MARKET REPORT Frankfurt Q1-Q2 217 Accelerating success. Office Leasing and Investment
Frankfurt KEY DATA Population 73, Area 248 sq km Socially-insured employees 56, Purchasing power index 113,8 Unemployment rate 5.7 % Rate of municipal business tax 46 % Disposable income per capita 25,553 Sources: Statistisches Bundesamt, Statistische Landesämter, Bundes agentur für Arbeit, Nexiga GmbH Fast Facts OFFICE LEASING Take-up of space 245, sqm Leasing take-up 238,2 sqm (without owner-occupiers) Prime rent 37.5 per sqm Average rent 18.8 per sqm Vacancy rate 1.8 % Office stock 11.5 million sqm Office Leasing Take-up Roughly 245, sqm was taken up on Frankfurt s office leasing market (including Eschborn and Offenbach Kaiserlei) in H1 217, exceeding H1 216 s results by around 16 %. This is the best H1 result we have seen since 28. Demand on the office leasing market remained high during the first half of 217. Although only one large-scale lease in the space segment of more than 1, sqm was signed in H1, total take-up was considerably higher yoy. This positive trend can largely be attributed to widespread leasing activity across most space segments. This is particularly the case in the segment of more than 5, sqm, which saw an increase of more than 35 % to around 64,2 sqm. Activity also remained lively in the small-scale segment of up to 5 sqm. Take-up of space in 1, sqm 8 6 4 2 33 467 17 433 8 36 42 348 4 548 7 238 212 213 214 215 216 H1 217 Leases Owner-occupiers 2
Investors tended to focus on central locations such as Frankfurt s Banking District which generated more than 2 % of total take-up. Some of the city s other submarkets benefited from large-scale leasing activity as well. Eschborn continued to enjoy popularity and mimicked 216 s excellent results with tenants signing leases for just shy of 25, sqm in total, putting the submarket in fourth place. Supply and Vacancy The drop in vacancy on the office market continued throughout H1 217. Around 1.24 million sqm of space was available for immediate tenancy at the end of Q2 and the vacancy rate fell considerably by 1 basis points yoy to a current 1.8 %. completion in 218 has already been pre-leased with roughly 61, sqm out of 117, sqm of new-build space still available. In response to high demand and recent steep drops in vacancy, property developers are proving increasingly willing to begin work on larger-scale speculative developments. Once completed in 219, the OMNITURM project at the Metzler site and the Marieninsel development will bring an additional 9, sqm of speculative office space to the market. Other projects in downtown locations such as the development of the former Deutsche Bank site (project FOUR) by Groß & Partner are expected to get underway next year. We do not expect to see a reversal in this trend in the months ahead. Pressure on vacancy rates will remain high due to conditions such as low new-build activity, the ongoing trend of converting office space into residential and lively demand for stock space. Vacancy rates do differ considerably depending on location, however. Submarkets such as Europaviertel, Frankfurt City and Bockenheim recorded rates of well below 6 % while space availability in some peripheral locations is still high. The number of new-build completions will remain below average in 217. With construction activity sluggish, demand for stock properties is on the rise. Only slightly more than 8 % of total take-up was generated with property developments in H1 217. 84 % of roughly 116, sqm scheduled for completion in 217 in nine projects has already been taken up. Construction activity will remain moderate in 218 as well. 47 % of space scheduled for Market Overview LOCATION TAKE-UP OF SPACE in sqm LEASING TAKE-UP (excl. owner-occupiers) in sqm ACHIEVABLE RENTS in /sqm AVERAGE RENT in /sqm VACANCY in sqm COMPLETIONS 217 in sqm 1 Banking District 54,5 53,2 24. - 42. 27. 175, 16, 2 Westend 28,5 28,5 18. - 36. 25. 64,9 21,4 3 City 23, 23, 12. - 36. 21. 66,5 8 4 Central Station/Westhafen 26,9 26,9 1. - 25. 16.5 66,1 37,3 5 Bockenheim 2,7 2,7 12. - 15.5 14.5 15,3 6 Europaviertel/Fair District 2,5 2,5 17.5-22. 18.6 1,5 7 City West 11,9 11,9 11. - 2. 15. 8,1 8 Frankfurt South 3,5 3,4 1.5-21. 14.1 42, 9 Airport 14,2 14,2 15. - 26. 18.7 77,6 6,6 1 Frankfurt West 6,3 6,3 9. - 13. 11.1 76,5 8 11 Frankfurt North 7 7 8.5-13.5 1.5 51,2 5,1 12 Mertonviertel 1,2 1,2 9.5-13. 11.5 118,7 9, 13 Ostend West 16,9 11,5 9.5-18. 14. 25,9 15,2 14 Ostend East 1, 1, 8. - 13. 9.7 51,7 3,8 15 Niederrad 6,2 6,2 9. - 15. 12.8 93,3 16 Eschborn 24,8 24,8 9. - 15. 11.3 171,9 17 Kaiserlei 11,1 11,1 1. - 12.5 11. 59,6 Total market 245, 238,2 8. - 42. 18.8 1,237,8 116, 3
