NAI apollo: Frankfurt office lettings market performed below average in 2023 despite an improvement in Q4
Frankfurt am Main, 3rd January 2024 – The Frankfurt office lettings market including Eschborn and Offenbach-Kaiserlei registered below-average take-up in the fourth quarter of 2023, continuing a trend that was already evident in previous quarters. NAI apollo, partner of the NAI apollo group, recorded total take-up by tenants and owner-occupiers of 96,700 sqm for the period from October to December 2023. While this represents the best quarter of the year, it does not compare well with the long-term average. For example, the Q4 result is around 40 % below both the five-year and ten-year average for fourth quarters of about 160,000 sqm in each case.
For 2023 as a whole, space take-up amounts to 357,800 sqm, which is around a quarter below the long-term average (2013 - 2022: 482,000 sqm). In recent years, only 2020 registered a weaker performance with 329,200 sqm. “This result comes as no surprise, however, given the current mixed picture of economic decline, high inflation and interest rates, apparent political uncertainty and a skills shortage,” said Martin Angersbach, Director Business Development Office Germany at NAI apollo.
The number of contract signings also decreased in conjunction with the lower take-up. “The figure fell to 456 from 503 in the previous year, almost reaching the 2020 level when 455 lettings took place. Compared to late summer, there was also a noticeable rise in take-up attributed to the extension of leases following an active market exploration. The 140,000 sqm recorded here for the full year is only slightly below the previous year’s level and also represents the third-highest level within the last ten years. A tendency towards lease extensions is associated with economic uncertainty,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo.
The outlook for the coming year is cautiously positive. Both the economy as a whole and the property industry may have reached their lowest points in 2023. In 2024, a moderate increase in GDP is not only expected for Germany. According to the latest employment and economic forecast by the “PERFORM Zukunftsregion FrankfurtRheinMain” initiative, a slight GDP increase of 0.4 % is also expected in the Rhine-Main region, following a decline of 0.2 % in 2023. Sectors that tend to be major users of office space, such as banks in Frankfurt, are likely to provide some positive impetus here. For example, Helaba Research is forecasting a 1.3 % increase in employment in the Frankfurt banking sector by the end of 2024, contrary to the national trend. “Some large searches are also still underway on the market. In this respect, we are currently in a position to forecast a moderate market recovery, which is likely to become more apparent in the second half of 2024,” said Angersbach.
Revival of medium-sized deals
The last three months of 2023 saw a confirmation of the trend towards higher take-up of medium-sized spaces between 2,500 sqm and 10,000 sqm. On the other hand, deals above 10,000 sqm and below 2,500 sqm decreased year-on-year. “The largest deal of the year was recorded in the final quarter of 2023 with the leasing of over 12,400 sqm by Deutsche WertpapierService Bank at 5, Kölner Strasse in Eschborn. However, together with the lease contract signed by an industrial company for around 12,400 sqm in ‘The Move Orange’ in Gateway Gardens, only two lettings above 10,000 sqm were recorded for the year as a whole,” said Dr Konrad Kanzler, Head of Research at NAI apollo. The analysis does not include the letting of the Lateral Towers by the City of Frankfurt, as this involves the conversion of the 46,000 sqm office complex into two grammar schools, including a major renovation.
Banks, financial service providers and insurance companies strengthen their leading position
“Banks, financial service providers and insurance companies” were responsible for the largest lease signing of the year and maintained their dominant market position with take-up of 78,800 sqm or a market share of 22.0 %. Next were “industrial production and manufacturing industries” with 41,700 sqm and the “construction and real estate” with 34,900 sqm. Among the submarkets, Bankenlage (banking district) dominated the office market with 46,900 sqm of take-up, followed by Eschborn with 42,600 sqm, Messe/Europaviertel with 33,700 sqm and Westend with 29,400 sqm.
Noticeable increase in prime rents
High-priced deals in city centre projects pushed up the prime rent in the fourth quarter to €47.50/sqm, representing an increase of 3.3 % or €1.50/sqm compared to both the previous quarter and the previous year. “With the increased willingness to pay for modern and ESG-compliant properties in central
locations, prime rents are likely to stabilise at this level,” according to Angersbach. By contrast, the average rent has fallen as a result of lettings in less central locations and stood at €24.30/sqm at the end of the year. Nevertheless, this represents an increase of 1.7 % compared to the previous year.
High importance of projects, new builds and refurbished buildings, especially in the case of large contract signings
Around a third of total take-up relates to spaces in projects, new builds or refurbishment projects. “New space is particularly relevant in the case of lease signings for above 1,000 sqm, which account for almost half of take-up in this segment. In terms of the geographical location, the Eschborn-South and Bankenlage submarkets stand out, where respectively all or two thirds of take-up above 1,000 sqm took place in newly built or refurbished properties. The fact that an average rent of €29.30/sqm — around 20 % higher than the market as a whole — is achieved in projects, new builds and refurbishments is not often a criterion for exclusion,” commented Preuße.
Project volume declines – difficulties on the developer market filter through
At the same time, high financing and construction costs present major hurdles for current and new project developments, which is clearly reflected in the completion figures. Projects and plans in the Frankfurt market area are “on hold” or have been postponed indefinitely. “Accordingly, only 137,500 sqm of office space was completed in 2023. Of this, 38 % is still available to the market for letting. Around 130,000 sqm is currently still expected to be completed in 2024, with a pre-letting rate of 68 %,” said Kanzler. Around 55,000 sqm of space was removed from the office market in the last three months. As a result, office stock has remained almost stable compared to the previous year at 11.525 million sqm.
Market-active vacancies on the Frankfurt office market appear to have stabilised in the short term. As of 31 December 2023, vacancies stood at around 1.04 million sqm or a rate of 9.0 %, which is in line with the prior quarter. Compared to the previous year, this represents an increase of 175,000 sqm or 1.5 percentage points. “In the coming year, office vacancies that can be let at short notice is likely to remain at a high level. A further increase in available sublet space, which now accounts for 14 % of active market vacancies, will contribute to this,” said Kanzler.
Outlook slightly optimistic
Although potential tenants on the Frankfurt office market remained cautious at the turn of the year, we can look forward with optimism to the current year, particularly the second half. The first few months of 2024 will certainly still be difficult, but the expected economic recovery should subsequently lead to a moderate market revival. A number of applications are already in the pipeline, including for large spaces, and this is helping to underpin the market. Owner-occupier demand continues to focus on modern space in central locations that is as environmentally sustainable as possible. “There is also a willingness to pay higher rents for ESG conformity and a highly attractive location and space. Accordingly, the trend towards high-priced lettings will continue. This will make it increasingly difficult to reduce vacancies in properties that do not fulfil these requirements,” concluded Preuße.