Frankfurt's Office Market Revives on Improved Rental Prospects

Frankfurt's Office Market Revives on Improved Rental Prospects
By Peter Woodifield - Oct 7, 2010

Frankfurt’s office property market will probably attract the most investment this year since 2007 as the strengthening economy fuels demand for space, CB Richard Ellis Group Inc. and Jones Lang LaSalle Inc. said.

http://www.bloomberg.com/news/2010-10-06/frankfurt-s-office-property-market-revives-on-improved-prospects-for-rents.html

Investors spent about 1 billion euros ($1.4 billion) on office purchases in Germany’s main financial center in the first nine months, 36 percent more than in all of 2009, according to the commercial property brokers. Spending in the fourth quarter alone may match the total for the previous three.

“Demand has been rising enormously since the spring,” Burkhard Plesser, CBRE’s head of investment in Frankfurt, said in an interview. “Investors are looking for good locations and long leases.”

Confidence among German businesses and consumers is at a three-year high. The economy, Europe’s largest, grew 2.2 percent in the second quarter, the most since reunification 20 years ago.

The amount of new space leased to tenants including the European Central Bank and Allianz Global Investors rose 25 percent in the first nine months of 2010 from a year earlier. Investment spending may total about 2 billion euros for the whole year, said Marcus Lemli, head of leasing and capital markets at Jones Lang in Germany.

Investors spent 16.1 billion euros on offices in Frankfurt between 2005 and 2007. That slumped to 1.6 billion euros in 2008 and 735 million euros last year, Jones Lang said.

‘Hot Spots’

Next year, rental growth in Frankfurt is expected to be 2.9 percent, driven by a lack of new developments, Savills Plc said in an Oct. 5 report. The London-based property broker added the Frankfurt and Munich office markets to its top five “hot spots” for risk-averse investors.

Frankfurt’s biggest transaction in the third quarter was the 126 million-euro acquisition of the Fuerstenhof office building by Deutsche Immobilien Holding AG, an investment company based in Delmenhorst, Germany. The property, mainly occupied by Commerzbank AG, was sold by Hamburg-based Union Investment Real Estate AG last month.

The attractiveness of German office properties is highlighted by the 250 basis-point spread between the yield on this type of building and the yield on 10-year government bonds. That’s the widest for at least 23 years, according to Jones Lang, the second-largest publicly traded commercial property broker after CBRE. A basis point is 0.01 percentage point.

It’s not just Germans who are making purchases in Frankfurt. Foreign investors accounted for 40 percent of all commercial real estate deals by value in the first half, according to Savills.

Keeping Tenants

A drop in the number of commercial developments since the collapse of Lehman Brothers Holdings Inc. two years ago has helped German landlords keep their tenants.

“There has been very little reduction of space by the main occupiers,” Lemli said. The number of deals will probably “turn a lot faster than the market is expecting.”

Until now, office values have recovered more slowly than in London and Paris, Savills said.

“As some investors get priced out of these markets, we forecast the next wave of significant yield compression will occur in German office stock, which is seeing increased investor focus,” Giles Wilcox, head of cross-border investment at Savills, said in an e-mailed statement Oct. 4.

New office space amounting to 371,000 square meters (4 million square feet) was leased in the first nine months, more than the 350,000 square meters leased in all of 2009, CBRE estimates.

Finance, Law

“The expansion has been driven by the financial sector and also from law firms,” said Richard Tucker, CBRE’s head of Frankfurt leasing. “We haven’t seen this for two years.”

The ECB is moving into a new headquarters, a building on the site of a former wholesale market with space of 104,000 square meters. It was biggest lease signed in the city so far this year in terms of space.

Allianz Global agreed to lease 27,100 square meters, Tucker said. Parent Allianz SE, Europe’s largest insurer, bought the 10-story Triton office building from IVG Immobilien AG real estate funds in August. Its fund unit will occupy the space in 2013 after refurbishments.

The Opernturm tower in Frankfurt will probably be bought by JPMorgan Chase & Co.’s asset-management unit for less than 600 million euros, Handelsblatt reported on Oct. 5, citing people it didn’t identify. The 42-story building is owned by Tishman Speyer Properties LP.

Rick Matthews, a spokesman for Tishman Speyer in New York, and Kristen Chambers, a spokeswoman for J.P. Morgan Asset Management in New York, had no immediate comment two days ago.

Higher Rents

Rents for the best office properties in Frankfurt’s main business district will probably rise to about 34 euros a square meter next year from 33 euros in the first half of 2010, according to Jones Lang.

Typically, German office leases last for five years. Investors prefer those lasting 10 years or longer, especially for lower-quality properties, Plesser said.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

http://www.bloomberg.com/news/2010-10-06/frankfurt-s-office-property-market-revives-on-improved-prospects-for-rents.html