Take-up of space by size (in sqm and %) and number of lease contracts 8 6 4 2 213 21 % 57 15 % 22 12 % 19 24 % 1 29 % Demand The traditionally well-represented banking and finance sector gave way to other industries in Q1, a trend that continued into Q2. The banking sector accounted for two out of ten large-scale leases signed for more than 5, sqm in H1 with the Deutsche Bundesbank taking up space at Trianon (7, sqm) and the ECB signing a lease at the Japan Center (6,75 sqm). The sector only managed to take fourth place in terms of demand, however, due to strong activity by consulting firms and IT companies as well as in the construction and real estate sector. 51,8 36,9 28,2 58,5 69,6 up to 5 up to 1, up to 2, up to 5, from 5, Take-up of space by size Number of lease contracts Consulting firms accounted for more than 2 % of total take-up (around 51,3 sqm) and were also clearly in the lead based on number of leases signed. The largest lease signed this year to date saw law firm Clifford Chance taking up over 11,8 sqm at Junghof Plaza. The IT sector trailed at some distance with around 36,6 sqm, claiming second place. Outskirt submarkets such as Eschborn and Frankfurt Airport saw considerable take-up activity by the IT sector. Take-up by industries - Top Five (in sqm) and share of total office space take-up (in %) 51,3 36,6 31,6 24,7 14,5 1 2 3 4 5 6 Consultants Information and telecommunication Construction and real estate Banking and finance Manufacturing industry 21 % 15 % 13 % 1 % 6 % The construction and real estate sector also came in strong, clearly in part because of leases signed by business centers. More than half the take-up generated in this sector can be attributed to eight leases signed by co-working providers such as Design Offices, WeWork and work republic. The largest lease this year to date was signed by WeWork for just shy of 5,1 sqm at Junghof. Rents Prime rents stabilized at Q1 217 levels ( 37.5 per sqm). Compared to H1 216, however, prime rents dipped by 1 per sqm due to the smaller number of high-priced leases signed. Average rent registered a slight increase of.1 per sqm to 18.8 per sqm. Property Index Immax The IMMAX property index represents the supply and demand trend on the office market. It reflects the relationship between supply at a specific point in time and take-up of office space over the previous 12 months. Supply figures include current vacancies (space available within 3 months) and potential space that will become available within 12 months thanks to new developments and newly vacant stock space. Lease take-up from the previous 12 months is included in take-up calculation. The calculation does not include office space taken up by owner-occupiers. Prime and average rents (in /sqm) IMMAX 6/217 = 1,364,1 sqm = 2,4 566,5 sqm 35. 38. 38. 38.5 37.5 17.5 18.5 19.5 19. 18.7 212 213 214 215 216 Prime rent Average rent 37.5 18.8 217 Due to ongoing vacancy absorption, low speculative new-build activity and high take-up, the property index continued to drop in H1 217. The IMMAX property index was still recorded at 4.7 in H2 214. With vacancy on a fast decline and leasing activity very lively, however, the index has almost dropped by half over the past three years. Available space was only 2.4x leasing performance at 4
the end of Q2 217, effectively highlighting the current trend on the Frankfurt office leasing market. Assuming demand remains high, we expect currently low completion volumes to cause the property index to continue to drop slightly through the end of 217. Summary and Outlook The office leasing market has already exceeded last year s results by far with a take-up volume of around 245, sqm, and we expect demand to remain lively in the months ahead. The fact that leasing activity is currently high among a variety of sectors and industries reflects the attractiveness of Frankfurt as a business location. Vacancy will continue to drop in the coming months due to low completion volumes and high pre-leasing rates. If take-up activity continues at the levels seen over the past few years, we can reasonably expect to see vacancy rates of between 7 % and 8 % by 22 on the market as a whole, accompanied by rent hikes. We also expect activity in the banking sector to pick up over the course of the year. In light of the fact that several leases currently await signing by international banks, the first Brexit-induced deals in the finance sector could also stimulate demand. Take-up results of more than 5, sqm for the entire year remain realistic. Available space (in 1, sqm) and vacancy rates (in %) 16 14 12 1 8 6 4 2 13.9 % 13.8 % 212 213 12.5 % 11.8 % 11.2 % 1,623 1,66 1,454 1,358 1,289 1,238 214 IMMAX property index H1 217 H2 216 H1 216 2.4 2.5 3.3 215 216 1.8 % 217 H2 215 H1 215 H2 214 H1 214 H2 213 H1 213 H2 212 4. 4.1 4.7 4.4 4.3 4. 3.9 1 2 3 4 5 Completion volume of new space (in 1, sqm) thereof pre-let/owner-occupied 2 16 187 12 11 13 116 117 8 4 215 216 98 217 55 218 28 219 Volume of new space Pre-let / Owner-occupied 5
