Frankfurt: Grounds for optimism in spite of upheaval

Property

Frankfurt: Grounds for optimism in spite of upheaval

By James Wilson in Frankfurt
Published: October 2 2009 16:02 | Last updated: October 2 2009 16:02

Frankfurt’s property market professionals are surprisingly optimistic about the city’s prospects in spite of the inevitable upheaval that the deep banking crisis has caused in Germany’s financial capital.

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With turnover in the office rental market down significantly in the first half of the year – by anything between 15 and 30 per cent, depending on how the boundaries of the city market are understood – there is obvious cause for concern. Investment in the city has fared even worse, falling by two-thirds. Daniel Gedack, Savills’ managing director of office agency in Germany, says difficult times are not yet past. “Before the end of 2010 people should not think about recovery,” he says.

At the same time the preceding years had such a high level of market activity that the current decline is not a reason to despair. Mr Gedack says 2007 and 2008 “were such record years that it is difficult to compare now with then and say that everything has totally gone wrong”.

Sentiment in the market is also coloured by a belief that other cities – home and abroad – have fared much worse in the crisis and that Frankfurt’s resilience will result in a relatively smooth rebound.

The most obvious comparison is with the greater gloom over commercial property in London, the biggest European rival to Frankfurt as a banking centre. Financial sector professionals say the less complex banking activities typically carried out in Frankfurt mean it has been sheltered from the downturn that has hit the UK.

“It seems like the downsizing in Frankfurt has hardly hit the property requirements of the banks – it has been not as severe as in London for example, perhaps due to the type of business done in Frankfurt. There are a lot less structured finance products worked on here,” says Marcus Lemli, head of leasing and capital markets for Germany at Jones Lang LaSalle.

There is also a sense that the damage to financial institutions in other German cities – such as Munich, Düsseldorf and Hamburg, each of which is home to banks that have lost billions of euros – may presage a greater consolidation of Frankfurt’s role as the country’s eminent financial centre.

Marco Mallucci, director of office agency at the Frankfurt office of Savills, says: “No one really thinks Frankfurt as a financial centre will lose ground. In fact we expect it to benefit.”

Both Mr Mallucci and JLL’s Mr Lemli draw favourable comparisons between now and the last decline in Frankfurt’s office market, at the end of the technology boom early in the decade. Mr Lemli says that during this cycle the expansion of banks and other companies was a lot more controlled, with less of a spike in peak rents and a higher vacancy rate.

Mr Mallucci says: “The difference between this crisis and the last crisis is that companies are still there. After the tech bubble we had 40 per cent vacancy rates ... demand was gone.”

This time vacancy rates have risen to about 13-14 per cent, according to BNP Paribas, which also says prime rents in the city have slipped about 7 per cent since the middle of last year, to about €35 ($51) per sq m in Frankfurt’s Westend and banking districts. “No marked downward changes in the rental prices for high-grade premises in very good areas are to be anticipated,” it says.

But prime rents are still well below the €50 or more that could be commanded a decade ago.

The decline in letting in Frankfurt has been lower than in Germany’s other big office markets. In Düsseldorf the market was down almost 60 per cent while other big cities including Berlin and Munich have seen declines of at least 30 per cent, according to Savills.

Still, Frankfurt’s performance in the first half of the year would have been much worse without one headline deal. The letting of Dresdner Bank’s former headquarters – a 166m high, aluminium-clad building known colloquially as the Silberturm – was at the centre of the the city’s biggest lease deal for two decades. Deutsche Bahn, the state railway company, has signed for 72,000 sq m of space and will occupy the skyscraper – which was Germany’s tallest when it was completed in 1978 – in 2011 after a renovation.

Deutsche Bahn is consolidating some of the space it has in locations around the city, the nerve centre of the German railway system.

Consolidation of office space is definitely a theme for companies in the Frankfurt area, Mr Mallucci says. Corporate clients are keen to use the crisis to raise the efficiency of their use of office space, while still maintaining flexibility to take advantage of an upturn.

While caution is still the watchword, he notes signs of “a return of confidence”. He talks of three big companies that, six months ago, were putting off any consideration of office needs. Now they are starting to look and consider.

And cranes still hover over the city, completing a series of big projects including Tower 185, a forthcoming addition to Germany’s most impressive skyline, where PwC, the accountancy firm, has leased its new city headquarters.

Still Mr Lemlisays there has been a healthy “stopping and waiting” on a number of projects that have not yet achieved the required level of pre-lets.

One big corporate restructuring hovering over the Frankfurt market is Commerzbank’s takeover last year of Dresdner, which is likely to free up more office space in the banking centre as the two banks merge operations.

However the bank’s main focus at the moment is on cutting back peripheral activities abroad, and the details of most job cuts in Frankfurt will probably start to be worked out only in a year’s time.

Mr Lemli says: “We have not seen lots of reduction as of now and we expect the merger will have more of an effect in other German cities. The downsizing will mainly be in peripheral locations and in fact it will further the concentration of the German financial sector in Frankfurt.”

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Frankfurt office, German office