Frankfurt office lettings market continues its weak performance in Q2 2023

Frankfurt am Main, 12th July 2023 – The Frankfurt office lettings market including Eschborn and Offenbach-Kaiserlei continued to experience subdued demand for space in the second quarter (Q2) of 2023. In the period from April to June 2023 NAI apollo, partner of NAI apollo group, recorded space take-up by tenants and owner-occupiers of 91,300 sqm. Although the figure slightly exceeded take-up in the first quarter of 2023 (82,800 sqm), this still represented the third-weakest second quarterly performance since 2014 (75,600 sqm), after Q2 2020 (46,900 sqm) and Q2 2022 (87,800 sqm).

Total take-up for the first six months of 2023 amounted to 174,100 sqm. “The result is clearly below the first-half yearly average for the last ten years. It is also as much as 12 % lower than the five-year average. However, the first six months of 2020 remains the outlier in the period under review. In this period, take-up was even lower at 116,100 sqm owing to the COVID-19 pandemic and related lockdowns,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo.

The number of deals remained at a low level in the first half of 2023, falling by 14 compared to the previous year to 222. “The intermittent confidence in a more rapid market recovery has receded again. The economic outlook is becoming gloomier and search processes are taking longer. At the same time, users are in some instances reducing their space requirements even after signing a lease. This can be partly attributed to the implementation of new workplace concepts, but at times also reflects the need to make savings on an economic basis,” said Martin Angersbach, Director Business Development Office Germany at NAI apollo.

Thus, the recovery of the lettings market is likely to take longer, even though there is evidence that some users are still in the process of seeking large premises. “Whether these will succeed in reversing the current trend ultimately depends on the wider economic development and the attractiveness of the location as a stimulus for other companies with corresponding space requirements,” Angersbach said.

The volume of take-up generated by decisions to extend leases after an active search on the market has risen slightly compared to the beginning of the year and stood at 68,000 sqm after the first six months. However, this is below the previous year’s figure (100,000 sqm). “Here, it must also be taken into account that in the current environment companies tend to prolong their leases in the short to medium term without actively exploring the market while they await further developments. However, this is not recorded in the take-up statistics,” explained Preuße.

Increase in medium-sized deals

Trends that were evident in the first quarter continued into the second quarter. For instance, there is still an absence of deals above 10,000 sqm. In addition, take-up has continued to fall in the segment below 2,500 sqm. On the other hand, activity increased again in the 2,501 sqm to 10,000 sqm segments. “Large searches for spaces above 10,000 sqm are underway, but are unlikely to culminate in a contract signing before the end of the year. Smaller deals below 1,000 sqm are 4 % down on last year’s volume at 69,400 sqm. In the 1,000 sqm to 2,500 sqm category, take-up fell 22 % to 33,400 sqm. The next largest-segments from 2,501 sqm to 5,000 sqm as well as from 5,001 sqm to 10,000 sqm registered increases of 143 % and 61 % respectively, and generated total space take-up of 71,300 sqm,” said Dr Konrad Kanzler, Head of Research at NAI apollo.

Eintracht Frankfurt was responsible for one of the largest lettings in the second quarter after it signed a new lease for the property at 7, Otto-Fleck-Schneise. The sports club will now occupy the entire building with around 8,800 sqm. In addition, two larger leases were signed close to Frankfurt Messe. American Express leased 5,000 sqm in “The Spin” and State Street will occupy about 4,900 sqm in “One”.

Banks, service providers and insurance companies represent the strongest sector

Owing to the large deals signed in the second quarter, “banks, financial service providers and insurance companies” were able to slightly expand their market share at the end of the first half from 23.0 % in the early part of the year to 24.6 % or 42,900 sqm. Next are the groups “communication & IT” with 17,200 sqm and "construction & real estate” with 16,900 sqm.

In terms of the geographic locations, demand was highest for space in the central areas of the city during the first half of the year. The “banking district”, “Messe/Europaviertel”, “Westend” and “Stadtmitte” (city centre) recorded total take-up of 85,400 sqm, which corresponds to a market share of almost 50 %. In addition, high take-up was also registered in Sachsenhausen with 15,800 sqm and in the airport sub-market with 10,500 sqm.

Average rent continues to rise

Lettings in premium properties in the banking district as well as in projects or new buildings in the Messe/Europaviertel sub-market caused the average rent to rise further. The rate is now €24.90/sqm, an increase of 20 cents compared to the previous quarter (€24.70/sqm) or 7.8 % compared to the second quarter of 2022 (€23.10/sqm). The prime rent of €46.00/sqm was unchanged compared to the previous quarter as well as the previous year’s level. “Further anticipated deals in premium developments in the banking district suggest we will see a noticeable increase in the prime rent in the second half of the year. In the last few quarters, it has already become apparent that companies are focusing more on the qualitative characteristics of the buildings and are becoming more willing to pay higher prices per square metre for them,” said Preuße.

At the end of the second quarter of 2023, office stock amounted to around 11.54 million sqm. The “Flow” in Gateway Gardens at the airport is now completely finished and brings 32,500 sqm of office space onto the market. A total of around 128,000 sqm is expected to be completed in 2023. The pre-letting rate here now stands at 47 %. In 2024, latest figures suggest that approximately 233,000 sqm of office space will be realised with an occupancy rate of 52 %. “Spaces that are still available in current projects are in high demand among potential tenants because of their central locations, ESG criteria and the broadest possible flexibility of use,” Kanzler said.

Vacancy rate rises to 8.9 %

Vacancies on the Frankfurt office market increased significantly in the second quarter of 2023. As of 30 June 2023, market-active vacancies — that is, office space available for occupation within three months of the signing of the lease — stood at around 1.02 million sqm. Compared to the previous year, total vacancies have risen by 54,000 sqm and the rate by 0.5 percentage points to 8.9 %. “This is owing to the availability of space in completed projects along with an increase in subletting and a reduction in the size of spaces following office relocations. This situation will continue in the coming months as a result of the overall economic slowdown, putting further pressure on vacancies,” predicted Kanzler. 

Worsening outlook

“Office take-up in Frankfurt for the second half of the year will again be impacted by a range of factors such as the general reluctance of potential office users to lease new premises, a downward trend in the number of new leases, the continuing tendency to renew leases, and the increase in the supply of sublet space. Although some larger deals are still expected, it is unlikely that they will reverse current market dynamics,” Angersbach said. Accordingly, take-up will remain below average for the year, with a simultaneous increase or consolidation of vacancies at a higher level. In parallel, user preference for new buildings that are ESG-compliant and in a central location will further drive up rental levels on the Frankfurt office market.