Frankfurt's banks leasing ever less space, vacancies heading upwards

They may still be the biggest employers in town, but Frankfurt's banks have been renting less and less office space in the German banking metropolis. At a presentation of a new study last week in Frankfurt by advisors Cushman & Wakefield, attended by REFIRE, it is clear that that trend is set to continue. What's not at all clear is whether representatives from other industries will be able to pick up the slack, in a city which has traditionally had a high level of office vacancy.

C&W forecasts that the amount of space occupied by banks will decline from the current 1.5 million sqm to just under 1.2 million sqm in 2026. This represents a decline of around 13% to a 10% share of Frankfurt's total office space. As recently as 2000, banks occupied 19% of all available office space in the city. It's been in steady decline since then.

Pierre Nolte, head of office agency for C&W in Frankfurt, said that in addition to tracking the decline over the last years, the forecasts through to 2026 "are based on already known lettings, location relinquishments and applications on the market, as well as the plans of individual financial institutions, as far as can be ascertained." The two heavyweight banks, Deutsche Bank and Commerzbank, are alone set to reduce their office requirements by a further 35% by 2026.

Laura Müller, associate director Research at C&W Deutschland, said the loss of the banking space would only be partially compensated for by other tenant groups. Higher vacancy rates lie ahead, she said, although it was unlikely we would revisit the 17% vacancy rate at the peak in 2004. Vacancies will become highly differentiated across office types and locations. High-quality office space in the best business locations will remain in demand. Properties with poorer ESG ratings, or difficult locations, are going to have problems.

Why is this happening? Digitization and the shift in business focus are the main reasons for the banks needing less office space in Frankfurt. For IT-heavy jobs in the financial sector, Berlin has stolen a march on Frankfurt, as also has Munich, relegating Frankfurt to third place. Fast-growing fintech companies are also giving Frankfurt a wider berth. The banks themselves are making much wider use of home offices, and that trend looks as if it's here to stay. And the hoped-for influx of banking staff in the wake of the Brexit decision never really came to pass, with any exodus from London primarily benefitting other financial centres such as Paris, Dublin and Amsterdam.

Overall, the vacancy rate in Frankfurt's office sector probably hit the 10% mark at year-end, according to Stephan Leimbach, head of office letting at JLL. And that's just the headline figure, not including much space that's probably not being used by the current tenants, but may later be primed for a sub-tenancy. Landlords should be bracing themselves for lower future rental income, said Leimbach recently in an interview with trade publication Immobilien Zeitung. The market is turning from a landlord market to a tenants market, he said. It's happening across Germany, but Frankfurt as always is most sensitive to market shifts.

According to Leimbach, the use of incentives by landlords to keep tenants sweet and not dilute the nominal payable rents has been on the increase since the first corona year in 2020. This was less necessary for the highest-quality offices, but sometimes helped to smoothen things out in less exalted properties. As such, the much-prized 'peak rents' could be shown by the broker community to be holding up - whereas more run-of-the-mill offices were beginning to ask their landlords for a few extra bon-bons. C&W puts the value of these at about 5.8% on a five-year lease, in the form of rent-free periods and other incentives.

In their forecasts for Germany's office leasing markets at the beginning of January, all the big broker groups are unanimous that office vacancy rates are going to rise through 2023, putting a damper on the rent rises that were still visible through the first three quarters of last year.