Frankurt office rent pace unlikely to be sustained – study

A new report from the European commercial property team at Capital Economics provides food for thought as to where office rents are going, particularly in Frankfurt. Specifically, the report, authored by senior property economist Hamish Smith, concludes that the recent pick-up in Frankfurt office rents won't be sustained, despite strong occupier demand and limited completions, which have provided a boost to rent levels.

Across German office rents have benefited from the strong German economy and labour market, with unemployment falling to just 3.4%. A shortage of development has also helped to keep rent levels buoyant. With Berlin grabbing much of the limelight for the last three years, Frankfurt growth rates have recovered to overtake Hamburg and Munich, but still lag Berlin.

The report says that take-up in Frankfurt last year arguably overshot what might be expected on the basis of employment growth alone. So, while Frankfurt benefited from exceptionally strong levels of occupier demand last year 2017, 50% above the 2012-2016 average, the volume of new completions has not kept pace with demolition and conversion of older stock, with the result that the overall level of stock has been falling, by about 200,000 sqm over the last 18 months. This has helped push the vacancy rate down by more than 200 bps since the end of 2016, from 10.1% to 8.0%.

However, take-up was boosted last year by several large leasing transactions of over 10,000 sqm, which are unlikely to be repeated this year. And, with the labour market operating at near-full capacity, surveys are suggesting that employment growth will soon slow, which will inevitably affect occupier demand growth.

While several new completions are coming on stream this year and next, they won't outpace occupier demand, meaning further falls in the vacancy rate, but at a slower rate of decline, consistent with slower rental growth. The author expects the outlook for Frankfurt prime rates to remain positive, but says the recent rally in rental gowth is unlikely to last beyond this year, in which rises of 3.5% to 4% are expected – down on the 4.5% seen last year, but ahead of next year's slower growth of about 2%.