There is now clear evidence of the damage being wrought on office turnover in Frankfurt and the other top German commercial centres as a result of the corona crisis, with reports coming in from a variety of sources as to how the office markets are reacting to the new realities.
Half-year figures in from broker association German Property Partners (GPP) indicate that new lease agreements are down by a third year on year, with no let-up expected until next year at the earliest.
According to Oliver Schön, spokesman at GPP, "How and whether the current situation will have an effect on the development of rental prices and the supply of space in the long term cannot yet be foreseen. Even if in some places the situation is very slowly returning to normaility."
"We expect the top 7 locations to have around 2.5 million square metres of space available by the end of the year. In 2019, the figure was around 3.87 million square metres," predicts Schön, extrapolating the figures that GPP has calculated for the seven largest German cities. The figures were based on January to June.
Hardest hit so far has been Frankfurt, which is down by 55% on the year so far. Munich recorded the lowest fall (minus 19%). In the other Top 7 cities, too, demand has dropped significantly. Hamburg recorded the second largest decline of 47%, followed by Stuttgart (minus 445), Düsseldorf (minus 35%), Cologne (minus 34%) and Berlin (minus 24%).
Companies are definitely holding back on their search for new or additional office space. Anything based on companies’ actual expansion plans are being put on hold.
Over the first half, only in Berlin has the vacancy rate decreased, and there only from 1.6% in 2019 to 1.3% now. In Düsseldorf and in Munich it remained largely stagnant, while in the other four cities the supply of available space has increased, in Frankfurt to 7.2%, Hamburg to 3.3%, while Stuttgart and Cologne are up marginally to 2.2% and 2.6% respectively.
The situation in Frankfurt has deteriorated dramatically. The banking metropolis is heading for its weakest annual turnover since the turn of the millennium, albeit this is not yet showing up in falling rents or dramatic new vacancies. Most of the broker houses agree that Frankfurt, with lease turnover down by more than half on last year, will be the worst-hit city this year, with total lettings of between 116,000 and 126,000 sqm, to judge by most broker estimates.
In the first six months, the biggest clients were IT and communications companies, making up 18.8% of turnover (22,000 sqm) with a range of smaller transactions. Banks (26,000 sqm) made up the biggest industry grouping.
Broker Knight Frank notes that a large chunk of the 227,000 sqm of office space currently under construction in the city will be completed later than planned, due to corona. Broker blackolive thinks the impact on project development will be significant. “The days of relatively carefree speculatively building projects with a view to renting them out during the planning and construction phase are over for the time being”, it says in a note.
In a strange way, the current climate may even lead to a greater demand for broker advice, as the range of options open to landlords and tenants is suddenly thrown open. Lukas Kasperczyk, head of office letting Frankfurt at Knight Frank, says, "Now the race to catch up is beginning. Depending on the extent of their needs, companies have taken a three-month break when making far-reaching decisions. But leases DO end, even if landlords have so far granted a deferment. The market is changing and the need for advice is immense."
This applies not least to the implementation of greater social distancing between office users, more parking spaces and flexible workplace models, along with the new phenomenon of home office working. Flexibility is also becoming more important with regard to the rapid availability of additional office rental space and the term of long-term rental contracts.
Few of the brokers are anticipating heavy price falls on a square metre basis. Andreas Wende, CEO of NAI Apollo, says: "An increase in the demand for space is slowly becoming apparen again. It’s possible we’ve actually reached the low point of the turnover, especially since there are still some big requests in the pipeline. Accordingly, for the whole year a reaching of the 300,000 sqm-mark is quite possible".
Kasperczyk of Knight Frank says, "Frankfurt has the great advantage of being characterized more by banks, financial service providers and law firms and less by the automotive sector and industry. The market is intact.” This is why, in Knight Frank's book, top and average rents have not changed compared to mid-2019 and are at €45/sqm and €22/sqm respectively. NAI apollo sees the top rent even pushing up to €46.20 /sqm and therefore about 5% above the level of the previous year. Positive thinking, indeed.