Charles Kingston
Charles Kingston, CEO & Editor, REFIRE Ltd.
Meta, the parent company of Facebook, has just paid €170 million to extract itself from a lease on a London property, into which it never moved any staff. It leased the space two years ago for 20 years, and is now paying seven years rent to get out of the contract. This brings to over 1 million square feet the company is now sub-letting or surrendering in Europe, mainly in London and Dublin.
This should normally send shock waves through the real estate industry, but it doesn’t, really. The sheer scale of the withdrawal from further office commitment is impressive in its scale - and of course the company is a major tech employer, a group which has been on the retreat worldwide for some time. But Meta is in the vanguard of scores of companies who are facing the stark realisation that they have too much office space, and are taking decisive action to downsize and consolidate their office needs, rather than prolong the agony in the face of the inevitable.
Very few companies are currently looking to expand their office space. They might be planning to move from their current location into a posher location across town, but it’s likely they’ll be taking less of the new property than they had in the old. The net effect will be positive for some landlords - those who own the very best buildings - and very negative for a larger number of owners, now faced with huge contingent liabilities in the shape of ESG compliance, to add to the existing woes of waning demand and natural obsolescence.
Does this mean office vacancies in Germany rise further overall, in line with recent trends? The effect of the collapse in construction output in Germany this year, which has been worse than the stagnation across the eurozone as a whole, will really kick in in about two years’ time. Office completions will have tapered out, and so rents may well reap the benefits of a bottleneck in supply. Not everywhere - bubbling Berlin is still an exception, with a bump of 2.5% expected next year, while there’s real trouble brewing in Frankfurt. But with the economy expected to still be weakening in 2024, office take-up is still lagging its 10-year average in all the big German office markets this year so far.
The investment market for German offices has plummeted by 80% in 2023, with German banks in particular distancing themselves from engagement with anything but the most blue-chip financing. The sector is so tainted - unfairly, in many cases - that it surely offers glittering opportunities for the cash-rich, the adventurous, and those very solid on their ESG fundamentals.
In construction, residential has been hit much harder than commercial property, with major media focus on the spate of recent insolvencies of developers, several of whose collapse is having real-world consequences for tens of thousands of individual investors. Residential construction on new projects has effectively ground to a halt. All eyes this week were on the Wohngipfel, the housing summit convened by Chancellor Olaf Scholz and Building Minister Klara Geywitz to address demands from the industry to avert the impending catastrophe.
The resulting 14-point plan was (just about) enough on the day to ward off a mutinous uprising. Grumbling dissident voices conceded that the coalition had recognised, at the eleventh hour, that Germany is headed for a housing disaster, and had bought itself a bit of time (until December, when the effects of its largesse have had a chance to defuse the current incendiary atmosphere). Beyond that, and if there is no rapid turnaround, things could turn nasty. By 2025 Germany will have 1.4 million people looking for a place to live - these are by no means all refugees. Anger is boiling up, from the heart of the middle classes, and sympathy is swelling for those proposing radical solutions, in a nation where housing is still largely seen as a social good rather than as a plaything of the capital markets.
One thing we’re learning - rapidly - is that the public is losing patience with Germany’s lofty insistence on the highest environmental standards, if these really impinge on their ability to live a basically decent life. That includes being properly housed, even if each housing unit no longer aspires to be uniquely hand-crafted with impeccable green credentials, if it’s only deliverable at a crippling cost.
Making housing affordable for large numbers of people, whether renting or buying, has to be the key objective. Scholz, with his positive record on housing from his stint as mayor of Hamburg, probably knows this better than most. His resistance to strangulating new regulations from the EU on insulation and heating, which push up the price of building and refurbishment, is well-founded. Easing up on the environmental pedal is the right course - Germany itself has more than enough of its own building regulations, a source of constant aggravation for developers.
But fine words butter no parsnips. Scholz and Geywitz may have gotten away with it for now, appeasing many - but not all - of the 30 associations that attended the summit (two of the most heavyweight lobby groups refused to attend, calling the agenda of the summit ‘tokenism’). Subsidies and write-offs for new building, and promises to slash red tape and speed up issuing per- mits have been around for a while, without notably invigorating new construction. But real financial incentives for builders to actually build have been in short supply. Public loan guarantees, or the abolition of the punitive Grunderwerbsteuer (of up to 6.5%, depending on federal state) have all been mooted for years, so far to no avail. The Länder are too addicted to the tax revenue to collaborate collectively – even at the risk of seeing it shrivel away, as it undoubtedly is doing now, for lack of sales.
Indeed, getting sixteen federal states to act in unison, to promote new national standards in their own interests, has proven utopian in the past, with nimbyism always prevailing. This has drastically hindered the development of serial and modular building, seen as critical in promoting social and affordable housing. There are numerous other advantages of having a unified building ordinance, instead of sixteen competing ones at enormous wastage. Could this be about to change?
We’ll see, but we’re not holding our breath. Several other measures signed off upon at the summit were described by cynical observers as ‘old wine in new bottles’. Still, we spy a glimmer of hope. There’s nothing wrong with old wine, in our view, if it finally gets to be drunk.
