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  • NAI apollo: Large ECB lease characterises Frankfurt office letting figures for Q1 2024

NAI apollo: Large ECB lease characterises Frankfurt office letting figures for Q1 2024

Frankfurt am Main, 18th April, 2024 – The Frankfurt market for office space including Eschborn and Offenbach-Kaiserlei has made a somewhat stronger start to 2024 compared to 2023, with tenants and owner-occupiers generating take-up of 93,100 sqm in the period from January to March. According to NAI apollo, partner of NAI Partners Germany, the figure is 12.4 % higher compared to the previous year, and 11.1 % above the average for the past five years. “It must also be mentioned that the lease agreement signed by the European Central Bank for 36,800 sqm in the Gallileo tower accounted for 40 % of the overall volume. Without this deal, the market would have registered one of its weakest first quarters to date in 2024,” said Martin Angersbach, Director Business Development Office Germany at NAI apollo.

The low number of lettings clearly reflects the weaker market dynamics, with 96 deals registered in the first quarter of 2024. This is 8.6 % lower than the already weak result recorded for the corresponding period of 2023, when 105 deals were finalised. Moreover, this is the first time since 2012 that the number of deals has fallen below 100 in a first quarter.

In view of Germany’s economic situation, this development is hardly surprising. Not only have the latest GDP forecasts for Germany been revised downwards significantly for 2024, with growth of just 0.2 % to 0.3 % currently expected, but sentiment in the local economy has also continued to deteriorate. According to the latest economic report carried out by the Frankfurt am Main Chamber of Commerce and Industry (IHK) at the beginning of 2024, overall business sentiment remains below the growth threshold with a climate index of 98 points. Office users in Frankfurt are also correspondingly cautious. Not only is there less demand for space in some cases, but the duration of letting processes has also increased significantly. In addition, many users ultimately decide to extend their existing rental agreements following a search for space.

"In the first three months of 2024, lease renewals following an active exploration of the market accounted for a volume of 64,000 sqm. This represents more than a four-fold increase in take-up through extensions compared to the previous year and illustrates the ongoing tendency to extend leases in these uncertain times. In addition, it is also apparent that companies sometimes remain in their spaces due to a lack of alternatives that meet user requirements,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo.

Take-up declines in most size categories

The slowing in take-up dynamics was evident in categories below 1,000 sqm as well as in the segments between 2,501 sqm and 10,000 sqm. Here, decreases of up to 80 % were recorded compared to the previous year. In contrast, a slight upturn was observed in the segment between 1,001 sqm and 2,500 sqm as well as above 10,000 sqm.

“The positive development in the latter two segments was primarily driven by the lease signed by the ECB in the Gallileo at 7, Gallusanlage. The ECB will occupy the entire building with 36,800 sqm. The second-largest deal in the first three months was the lease signed for over 5,100 sqm of office space by an industrial company in ‚The Move Blue‘ building in Gateway Gardens. The third-largest deal was carried out by a German technology firm, which rented 2,900 sqm in ‚Horizon Tower‘ in Eschborn,” said Dr Konrad Kanzler, Head of Research at NAI apollo.


Banks, financial service providers and insurance companies dominate the market

The lease agreement signed by the ECB ensured that the group comprising “banks, financial service providers and insurance companies” generated by far the largest share of take-up, with total volume of 40,700 sqm and a market share of 43.7 %. Next were “industrial production and manufacturing industries” with 12,800 sqm and “construction and property” with 8,200 sqm. Similarly, the largest deal influenced the amount of take-up according to sub-market. The banking district accounted for 43,900 sqm and 47.2 % of total space take-up. It was followed by Eschborn and the airport with 7,700 sqm each, and the city centre with 6,200 sqm.

Significant rise in average rent

While the prime rent was unchanged from the €47.50/sqm recorded at the end of 2023, the average rent increased again by €0.70/sqm compared to the year-end figure. It now stands at €25.00/sqm. “Occupiers continue to favour primarily modern and ESG-compliant properties in central locations. At the same time, office users are highly price sensitive. As a result, rents are expected to stabilise at current levels in today’s market environment, although some higher-priced transactions are also likely to be registered,” said Angersbach.

Significance of modern space in projects, new buildings and refurbishments remains high

Projects, new buildings and refurbishments remained of high importance for the rental market in the first quarter of 2024. The new office space segment accounted for well over 50 % of total take-up. “In the segment larger than 1,000 sqm these spaces were responsible for around 80 % of take-up. Now more than ever, it is essential to tackle refurbishment and new construction projects on an anti-cyclical basis. With the right timing, tomorrow’s demand for modern, ESG-compliant space can be met,” said Preuße, with regard to a shrinking project pipeline. The difference between the overall market rent of €25.00/sqm and the average rent realised in projects, new buildings and refurbishments has widened further and now stands at 35 %.

Project volume continues to fall – new spaces expected to be in short supply

The tense situation on the project development market has deteriorated further. The economic uncertainty is making it more difficult to fulfil the pre-letting quotas required by the banks. In addition, financing and construction costs remain at a high level, although there are signs that these costs are stabilising or falling. Currently, 109,000 sqm is expected to be completed by 2024, of which only around 21 % will be available for letting. Based on the latest information, the completion volume for 2025 is 135,000 sqm with a pre-letting rate of almost 64 %. Project completions of 13,700 sqm were recorded in the first three months of 2024, while 25,000 sqm of space was withdrawn from the market at the same time. Accordingly, office space in the Frankfurt market area totalled around 11.51 million sqm at the end of the first quarter.

Following signs of stabilisation in the fourth quarter of 2023, market-active vacancies on the Frankfurt office market increased again at the start of 2024. As of 31st March 2024, there were around 1.09 million sqm short-term vacancies, representing the highest absolute figure since 2016. The vacancy rate now stands at 9.5 % after rising by 1.6 percentage points compared to the same quarter of the previous year. Of total vacancies, around 13 % is attributable to sublet space. “In view of the economic situation and the increase in sublet space in combination with lower net absorption, the vacancy rate is likely to continue to approach 10 % in the coming quarters,” said Kanzler.

Challenging environment on the Frankfurt office market

It is well known that office markets react to changes in the economic environment with a delay of several quarters. These changes now appear to be fully established on the Frankfurt office market. “Although major deals are still in the pipeline, market activity will remain at a low level this year. Companies are scrutinising their space requirements even more closely and are increasingly opting to remain in their existing premises for the time being. Nevertheless, even in the current situation certain less price-sensitive companies are leasing high-priced space in central and modern locations, although this is often in conjunction with a reduction in office space. In this respect, rents are expected to remain stable at the current high level,” said Preuße.

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