NAI apollo: Take-up activity remains weak on the Frankfurt office lettings market in Q2 2024

Frankfurt am Main, 12th July 2024 – The Frankfurt office space market, including Eschborn and Offenbach-Kaiserlei, again saw a limited level of activity in the second quarter of 2024. NAI apollo, a member of NAI Partners Germany, recorded take-up by tenants and owner-occupiers of 88,400 sqm for the months from April to June 2024. Not only is this figure 3.2 % below the already weak prior-year quarter, and 13.3 % less than the long-term average for second quarters, it also represents the third-worst interim result in the last ten years.

Take-up for the first six months of 2024 totalled 181,500 sqm, which was slightly up on the previous year (H1 2023: 174,100 sqm). “The largest deals so far this year – the ECB’s lease signing for 36,800 sqm in Gallileo at 7, Gallusanlage in the first quarter and the recent owner-occupier purchase of the 1, Hauptwache project development by Frankfurter Sparkasse with around 7,200 sqm of office space – account for around a quarter of take-up. Without these two deals, the first half of 2024 would have been the second-weakest H1 of the past 20 years after the first six months of 2020,” according to Martin Angersbach, Director Business Development Office Germany at NAI apollo.

The very subdued take-up momentum is also reflected in the low number of registered deals, which amounted to 207 in total. Compared to the ten-year average for H1s, this represents a 25 % decline or 71 fewer deals (H1 2014 – H1 2023: 278 deals). In addition, the first half of 2024 is almost on a par with H1 2020, when only 199 deals were registered because of the pandemic.

Lease extensions or renewals following an active exploration of the market accounted for around 74,000 sqm of office space in the first six months. “Indications are that we will see an above-average volume of lease renewals for the year as a whole. Tenants are opting to stay in their current premises in part owing to the lack of alternatives that meet their requirements, but primarily because of the state of the economy. Renewals where no active search for alternative space was carried out in advance are not included and are therefore not taken into account. Lease renewals as a whole are therefore likely to have far greater relevance and be more significant compared to previous years,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo

Demand falls in various size categories

In the first half of 2024, take-up activity declined once again in the sub-1,000-sqm and 2,501-10,000-sqm categories. “In particular, the volume in the 5,001-10,000-sqm segment fell by more than two thirds compared to the previous year. The 1,001-2,500-sqm category was slightly above the previous year’s level. The lease signing by the ECB also meant that one deal was registered in the segment above 10,000 sqm, after no deals of this size took place during the first six months of 2023,” said Dr Konrad Kanzler, Head of Research at NAI apollo.

Banks, financial service providers and insurance companies remain the most important occupier group

The largest deals that took place by the end of June this year contributed significantly to the fact that the group comprising banks, financial service providers and insurance companies recorded the highest take-up in this period, with 65,600 sqm or 36.2 % of the market. Next were “industrial production and processing trade” with 19,500 sqm and “construction and real estate” with 16,400 sqm, closely followed by “consultancy, marketing and research" with 15,400 sqm.

Among the sub-markets, the banking district plays a dominant role with 59,300 sqm and a market share of 32.7 %. In addition, demand was high in Eschborn with 18,000 sqm, the city centre with 15,700 sqm and the airport with 11,000 sqm.

Modern spaces in projects, new buildings and refurbished buildings account for over 40 % of take-up

The slight fall in the average rent reflects the current price sensitivity of a large proportion of office users. The rate has fallen by €0.40/sqm compared to the previous quarter and €0.30/sqm year-on-year to €24.60 /sqm.

“The prime rent, on the other hand, has stabilised at €47.50/sqm for the time being, although current offers and lease contract negotiations point to an additional increase. There is still clearly demand for high-quality ESG-compliant space in central locations,” said Preuße. Projects, new buildings and refurbished buildings remain popular and are responsible for over 40 % of take-up. In the segment above 1,000 sqm, as-new space accounts for 62 % of take-up. “However, the future project pipeline will prove to be a bottleneck owing to the current macroeconomic and financing situation as well as the persistently high construction costs,” Preuße added. Overall, significantly higher rents have been obtained for as-new spaces than for existing buildings. The average rent achieved in as-new buildings in the first half of the year was €32.90/sqm – a third above the average overall market rent.

Vacancy rate now at 9.4 % – further increase in sub-let space

“At the end of the second quarter of 2024, total office stock amounted to around 11.53 million sqm. Completions in the second quarter include the ‘Timber Pioneer’ with around 14,000 sqm in the Europaviertel as well as the ‘Tower’ with 17,600 sqm and ‘The Hub’ with around 4,000 sqm in the ‘Eschborn Gate’ project site. A total of around 109,500 sqm is expected to be completed in 2024. Here, the pre-let quota is now at 80 %,” said Kanzler.

Compared to the same period last year, market-active vacancies on the Frankfurt office market – that is, office space that could be occupied within three months of signing the lease – has increased by 60,000 sqm. “This means that a total of 1.083 million sqm are available on the market for short-term letting. This corresponds to a vacancy rate of 9.4 %. A further increase in sublet space is evident here. While this type of space accounted for 12.5 % of total vacancies in the previous quarter, the figure has now risen to 13.4 %,” said Angersbach.

No market revival foreseeable on the Frankfurt office market in the short term

Although certain GDP forecasts for Germany as a whole have been raised and sentiment in the local economy appears to be improving slightly, this will not have any significant impact on the Frankfurt office market for the time being. A possible revival of the office market is only likely to become apparent after a delay of several quarters. “Although there are signs of increasing demand, particularly for medium-sized office spaces, and potential large-scale deals are on the table, this will not be sufficient to offset the moderate overall demand. Accordingly, market activity is expected to remain subdued in the coming months, with a below-average take-up volume for 2024 as a whole. The increase in sub-let space, coupled with negative space absorption, will cause the vacancy rate to rise further. However, the resilient demand for modern, central and high-priced office space should once again be reflected by an additional increase in rents over the next few quarters,” said Preuße.