2nd quarter 2022 - Demand on the Frankfurt office market is rising, but remains below pre-crisis levels

Take-up in the Frankfurt office letting market, at around 216,200 sqm and 347 leases, is up on the first two halves of 2020 and 2021, which were heavily affected by the Corona pandemic, but still below pre-crisis levels. The largest deal remains the start of construction by owner-occupier GIZ in Eschborn for around 28,000 sqm. "Further mega deals are probably not to be expected this year either, but demand in the mid-range space segment is good," says Kevin Nguyen, Head of Brokerage at blackolive. "This is also shown by the contract concluded a few days ago for around 10,000 sqm in the TAURUS project. The space was secured by a financial services provider," Nguyen continues. 

Medium-sized space segment remains strong, CBD returns to old form

In the 2,001 sqm to 5,000 sqm space class, leasing performance has more than doubled compared to the first half of 2021. According to blackolive research, the good demand in this segment is distributed across the entire office market area. As usual, the small space segment up to 1,000 m² is the mainstay of the Frankfurt office market and was able to increase by another 20 % compared to the same period last year. "Deals in this size class were responsible for almost half of the total take-up," explains Kevin Nguyen. Frankfurt's Central Business District (CBD), which was still somewhat weak at the beginning of the year, seems to be regaining its former strength, with a good third of the take-up concluded in this area, according to blackolive's surveys. Financial service providers and consulting firms are represented there more than average, as they prefer space in high-quality properties in prestigious locations. This is also shown by the larger lettings in projects and refurbishments. The law firm Noerr has opted for around 8,700 m² in the former BHF high-rise, which is marketed under the name CENTRAL PARX, in the direct vicinity of Opernplatz. The high-rise will be fully refurbished by 2028 and will then become the consulting firm's new headquarters on the upper floors. "The aforementioned leasing of the financial services provider in the TAURUS project on Börsenplatz in the heart of Frankfurt's city centre is also proof of this," says blackolive's leasing manager Nguyen. 

Financial service providers lead the field, sector mix remains

In recent years, financial service providers have no longer been the top dogs on the Frankfurt office market, but they have always been an integral part of the banking city. This is also reflected in the first half of 2022, when they accounted for a quarter of the total take-up. The second strongest sector was public sector companies. The construction and real estate services sector concluded the most contracts (48), closely followed by financial services providers and consultants with 44 deals each, according to blackolive's research. In addition, technology companies are playing an increasingly important role in the Frankfurt market. The pandemic has triggered a surge in digitalisation everywhere, which is also reflected in the demand of companies active in this sector, who concluded 30 contracts with a volume of around 18,000 sqm in the first half of the year.

Rents continued to rise

The average rent has risen by 0.70 €/sqm to 22.60 €/sqm compared to the first half of 2021, with two major high-priced deals in projects in the second quarter of 2022 contributing significantly to this. The prime rent has also increased and currently stands at 46.20 €/sqm, which corresponds to an increase of1.20 €/sqm compared to the second quarter of 2021. "Rental prices in prime properties will remain high, and owners and project developers will gradually have to pass on the increased construction costs to the tenant. This is inevitable given the massive price increases," explains Kevin Nguyen. 

Vacancy rate declines slightly

A slowdown in the increase in vacancies was already evident in the first quarter, and the vacancy rate even decreased in the second quarter, so that currently around 936,600 sqm are available for leasing within three months; the vacancy rate at the end of the first half of the year is 8.0%, which is 0.5% lower than a year ago. "This further decline in vacancy is only partly due to lettings, as many recent larger lettings have been in projects," says blackolive's lettings manager Kevin Nguyen. In some cases, large spaces fell out of vacancy due to the start of a refurbishment, as happened in the case of the approximately 45,000 sqm former Deutsche Bahn headquarters in Stephensonstrasse. In addition, the low completion performance in the first half of 2022 also contributed to this; the only major property to be completed in the second quarter was the second construction phase of the new building for DEKA at Lyoner Strasse 13. The development of vacancies in the individual submarkets varies greatly. While there were significant decreases in the Frankfurt West submarket, partly due to the refurbishment mentioned above, the City West submarket and the City Rand area had to accept a significant increase, since, for example, Deloitte moved its headquarters to the Europaviertel and Commerzbank returned larger spaces ahead of schedule. The move of the major French bank BNP Paribas S.A. from the Europaviertel to the Senckenberg Tower also contributed to the increase in vacancies there.

Short low in completions, trend rising again

After a relatively large amount of space was completed in the last two years, this trend has currently been briefly interrupted. By the end of 2022 a total of around 150,000 sqm should be completed, but so far only just under 25,000 sqm have been completed, of which around 21,300 sqm are attributable to the new DEKA building. By the end of the year, two larger properties, ONE in the Europaviertel and FLOW in Gateway Gardens, will be on the market. In both properties, space in the range of 25,000 sqm to 30,000 sqm each is still available for rent. The pre-occupancy rate in 2022 is currently 55%. In 2023, around 254,000 sqm is expected to come onto the market again, of which around a quarter is already let. "As construction costs rise and projects can unfortunately be delayed by supply chain bottlenecks and lack of staff, early market sounding is even more important today than in the past," Nguyen highlights. "While many projects are planned for the future, it is impossible to say exactly which ones will come to fruition and when. But the good news is that companies can draw from a large supply," he adds.  

Stable demand with high prices, but hardly any large deals

After the first six months of the year, the Frankfurt office market is in a better position than in 2020 and 2021, but the pre-crisis level has not yet been reached. "Smaller but more expensive" could become the new motto in the CBD. Rents have risen mainly in this area, especially strongly in the City and Westend, partly due to the two larger project lettings. "The strong increase in demand in the segment between 2,000 sqm and 5,000 sqm also shows that companies want to change again," says Kevin Nguyen. "We notice this clearly at blackolive. However, deals beyond 10,000 sqm are rather scarce at the moment, the overall situation is too uncertain. The Ukraine war, the pandemic that has not yet ended and the sharp rise in inflation are slowing down thoughts of a move." The latest reports of a slight slowdown in inflation in June could fuel hopes that the peak has passed. But this is unlikely to impress the property market, which always reacts with a time lag. "By the end of the year, we have therefore also corrected our forecast for take-up slightly downwards, we are assuming around 400,000 sqm, while rents will remain at a high level and could even rise slightly under certain circumstances," says the head of lettings, summarising the situation on the Frankfurt office market.