Tenants are driving hard bargains and landlords offering big incentives as demand continues to fall across Germany. Most analysts expect the slump to continue through 2004, and there are fears that a declining office workforce may threaten long-term recovery
For the past two years new turnover in the German office markets has been declining, a trend that has accelerated in the first half of this year. Research group Bulwien predicts that the slowdown in demand will continue throughout this year, followed by stagnation in 2004. “This will coincide with increasing vacancy rates and falling rents,” says Andreas Schulten, member of the board of management of Bulwien. “We expect rents to stagnate, probably throughout 2005. Ultimately, any improvement in office markets will depend on general economic development.”
Though all the German markets are suffering from the downturn, there are regional differences. “Frankfurt is probably the most difficult market at the moment,” says Chris Bull-Diamond, head of FPDSavills in Germany. “The market is not only affected by the amount of new development, it also has to cope with secondhand space. In many instances this is still grade-A space that the banks are off-loading and that they are prepared to get rid of at any price.”
As a result, vacant office space in Frankfurt now exceeds 1m m2. Newly built speculative space will add another 564,000m2 in 2003/2004, with another 300,000m2 to 400,000m2 of office space available as sublettings. However, as Piotr Bienkowski, managing director at Atis Real Mller, points out, there are some uncertainties regarding the quality of these statistics. Also, some occupiers eager to sublet now find that they had originally underestimated their requirements or for other reasons lack earnestness in their attempts to sublet.
Offices put on the market as sublettings are offered at bargain rents, competing head-on with the marketing efforts of the institutional owners. However, while institutional owners may be refusing to lower rents, they can make up for this by offering tenants greater flexibility.
Ralf Pohl, managing director of Gerling Investment Kapitalanlagegesellschaft, and head of real estate investment at the Gerling insurance group, is not unduly concerned about sublettings. “Subleases have to stay within the framework of the original lease, but they can prove advantageous for tenants to rent directly from the owner, as landlords can negotiate options and provide tailor-made solutions to meet the longer term requirements of tenants,” he says.
In Frankfurt, falling demand has caused top rents to drop from €600 per m2 a year to €500 per m2 a year. But if incentives are factored in, modern high-quality space is available at around €360 per m2. Demand is more or less limited to the legal profession. “Many of the major legal firms will have space requirements within the next 12 to 24 months, and as they are virtually the only sector that is looking for space in downtown Frankfurt, they will negotiate some very tough deals,” says Bull-Diamond.
Rents in the city are not expected to recover soon. Dr Willi Alda, chief executive officer of Deka Immobilien and a professor at Stuttgart University, is convinced that prime Frankfurt locations will remain in favour with tenants, but he does not expect top rents to reach their former level in the foreseeable future. “Even after the recovery period, top rents are more likely to peak at around €500,” he says.
Deka Immobilien’s continued faith in the Frankfurt central business district is demonstrated by the Skyper project, a high-rise office building that will be another landmark on the city’s skyline. The scheme will add 48,000m2 of office space as well as housing some shops and flats. Construction of the €480m project is scheduled for completion at the turn of 2004/2005.
Munich is also facing slackening demand and rising vacancy rates. Atis Real Mller expects a turnover of 450,000m2 this year. Firms are capitalising on the situation to optimise their space requirements, particularly those who are spread across several floors – or worse, several buildings. “These companies can now move into more efficient buildings, consolidate their different locations and save on the rent,” says Bienkowski.
While the office markets in Frankfurt and Munich are tipped to move ahead once the economy starts to recover, the future of Berlin is more uncertain. Atis Real Müller calculated total take-up of 404,000m2 last year, just fractionally higher than 2001. But the start of this year has been less promising, with Jones Lang LaSalle reporting a 17% decline in turnover.
The decision by the Berlin Senate to call off negotiations with a private-sector consortium led by IVG Immobilien and Hochtief to build and operate the new international airport Berlin-Brandenburg was regarded as a major setback for the city. “It is a catastrophe that no decision on the new international airport has been taken,” says Bulwien’s Schulten.
He is also concerned about the future financial support Berlin will need to maintain its competitive position by building upon its good infrastructure, universities and research facilities.
In other major German office markets such as Hamburg, Düsseldorf and Stuttgart, take-up has also fallen over the past two years and is likely to decline by another 10% this year. But these cities have far fewer schemes in the pipeline than Frankfurt and Munich. DTZ estimates that new developments will add 255,000m2 in Hamburg, compared with 283,000m2 for Berlin and 74,000m2 for Düsseldorf. In Stuttgart, a mere 15,000m2 will be completed. In these markets, the reluctance of developers to start projects and banks to finance them speculatively is paying off.
