NAI apollo: Another weak quarter for the Frankfurt office lettings market

Frankfurt am Main, 2nd October 2023 – Weak market dynamics remained in place on the Frankfurt office space market including Eschborn and Offenbach-Kaiserlei in the third quarter of 2023. NAI apollo, partner of the NAI apollo group, registered take-up of 87,000 sqm through lettings and owner-occupier projects for the period from July to September 2023. This falls within the range of the similarly weak previous quarters (Q1 2023: 82,800 sqm; Q2 2023: 91,300 sqm) and also represents the lowest Q3 result since 2011 (Q3 2011: 73,000 sqm).

“Total take-up for the first nine months amounts to 261,100 sqm. In recent years, apart from 2020, when take-up reached 207,500 sqm in the first three quarters because of the COVID-19 pandemic, only the take-up result for 2014 was lower, with 258,200 sqm recorded for the first nine months,” said Martin Angersbach, Director Business Development Office Germany at NAI apollo. Accordingly, the latest result is 17 % and 19 % below the average for the past five and ten years respectively (Q1-Q3 2017 to Q1-Q3 2022: 314,800 sqm; Q1-Q3 2013 to Q1-Q3 2022: 321,800 sqm) and 12 % lower than the previous year.

Along with the lower take-up, the number of deals is also below the previous year’s level after falling from 365 in the first nine months of 2022 to 334 in 2023. “This indicates that any market revival is currently receding further into the distance. Tenants have become even more cautious and those who do not currently need to rent are scaling back their market activities. Although some requests for larger office premises are still active on the market, a considerable portion of these are from the public sector, including the City of Frankfurt. Elsewhere, companies are requesting less space than before, which is partly owing to trends such as ‘new work’ and ‘run to quality'. In addition, current search processes often take more time than in the past. Although the final quarter tends to be the strongest of the year in terms of take-up, it’s unlikely that we will see a significant year-end rally as in previous years in view of the looming economic slump,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo.

Take-up generated through the extension of leases following an active market exploration also weakened considerably to 76,000 sqm. After a temporary increase in the second quarter, companies were noticeably restrained in the last three months. “Overall, the result for the first three quarters of 2023 is around 30 % below the previous year’s figure. Here, too, it is apparent that rental market participants are acting with caution in the negative economic environment,” said Preuße.

Market focus on middle-sized deals

As was already the case at the end of the first half of the year, there was a clear dichotomy on the market in terms of the size of deals. “While small deals below 2,500 sqm and large deals above 10,000 sqm generated lower total take-up of 157,600 sqm and 12,400 sqm respectively, medium-sized deals ranging from 2,501 sqm to 10,000 sqm are well above the previous year’s level with a total of 91,000 sqm,” said Dr Konrad Kanzler, Head of Research at NAI apollo.

The first lease this year for an office space larger than 10,000 sqm was recorded in the third quarter. An industrial company rented the entire property called “The Move Orange” in Gateway Gardens with around 12,400 sqm. Other large lettings in the third quarter include the agreements signed by LG ELECTRONICS Vehicle Components Europe in “Matchbox” in Eschborn for 5,500 sqm and the Sweco Group in “Oval” with 4,500 sqm.

Banks, financial service providers and insurance companies as well as industrial production and manufacturing industry are the strong sectors

The largest contract signing of the third quarter elevated the “industrial production and manufacturing” sector into second place with 32,300 sqm after the first nine months, behind “banking, financial services and insurance” with 51,800 sqm. Next were “communication and IT” with 27,000 sqm and “construction and rea estate” with 25,700 sqm.

Within the Frankfurt office market area, the “banking district” remains the popular sub-market with take-up of 36,100 sqm. Supported by transactions in “The Spin”, “ONE”, “Meandris” and “Timber Pioneer”, the “Messe/Europaviertel” sub-market recorded the second highest take-up volume of 32,300 sqm. The “Airport” sub-market including Gateway Gardens registered 25,300 sqm.

Office rents with growth potential

In the third quarter, premium lettings in the banking district ensured that the prime rent remained stable at €46/sqm, both compared to the previous quarter and the same quarter of the previous year. In the last three months, the average rent fell slightly by 10 cents to €24.80/sqm compared to the previous quarter owing to larger lettings in less central locations. However, this represents an increase of 7.8 % compared to the previous year.

“Rentals are increasingly taking place in new or as-new, ESG-compliant properties, preferably in central locations. There is a willingness to pay higher rents per square metre. Accordingly, the prime rent is likely to rise in the fourth quarter. However, in some cases savings are being made through a reduction in space, which compensates for rising costs,” said Kanzler.

Office stock amounted to 11.52 million sqm at end of the third quarter of 2023. Within the last three months, office properties with a total of 36,500 sqm were completed, while the removal of space from the office market amounted to 56,900 sqm. The largest building to be completed in the third quarter was “The Move Blue” at the airport with over 23,000 sqm. As things stand, the completion volume for the year as a whole is expected to amount to 163,000 sqm, of which around 39 % is still available. The supply of vacancies in new construction projects is low, particularly in the highly sought-after central locations.

Vacancy rate rises to 9.0 %

Vacancies continued to increase on the Frankfurt office market in the third quarter of 2023. Active vacancies as of 30 September 2023 stood at around 1.04 million sqm. On an annual basis, total vacancies increased by 157,000 sqm while the rate rose by 1.4 percentage points to 9.0 %. “Amid the prevailing economic uncertainty, the number of sub-lease offers will continue to increase, while space reductions due to relocations will influence take-up. In addition, not all space in current projects will be absorbed by the market by the time it is completed. A further increase in the availability of vacancies is therefore foreseeable,” Angersbach said.

Outlook in a gloomy climate

The economic slowdown is set to continue in the coming quarters and is already evident from the reluctance of potential tenants to take on new leases as well as a significant increase in subletting. For the most part, there will be less demand for space than before in new lettings. At the same time, the focus on modern or ESG-compliant office space will continue, which will have a positive effect on the rent structure in the coming months. Until the end of the year, the public sector is likely to be the mainstay of letting activity. This sector is already conducting a number of searches on the market and is less dependent on the economy than the private sector. In this respect, take-up in the region of 350,000 sqm is considered achievable on the Frankfurt office market for 2023 as a whole.