Investment Transaction Volume Laura Müller Senior Consultant Research +49 69 719 192-29 laura.mueller@colliers.com H1 217 results on the Frankfurt investment market at just over 2.1bn reflect ongoing high demand for commercial assets. Following a short breather in Q1 and a generally modest start to the year, activity picked up significantly in Q2, reflecting a yoy increase in transaction volume of 25 %. Activity was fueled not only by the generally tense market situation but also by excellent conditions on the office leasing market. Foreign investors were particularly active buy side when it came to high-volume deals. South-Korean investor Mirae Asset Management participated in 217 s highest-volume deal to date, purchasing T8 for around 3m. Foreign investors also secured further deals for more than 1m, including Westend Carree. Buyer and Seller Groups Fast Facts INVESTMENT Commercial transaction volume Largest purchaser group: (Asset/Fund Managers) Largest vendor group: (Open-ended real estate funds/special funds) Most demanded property type: Office 6, 4,8 3,6 2,4 1,2, 3. 3.4 5. 5.7 6.1 2.1 212 213 Transaction volume 214 215 216 2.12 billion 36. % 27. % 97. % Prime yield office 3.85 % Commercial transaction volume (in billion ) H1 217 Core products generated a 4 % share of total transaction volume in H1 217. However, this result was heavily impacted by the sale of T8, which accounted for a third of total investment volume in the core segment, going for around 3m. The other risk classes also benefited from high demand, in particular in the price segment of up to 1m. We are also seeing an upswing in demand for locations outside the city center with around 65 % of transaction volume recorded outside the CBD in H1 217. The high share of deals signed in peripheral submarkets shows that many investors are willing to accept location risks in light of scarce supply. Foreign investors significantly increased their activity in Q2, considerably boosting their share buy side from around 11 % in Q1 to a current 59 %. Following a slow Q1 in terms of large-scale deals, which typically involved foreign investors, market activity has picked up considerably in the past three months. We expect foreign investors to remain very active buy side throughout the remainder of the year. As in 216, asset/fund managers, acting as institutional investors on behalf of third parties, continue to be the most important investor group buy side on the Frankfurt market, accounting for over 35 % of transaction volume. Open-ended funds and special funds trailed at some distance with a market share of 17 %. Open-ended real estate funds and special funds generated the highest share of transaction volume sell side, however, with roughly 58m. Property developers and development companies followed in the ranks with just shy of 25 %, taking advantage of the current market situation to dispose of new-build properties. Investment Assets A number of deals signed in the office segment, traditionally the strongest asset class on the Frankfurt leasing market, led to a further increase in market share. Office assets have clearly led the market this year to date, recording an investment volume of 6
more than 2bn with a market share of roughly 97 %. Commercial sites (around 2 %) trail behind, just missing the 5m mark with a volume of 49m. To date, hotel assets have not been able to retain last year s relatively high market share. Ongoing high demand continues to put pressure on yields in all market segments. (Gross) prime yields for office assets in top location fell another 25 basis points to a current 3.85 %. Yield compression is tangible in outskirt locations as well with an increasing number of assets changing hands at below 5.5 %. We also saw a drop in (gross) prime yields for retail assets in High Street locations (2.8 %) and logistics assets (4.9 %). Summary and Outlook Current data suggests that the rapid growth we are seeing on the Frankfurt investment market will continue into H2 217. Limited supply again proved an obstacle in H1 217, causing investors to sign a large number of deals in peripheral submarkets. Lively market activity and significantly higher volumes in Q2, however, serve to illustrate Frankfurt s status as a highly attractive investment destination. With several high-volume deals already in the pipeline for H2, we can once again expect transaction volume to hit the 5bn mark by the end of 217. Transaction volume by buyer groups (in million ), share (in %) 8 6 4 2 36 17 9 7 4 Asset/Fund Managers Open-ended real estate funds/special funds Developers/Constructors Opportunity funds/ Private equity funds Banks Transaction volume by seller groups (in million ), share (in %) 6 5 4 3 2 1 27 24 2 7 6 Open-ended real estate funds/special funds Devlopers/Constructors Asset/Fund Managers Private Investors/ Family offices Opportunity funds/ Private equity funds Types of properties (in %) Building sites Mixed use 2 1 97 Office 7
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