Weak fourth quarter results in below-average take-up on Frankfurt office lettings market
- Space take-up of 381,600 sqm in 2022 is well below comparative medium- and long-term average results
- Banks, financial service providers and insurers account for a quarter of take-up and play dominant role
- Banking district accounts for highest share of market activity
- Vacancy rate broadly stable at 7.5 %
- Rents are on an upward trend: Prime rent stable at €46.00/sqm while average rent increases to €23.90/sqm
- 2023: Outlook is moderately optimistic owing to the recent improvement in economic forecasts; ecological sustainability is of growing importance; decreasing space requirements owing to hybrid working models
Frankfurt am Main, 2nd January 2023 – Activity was somewhat subdued on the Frankfurt office market (including Eschborn and Offenbach-Kaiserlei) in the fourth quarter of 2022, according to the latest study from NAI apollo. “The final three months formed the weakest quarter of 2022, with take-up by tenants and owner-occupiers amounting to 84,500 sqm. This result is not only 54.2 % below the previous year’s value, but also 49.8 % below the average of Q4 results for the last ten years. The last time there was a weaker quarter was at the beginning of 2021," said Dr Marcel Crommen, Managing Director of NAI apollo. For the year as a whole, take-up amounted to 381,600 sqm. Here, too, the result was well below the previous year’s figure (449,000 sqm) as well as the five-year (537,200 sqm) and ten-year (495,700 sqm) averages. However, last year’s result is still 16 % higher than in 2020, which turned out to be one of the weakest years for office take-up owing to the start of the COVID-19 pandemic.
The fact that a historical market slump failed to materialise is evident from the number of deals, which fell by only 6.9 % to 503 compared to 2021. “Moreover, large-scale inquiries are still in progress. Some of these will be completed in the first months of 2023, thereby exerting a positive influence on the market. At the moment, however, it can already be seen that the lack of ESG-compliant and future-oriented office space is creating a bottleneck,” said Michael Preuße, Head of Office and Retail Letting at NAI apollo. Take-up related to lease extensions after active market exploration has continued to increase and totalled around 144,000 sqm for the year. In the second half of the year, contract extensions decreased, but the overall volume was still 12.5 % above the result for 2021.
Fewer large deals impacts full-year result
In 2022, the Frankfurt office market was characterised by significantly lower take-up attributed to larger deals. While deals below 1,000 sqm slightly exceeded the previous year’s result with 156,600 sqm, and take-up in the “1,001 - 2,500 sqm” cluster even increased by 19.7 % to 86,200 sqm, larger office spaces registered declines of between 25.3 % in the “2,501 - 5,000 sqm” cluster and 48.6 % in the “>10,000 sqm” cluster. In the recent quarter, not a single deal was recorded for more than 5,000 sqm. This is certainly also owed to the fact that companies seeking larger premises are being more diligent about office inspections, whereby ESG, new workplace models and the future economic development are playing a role.
“The start of construction on a 28,000 sqm owner-occupier project by GIZ in Eschborn remained the biggest source of take-up in 2022. This is followed by the rentals of 18,600 sqm of office space by the bank ODDO BHF at 8, Gallusanlage and around 10,100 sqm by Citigroup in the ‘Taurus’ building,” said Dr. Konrad Kanzler, Head of Research at NAI apollo.
Finance sector dictates annual figure
For the year as a whole, “banks, financial service providers and insurance companies” finished in first place in the industry ranking. Overall, these companies accounted for take-up of 93,400 sqm or a share of 24.5 %. Next are “public institutions” with 43,200 sqm and “law firms, notaries and legal advisers” with 42,000 sqm. In Q4, companies in the latter group were particularly active in the banking district with transactions in the FOUR or Global Tower buildings.
Within the Frankfurt office market area, the banking district remains the sub-market with the highest take-up and thus replaces Eschborn in pole position. In the banking district, take-up amounted to 63,200 sqm, followed by Eschborn with 58,200 sqm, the city centre with 40,100 sqm, and Westend with 39,300 sqm.
Sharp rise in average rent; high demand for new office space
“In the fourth quarter, many high-priced lettings were recorded in the banking district and the “Messe/Europaviertel” sub-market, some of which took place in project developments or recently completed properties, which is reflected by the average rent. In the past three months, the rate has risen to €23.90/sqm. Over the past 12 months, this represents an increase of 5.8 %,” said Kanzler. The prime rent, on the other hand, was unchanged at the previous year’s level of €46.00/sqm.
In Q4, almost 33,000 sqm of new office space was completed in the Frankfurt market area, of which around 60 % is still available for rent. After subtracting the removal of property from the office market, office stock stood at 11.53 million sqm at the end of 2022. A project volume of 349,000 sqm of office space is currently expected for 2023 and 2024, of which 44 % has already been assigned to users. “The increasing importance of sustainable, future-proof space will further boost the pre-letting quota. Too often, available office stock no longer corresponds to user needs. Office users are looking for premises with flexibility in order to be able to meet new and changing requirements better and faster. In this respect, speculative premium developments will not struggle to find takers in future,” predicted Preuße.
Vacancies almost stable
Vacancies on the Frankfurt office market remained broadly stable in the fourth quarter of 2022. Market-active vacancies – that is, office space that can be occupied within three months of signing the rental agreement – amounted to around 864,000 sqm as of 31 December 2022. This equates to a current vacancy rate of 7.5 %, which is 0.1 percentage points below the previous quarter.
Improvement in market sentiment signals take-up revival
Although Germany, and therefore also Frankfurt, is heading towards a recession, latest forecasts indicate that this will not be as severe as had been assumed only a few months ago. This is likely to be reflected by a faster recovery in demand among users on the Frankfurt office market. “Searches for space are still in progress on the market. At the same time, sentiment among potential users appears to have improved, which in turn could provide a boost to take-up in the coming months,” said Crommen. Older office stock in weaker locations continues to lose ground, while users are increasingly focusing on areas in central locations. In future, meeting ESG requirements will be a key criterion when renting space, a requirement that can primarily be fulfilled only by new buildings. Accordingly, rental prices will continue to rise. At the same time, the vacancy rate for the city is likely to increase because of the influx of more new space and a reduction in space requirements per company as they implement flexible, hybrid workplace models. Furthermore, companies are still acting cautiously when it comes to renting new office space.