Frankfurt office lettings market makes weak start to 2023

• Space take-up of 82,800 sqm in Q1 2023 is around 13 % below comparable medium- and long-term figures
• Banks, financial service providers and insurance companies generate highest share of take-up
• Banking district is most popular sub-market
• Vacancy rate increases to 7.9 %
• Rental prices remain on an upward trend: prime rent at €46.00/sqm, average rent increases to €24.70/sqm
• 2023: challenging economic outlook, yet searches for large offices and the need for sustainable space will determine the next few quarters

Frankfurt am Main, 3rd April – Activity remained very subdued on the Frankfurt office market, including Eschborn and Offenbach-Kaiserlei, in the first quarter of 2023. Take-up by tenants and owner-occupiers amounted to 82,800 sqm, which represents one of the weakest quarterly result in recent years. “A worse result was last registered for the first two quarters of 2020 as well as the first quarter of 2021. At those times, however, the market was heavily affected by the coronavirus pandemic and the lockdowns that were imposed to halt the spread of COVID-19. The latest result is almost 20 % lower compared to last year, as well as around 13 % below both the five-year and ten-year average figures for first quarters,” said Barbara T. Lewandowicz, Managing Director at NAI apollo.

Accordingly, the number of deals was also at a low level, amounting to 105 in the first three months of 2023. This is almost 17 % below the quarterly average for the past year. “The overall economic situation remains challenging, but we see some signs of improvement on the market. The poor result is certainly in part owing to the ongoing uncertainty. The postponement of large lettings is a further factor. Since there were doubts about some rental requests in the second half of 2022, take-up currently remains at a low level. At the same time, the number of searches for office spaces, particularly for larger premises, is increasing. As a result, we expect take-up to pick up over the course of 2023,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo.

Lease extensions that were implemented following an active exploration of the market accounted for a fairly moderate volume of 13,600 sqm in the past three months, which is almost 80 % below the previous year’s level.

Overall result significantly impacted by the absence of large lettings

With regard to the size of office premises, three categories in particular illustrate the weak first quarter in Frankfurt. The sub-1,000 sqm segment generated 31,900 sqm and thus remained at the low level of the previous year, while take-up in the 1,000 sqm-2,500 sqm fell 37.3 % to 12,900 sqm. There were no major deals above 10,000 sqm. On the other hand, the 2,501 sqm-5,000 sqm and 5,001 sqm-10,000 sqm segments each registered year-on-year growth. “As the year progresses, we expect to see more transactions above 5,000 sqm as some processes are nearing completion”, said Preuße.

“The largest lease in the first three months of 2023 was signed at the end of the quarter by Universal Investment, which is leasing almost 10,000 sqm in the new Timber Pioneer building on Europa-Allee. This is followed by a public sector deal at 92, Breitlacher Strasse for around 9,100 sqm, which was also completed shortly before the end of the quarter. Third place goes to the creative centre Massif Central, which will occupy around 5,800 sqm of office space in Bethmannhof”, said Dr Konrad Kanzler, Head of Research at NAI apollo.

Banks, financial service providers and insurance companies form most active group

At the beginning of 2023, and despite the current sense of crisis, “banks, financial service providers & insurance companies” remained the most active group and accounted for take-up of 19,000 sqm. However, financial service providers contributed more to this than the banking sector. “Public institutions” accounted for 11,900 sqm, followed by “industrial production & processing trade” with 11,800 sqm and “construction & real estate” with 7,100 sqm.

Owing to lettings in FOUR FRANKFURT and GLOBAL TOWER, among others, the “banking” district accounted for the highest take-up within the Frankfurt office market area at 12,800 sqm. The “Messe/Europaviertel” sub-market was in second place with 11,000 sqm thanks to the largest deal of the quarter, followed by the “airport area” with 10,000 sqm and “Rödelheim” with 9,400 sqm.

Lettings in new buildings drive up rental price levels

Rental prices in Frankfurt have continued to rise as users still favour modern, sustainable and more expensive premises that can be used in a flexible way, and which are mostly only available in new developments. The average rent is now €24.70/sqm after rising by €2.10/sqm or 9.3 % over the past 12 months. The prime rent increased by 2.2 % year-on-year to €46.00/sqm. “In contrast to the average rate, however, the prime rate has not risen any further since the end of 2022. Leases that are currently being negotiated in new developments point to a further increase in rents in the coming quarters,” said Preuße.

At the end of the first quarter of 2023, office stock amounted to 11.55 million sqm. The net growth of 0.2 % within the last three months is attributable to completions of 22,200 sqm — for example, the “Oststern-West” property with 7,700 sqm of office space on Hanauer Landstrasse. A total of around 128,000 sqm is expected to be completed in 2023 as a whole with a pre-let rate of 40 %. In all likelihood, another 228,000 sqm of office space will come onto the market in 2024. “ESG-compliant and certified new building space will continue to be very popular with users in the next few quarters, especially if the micro-location is right and has strong appeal for users. This is not only important for the image of the users, but is also a critical factor to ensure the loyalty of employees”, said Kanzler.

Vacancy rate at 7.9 %

Vacancies on the Frankfurt office market increased in the first quarter of 2023. Market-active vacancies – i.e. office space that can be occupied within three months of signing the lease – stood at around 909,000 sqm as of 31 March 2023. The current vacancy rate is 7.9 %, indicating that vacancies have increased by around 45,000 sqm or 0.4 percentage points within the last three months. Compared to the same quarter of the previous year, the rate fell by 0.7 percentage points.

Moderate revival in take-up is expected

The Frankfurt office market got off to a very weak start in 2023, which was largely owing to the difficult macroeconomic environment. At the same time, it should be pointed out that the situation was even more negative and future prospects even more uncertain in the second half of 2022, which in turn has affected recent take-up activity. According to latest assessments, the recession that was forecast last year for 2023 will probably not materialise, which in turn improves market sentiment. Accordingly, searches for large premises are underway in the market, of which some will be completed in the near future. The two major deals that were completed at the end of the quarter can be taken as evidence of this.

“The quality of space is of paramount importance for users, the majority of which prefer centrally located and prestigious office space that also conforms with modern office concepts and ESG requirements and thus minimises their CO2 footprint,” said Lewandowicz. As a result, users are likely to opt primarily for new buildings, project developments or extensively renovated property, which in turn will be reflected by a further increase in rents. At the same time, the vacancy rate will continue to rise during 2023 as the proportion of occupied space is reduced through new deals and vacancies remain in newly completed space.