The strong demand situation and the supportive economic environment for the occupier markets will stimulate take-up in the second half-year. This will be even more the case, because the share of major deals should increase. Against this background, an above-average take-up is again expected for the year as a whole, which should exceed the 600,000-m² mark. As the reduction in the amount of vacant space will continue, albeit at a slower rate, a further increase in rents is expected.”

Carsten Ape, Managing Director, CBRE

“Thanks to the strong economy, Frankfurt is in a dynamic state. We are observing an unwaveringly high demand in the office market. With an office space take-up of 253,700 m2 the first half of the year was 13 % above the strong previous years. That strong momentum at the beginning of the year persists throughout the first half of the year.

While the first quarter of the year was dominated by single large-scale projects such as the Frankfurter Allgemeine Zeitung leasing around 24,000 m², the current growth in Frankfurt can mainly be attributed to the traditionally strong financial sector: in addition to banks, consulting firms and law firms, companies from the real estate industry are looking for space.

Moreover, the focus increasingly lies on small-scale objects of up to 1,500 m² – a segment which made up 53% of the 106,800 m2 take-up of the second quarters. Co-working is contributing to that upsurge: within just a few years take-up increased from 1,100 m² in 2015 to 24,800 m² in the first half of this year. Especially start-ups are causing a demand in shared offices – an innovative segment giving the Frankfurt office market an opportunity to grow and ensuring its flexibility.

The high demand, the repurposing and demolition of existing office space as well as a rather modest number of completed real estate projects, caused the vacancy rate to drop to 8.5%. However, construction activity remains to be high. The pipeline is well filled. By the end of 2018, 114,000 m² of office space is to be completed in Frankfurt, of which only about 16% is still available. While the number of available office space is becoming increasingly limited, there is still room on the market.

It is likely that Brexit will have an impact in the medium term. Currently, the political developments in Great Britain are unpredictable and thus, many market participants are awaiting the outcome of the negotiations. However, it can be predicted that Frankfurt will be one of the Brexit winners.

The strong momentum of the Frankfurt office market is likely to continue throughout the second half of the year. The persistently high demand and shortage in office space located at the city centre could lead to an increase in prime rents. Nonetheless, national and international investors are interested in attractive investment opportunities in the Rhine-Main area. Frankfurt continues to be a focal point.”

Andreas Trumpp MRICS, Head of Research Deutschland, Savills Investment Management

“The outcome of the negotiation process for Great Britain’s departure from the European Union will determine the future of other Financial Centres such as Frankfurt. In 2017, the Frankfurt Office Market was marked by record results, even without Brexit-related relocations. An upward trend that persists in the first half of this year. The dynamic of Frankfurt and the Rhein-Main-Region is beneficial to real estate investors, which is amongst the reasons of why Frankfurt moved up 4 places to the 17th most dynamic city in Europe in the recently published Savills IM Dynamic Cities Index. The Main metropolis benefits from its excellent international train and airport infrastructure, above average public transport system and digital network on the local, national and international level. Real estate investors will find investment opportunities in every size category, real estate segment and risk profile. The Financial Centre Frankfurt offers unique investment opportunities that other German cities can hardly provide.”

Markus Kullmann, Team Leader Office Leasing Frankfurt am Main, JLL

“The Frankfurt Office Market reached a strong sales momentum midyear. With a take-up of 260,000 m² a comparison to the previous year (+ 9%), and both the 5- and 10-year average (+ 28% bzw. + 14%.) highlights the outstanding performance. Frankfurt has reached its third-best half-year take-up volume in the past ten years. While large scale rentals of over 10,000 m², such as the rental by the FAZ in the first quarter, do not occur every quarter, we are highly confident that the second half of the year will yield some top lettings – at prime rates. Companies seeking to hire or keep high-calibre personnel are willing to pay prime rents for excellent properties in top locations. Since the dynamic of demand continues to be high, I am confident that take-up will reach 575,000 m² in 2018.

An issue with which actors will be confronted on Frankfurt’s real estate market: vacancy does not necessarily mean vacancy. Available space does not meet the requirements in location, amenities, leasing period and rent. Meanwhile, the vacancy rate is at 7.3 %, with tendency to decrease to 6.8% by the end of the year. As quick reminder: The highest quote was at 17.9 % in 2006. From 2011 (15%) onwards, it gradually declined.

The urgently needed vacant office space did not become available on the market in the second quarter. This is unlikely to have changed by the end of the year. The supply in completed office space of around about 10,000 m² that will become available on the market in the next months is rather modest. I expect a notable relief to hit the market in 2020. By then, 485,000 m² could be constructed.”

Hubertus Väth, Geschäftsführer, Frankfurt Main Finance e.V.

“The high level of leasing activity in Frankfurt and the sinking vacancy rate show that the real estate market in the Financial Centre is booming. The extraordinary quality of life, excellent infrastructure, high concentration of innovative companies and the strong global commercial network make Frankfurt and the Rhein-Main Region one of the most popular destinations international firms. Frankfurt is able and ready to accommodate the numerous financial services firms relocating to Frankfurt from London due to Brexit.”