Office market: Construction tracks the health of banking - FT.com

Frankfurt as a Financial Centre

June 13, 2011 4:12 pm
Office market: Construction tracks the health of banking
By Ed Hammond

The lofty canyons of Frankfurt’s financial district are once again reverberating with the rumble of heavy machinery.

Caterpillar-tracked piling rigs plunge drill heads into the soil, boring the deep holes for the concrete and steel foundations from which the city’s next generation of skyscrapers will rise.

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Cranes whirr and swivel overhead and the steady flow of limousines lurching through the narrow streets is interrupted occasionally by the arrival of a cement mixer.

The bulk of the projects are not new, however. Instead, they are part of a backlog of work that was put on hold when the economic crisis hit Germany’s financial heart.

Today, demand for new office space in Frankfurt is rocketing as vacancy levels begin to fall and developers look towards the prospect of strong rebound in occupancy rates during the next three years.

The 447,000 square metres of office space leased during 2010 represented a 33 per cent increase on the previous year, according to data from King Sturge, the global property consultancy.

“The fate of Frankfurt’s commercial property market is tied almost totally to the health of the financial sector. When the banks got hit by the downturn, the confidence to build new towers, even if they were already under construction, evaporated,” says Marco Ossmann, director of Witte, the German project management group.

This parallelism between the banks and the construction sector has seen office building come under far harsher strain than in other German cities.

The market for commercial construction in Hamburg, for instance, with its port-based economy, has fared significantly better than that of Frankfurt.

“Compared with Hamburg or Munich, Frankfurt has a very unstable property demand cycle, as the confidence to build is so closely tied to what is going on in the global financial markets,” Mr Ossmann adds.

The core of Frankfurt’s commercial property market is the banking district, where a small clump of glass-clad towers rises incongruously from the otherwise low-slung city.

However, there is new work going on beyond the heavily overbuilt centre.

On the north side of the Main, Frankfurt’s bisecting river, Tower 185 is emblematic of a wave of building work moving into fresh areas of the city – in this case the old railway goods yard.

PwC, the accountancy group, moved into the 200 metre tower in May, vacating several smaller office buildings further out of town.

While there is a finite amount of space in the banking district, the banks are unlikely to abandon their headquarters buildings in the centre.

“The tall buildings are symbols for their owners, so they need to keep them looking good by refurbishing them or pulling them down and replacing them,” says Mr Ossmann.

The refurbishment market is likely to prop up the order books of commercial construction companies in the city. Buildings are regularly refitted with new windows and other fixtures.

Deutsche Bank recently completed a four-year project to carry out a so-called “green modernisation” of its two towers in central Frankfurt.

The work, which the bank says is the biggest refurbishment of a building undertaken in Europe, has cut energy use in the two towers by 55 per cent.

The long lead times of construction projects – particularly skyscrapers, which require large amounts of materials to be brought into congested areas – mean that the impact of the projects that were halted during the recession is unlikely to be felt until the second half of this year.

According to CB Richard Ellis, the consultancy, only 200,000 sq m of office space is expected to be delivered during 2011, down 35 per cent on last year.

However, CBRE also points out that €258m was invested in the city’s property market during the first three months of the year, 45 per cent ahead of 2010.

Another sign of returning confidence in the strength of Frankfurt’s property market is the high levels of cash flowing into the sector from overseas investors.

During the first quarter of 2011, the total share of the volume of transactions rose to 56 per cent, compared with just 32 per cent in the comparable period of 2010.

Elvin Durakovic, a partner at Knight Frank, the property consultancy, says: “Foreign investors had in the past three years quite a large setback in the commercial property sector because of the limited amount of approved loans from the banks.

“Since the beginning of 2011 the market has improved slightly.”

Rental yields, too, have started to rebound in Frankfurt, having fallen back more than other German cities where the financial services sector plays a smaller role in overall economic activity.

The shortfall in new office space coming on to market during the next 18 months is likely to help yields recover, however.

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Frankfurt office, German office