Frankfurt Longs for 'Mainhatten' Era

COMMERCIAL REAL ESTATE
March 30, 2011

Frankfurt Longs for 'Mainhatten' Era
Office-Market Activity Begins to Return Financial Capital to Golden Age

By WILLIAM BOSTON | Special to the WSJ

Prime Frankfurt office-building values are still 20% below 2007 peak levels and vacancy rates continue to exceed 15%. But you would never know that from the amount of investment and development activity beginning to take place.

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Germany's financial capital has seen two major deals in the past four months, with J.P. Morgan Chase JPM & Co.'s J.P. Morgan Asset Management buying the OpernTurm tower and Deutsche Bank AG DB announcing plans to sell its Frankfurt headquarters to DWS Investments, an arm of the bank's asset-management division.

Moreover, three major properties are on the block, including Silberturm, the former headquarters of Dresdner Bank, which has been put up for sale by Commerzbank AG. And a venture of developer Tishman Speyer and Commerz Real AG is moving ahead with plans for a 40-story office tower, one of the few speculative projects in Europe at a time of economic upheaval.

"There is some risk," says Michael Spies, head of European business for Tishman Speyer, which also was the seller of the OpernTurm building. "But if you are too confident, then you are probably too late."

The activity is a sign that the office market is firming despite uncertainty about the Middle East and the Continent's sovereign-debt crisis, although conditions remain far from the heady days of the early 1990s, when Frankfurt was known as "Mainhatten."

Commerzbank originally planned to unload Silberturm, which means Silver Tower, in the wake of its acquisition of Dresdner Bank in 2009. It put the sale on hold as global markets froze during the financial crisis, but now experts say the tower could fetch about €400 million ($564 million).

At the same time, Tishman Speyer's development plans reflect the belief by some that, despite the high vacancy rate overall, demand will be strong for high-quality space. "There is a high proportion of vacancy in Frankfurt, but there are also a lot of old buildings," Mr. Spies points out. "The market is looking for very good buildings with very good space."

The market is still a long way from the golden age of Frankfurt office properties at the end of the 1990s, when a new corporate skyline was emerging and the city on the banks of the river Main won the name "Mainhatten."

The trend was enhanced by the growth of Deutsche Börse, which became a global leader in derivatives trading, and the location of the European Central Bank in Frankfurt with the creation of the euro. At the peak of demand, top office rents hit more than €50 per square meter, compared with about €36 now.

But Frankfurt's office market never fully recovered from the global economic downturn after the Sept. 11, 2001 terrorist attacks. From the peak in 2001, Frankfurt prime office values fell 43% until bottoming out in mid 2005, according to an index prepared by Jones Lang LaSalle. Frankfurt prime office values rose again from that trough, but even at the top of the last property boom, Frankfurt office valuations were still 21% below 2001 levels. At the beginning of this year, they were 37% below the 2001 peak.

Given these cross currents, real-estate professionals are watching the three pending sales for signs of whether values are rising again. They say the sale of Deutsche Bank's headquarters—for a price of roughly €600 million—is difficult to analyze because the deal wasn't done at arm's length.

Commerzbank is trying to decide whether to follow Deutsche Bank's lead and sell Silberturm to one of its own funds or to put it up for sale in the open market, according to a person familiar with the matter.

In another possible deal, an investment fund operated by Morgan Stanley is marketing the Trianon tower in Frankfurt's banking district. As it liquidates its P2 Value fund, a German open-ended property fund that ran into liquidity troubles two years ago, Morgan Stanley Real Estate GmbH has put all of the fund's assets up for sale.

A person familiar with the situation said Morgan Stanley could sell Trianon in the next few months, but that the fund is still working out the details of the sales process.

Morgan Stanley's fund bought the building at the top of the property boom in 2007 for an estimated €620 million, representing a net initial yield at the time of about 5%. In the most recent financial report of the P2 Value fund, published in September, Trianon's book value was reported as €471 million. Morgan Stanley's P2 Value fund owns a little less than 57% of the Trianon tower. The rest of the building is owned by the Morgan Stanley Eurozone Office Fund. It isn't clear if both funds will sell their stakes in the building or if only the P2 Value fund's stake is up for sale.

Morgan Stanley Real Estate didn't return phonecalls seeking comment.

Another office building that is on the market is the Westend Gate building, which houses the Marriott Hotel near the Frankfurt trade-fair grounds. The building is owned by the Aberdeen Asset Management's Degi Europa open-ended property fund. According to the fund's 2010 annual report, the value of the 47-story building was €193.8 million at the end of 2010, down from €242.9 million at its previous valuation. The vacancy rate stood at about 34%. Annual rent in 2011 is expected to be €8.9 million.

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