As vacancy levels rise, institutional owners are urging tenants to extend existing leases. “We are looking at the term structure of our lease agreements and trying to appeal to tenants with maturing leases to extend them for at least three years,” says Gerling’s Pohl. For Barbara Knoflach, managing director of SEB ImmoInvest, the success factors to attract tenants include efficiency of space, flexibility and service, but she admits that rents also play a decisive role in today’s competitive market.
For the time being, property professionals concur with Bulwien that the economy will stagnate in 2003 and most of 2004. Jim Garland, executive director, real estate principal investment group, at Goldman Sachs, agrees that the German economy will be relatively sluggish in the near to medium-term. In the property market, he expects to see a continued deterioration in the office leasing market particularly in cities like Frankfurt, Munich and Berlin. His views are shared by Michael Fritz, head of office agency at Jones Lang LaSalle, who thinks that office demand might pick up in 2005 at the earliest, followed by rent rises in 2006.
In addition to apprehensions about the cyclical development of the economy, there is another underlying concern regarding the future of Germany’s office markets. As Schulten points out, the market’s future prosperity will depend on a rise in the number of office workers. Nearly 30% of Germany’s workforce is still employed in the industrial sector, while the creation of service sector and office jobs has stagnated since 1990. For growth in this area to resume, more than a just cyclical upturn will be required.
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Requirements, rents and supply in major German cities |
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Demand and rents have fallen furthest in Frankfurt |
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New requests m2 |
Top rents in prime locations €m2/month |
Office stock m m2 |
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|
2002 |
1st half 2002 |
1st half 2003 |
change %* |
2002 |
1st half 2002 |
1st half 2003 |
change %* |
2002 |
1st half 2002 |
1st half 2003 |
change %* |
|
|
Berlin |
330,200 |
203,300 |
148,300 |
-27.1 |
24.00 |
26.00 |
22.00 |
-15.4 |
15.91 |
15.78 |
16.00 |
1.4 |
|
Dsseldorf** |
247,400 |
149,200 |
146,000 |
-2.1 |
23.00 |
25.50 |
23.00 |
-9.8 |
6.70 |
6.53 |
6.78 |
3.8 |
|
Frankfurt*** |
486,300 |
358,700 |
153,000 |
-57.3 |
42.50 |
45.50 |
38.50 |
-15.4 |
10.57 |
10.22 |
10.81 |
5.8 |
|
Hamburg |
405,600 |
248,100 |
168,400 |
-32.1 |
20.50 |
23.50 |
20.50 |
-12.8 |
12.69 |
12.60 |
12.84 |
1.9 |
|
München Region |
357,100 |
197,800 |
152,600 |
-22.9 |
31.50 |
32.00 |
31.00 |
-3.1 |
16.46 |
15.76 |
16.78 |
6.5 |
|
Source:Jones Lang LaSalle *Between 1st half 2oo2 and 1st half 2003 **Includes Ratingen, Neuss, Erkrath und Hilden ***Includes Eschborn und Kaiserlei |
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Office turnover in major German cities |
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Hamburg’s turnover is holding up well among the five major cities |
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Total turnover |
Lettings |
Owner-occupiers |
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|
2002 |
1st half 2002 |
1st half 2003 |
% change* |
2002 |
1st half 2002 |
1st half 2003 |
2002 |
1st half 2002 |
1st half 2003 |
|
|
Berlin |
402,900 |
190,000 |
157,900 |
-16.9 |
352,200 |
149,900 |
146,600 |
50,700 |
40,100 |
11,300 |
|
Dsseldorf** |
307,400 |
161,200 |
112,800 |
-30.0 |
307,400 |
161,200 |
109,700 |
0 |
0 |
3,100 |
|
Frankfurt*** |
465,000 |
229,400 |
198,100 |
-13.6 |
428,200 |
192,900 |
173,800 |
36,800 |
36,500 |
24,300 |
|
Hamburg |
322,700 |
167,200 |
158,400 |
-5.3 |
268,500 |
128,000 |
154,200 |
54,200 |
39,200 |
4,200 |
|
Mnchen Region |
509,800 |
231,200 |
206,900 |
-10.5 |
509,800 |
231,200 |
206,900 |
0 |
0 |
0 |
|
Source: Jones Lang LaSalle *Between 1st half 2oo2 and 1st half 2003 **Includes Ratingen, Neuss, Erkrath und Hilden ***Includes Eschborn und Kaiserlei |
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