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How Germany's Office Building Market Went From Bubble To Bust

Higher, faster, more expensive – in German cities, renting out office space was a booming business. Then came remote working and higher interest rates.

Photo of a construction manager overlooking a construction site in Germany

Construction Manager Jens Schüenberg stands over one of the largest inner-city construction sites in Germany.

Michael Fabricius, Andreas Macho, Cornelius Welp

FRANKFURT — The four towers still look like huge stone skeletons. But in some places, there are already windows appearing in the façade. The “Four” building project in Frankfurt is due to be completed in two years’ time. It will have more than 200,000 square meters of floor space, housed in tower blocks that soar to heights of 233 meters. Plenty of space for apartments, shops and, above all, offices.

A few hundred meters away, José Martínez sits at his desk in a much less spectacular building. On the wall behind him hang sketches of other planned tower blocks. Martínez is CEO of Groß & Partner, which has overseen the construction of the towering “Four” over the past 10 years.

He has no doubt that the effort has been worth it. “A mixed-use building in a prime location is an easy sell,” he says, adding that more than 80% of the office space has already been reserved.

Up until recently, such success stories were almost taken for granted. All across Germany, investors keen to see a return on their money, their funds boosted by cheap financing, were sinking more and more money into ambitious construction projects. Demand sometimes seemed almost limitless. But now higher building costs and interest rates have brought an end to that wave of euphoria.

That could spell bigger problems for some developers and investors. One victim of more straitened financial circumstances is Dusseldorf-based Centrum Gruppe, which was behind major development projects such as “Kudamm Eck” in Berlin. In July, the company submitted a number of restructuring applications to the insolvency court, saying that take-up for office space rental had fallen significantly and there was no new business on the horizon.

Andreas Trump from the real estate consultancy Colliers agrees that the market has “slowed down considerably”. In the first half of the year, take-up across the office space rental market in the seven largest cities in Germany was around 1.1 million square meters – about a third less than in the same period the previous year, he says.

Market bottoming out

At the time, companies were reluctant to make decisions about locations or expansion plans. Trump believes the market may be bottoming out, but also that it is becoming “more polarized”. The offices most likely to be standing empty are those located on the outskirts of cities, as well as older buildings that fall well below modern expectations around environmental standards.

International realtors JLL say that these kinds of buildings are no longer very marketable. Stephan Leimbach, regional director for JLL Germany, says there has been a significant drop in interest in locations on the outskirts, rather than in the city center. “The market is becoming more differentiated,” he says.

However, in the outskirts, demand is significantly lower.

“So the proportion of offices standing empty across all areas of Frankfurt am Main is high, but in the center it is no more than 3 or 4%. However, in the outskirts, demand is significantly lower.” Even in “Gateway Gardens”, the office complex near the airport, which only opened a few years ago with great pomp and ceremony, almost a third of the offices are now standing empty.

Fiercer competition, fewer takers

Around a million square meters of office space in Frankfurt are currently not being rented – and the competition to rent out space looks set to become even fiercer. According to real estate portal Skyline Atlas, there are no less than 24 tower blocks currently under construction, with many more in the pipeline.

At the same time, for some years now, the city’s most important industry has not been growing. “For many decades, Frankfurt was a major location for banks and financial services,” says Sven Carstensen, a member of the executive board at real estate consultants Bulwiengesa. “Having such a high concentration of businesses in one industry becomes a problem if that industry goes into decline.” The cuts to office space have already been “enormous”.

The wave of empty offices could also spread to other locations. According to JLL, in Berlin there are currently around 1.5 million square meters of office space under construction, with these buildings designed to offer a home to the start-ups based in the city – but investors are also backing out of financing start-ups in increasing numbers.

Ulrich Höller, managing partner at ABG Real Estate Group, recently predicted that the office space market as a whole could shrink by around 20 percent. This prediction seems to be supported by the continuing popularity of working from home. Because companies have usually signed long-term leases, their reduced need for office space has gradually become more and more clear.

In view of the changing environment, investors are currently reluctant to flash the cash. “The change in interest rates is affecting their assessments of the financial feasibility of buying and selling buildings, as well as investing in construction projects,” says Michael Rinas from consultancy firm Mazars.

Photo of construction in the middle of Frankfurt

Construction work is taking place on the building site for the ''Four'' project. One of the largest inner-city construction sites in Germany is located in the middle of Frankfurt.

Arne Dedert/dpa/zuma

Optimism in a tough market

For some banks, the current situation could lead to a serious problem. “Especially when they have been financing projects that don’t have a significant equity investment from the developers,” says Rinas. That could create cluster risks, which not every bank would be able to absorb.

Filip Kurkowski from legal advisers Ashurst estimates that another group of investors could soon come under pressure, because banks often only financed buildings up to a maximum of 60% of the building’s value.

Higher sums often came from so-called credit funds, whose business has increased significantly in recent years. “Some acted very aggressively, and now they are running into problems,” says Kurkowski.

That is partly because the value of buildings in less desirable locations is dropping. Financing that was expiring is now mostly being extended by one or two years, but sometimes it has to be partially paid back. “Normally, no one benefits from bankruptcy, as the bank or fund, where possible, usually has to take on the building itself,” says Kurkowski.

We are creating incentives to tempt people back into the office.

For Frankfurt-based developer Martínez, however, these factors are no reason to be pessimistic. “I am optimistic about Frankfurt’s future. As a location, it is popular with highly professional industries and investors,” he says. While it is true that there has been a lot of construction in the last few years, there is also always movement and companies that are looking for modern city offices.

He says they are taking into account the new popularity of working from home. “We are creating incentives to tempt people back into the office,” says Martínez. Alongside ensuring the space is used in the best way, that also includes factors such as better air quality.

Higher interest rates and building costs may lead to higher rents, but companies accept this when offices are equipped accordingly, says Martínez. Even in the most sought-after locations in Frankfurt, he says rental prices are still a long way off their historic peak.

So on it goes. Martínez and his colleagues are already working hard on two major new projects, called “Nion” and “Kaia”. They are tower blocks – for offices.

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Migrant Lives

They Migrated From Chiapas When Opportunities Dried Up, Orchids Brought Them Home

An orchid rehabilitation project is turning a small Mexican community into a tourist magnet — and attracting far-flung locals back to their hometown.

They Migrated From Chiapas When Opportunities Dried Up, Orchids Brought Them Home

Marcos Aguilar Pérez takes care of orchids rescued from the rainforest in his backyard in Santa Rita Las Flores, Mapastepec, Chiapas, Mexico.

Adriana Alcázar González/GPJ Mexico
Adriana Alcázar González

MAPASTEPEC — Sweat cascades down Candelaria Salas Gómez’s forehead as she separates the bulbs of one of the orchids she and the other members of the Santa Rita Las Flores Community Ecotourism group have rescued from the rainforest. The group houses and protects over 1,000 orchids recovered from El Triunfo Biosphere Reserve, in the southeastern Mexican state of Chiapas, after powerful storms.

“When the storms and heavy rains end, we climb to the vicinity of the mountains and collect the orchids that have fallen from the trees. We bring them to Santa Rita, care for them, and build their strength to reintegrate them into the reserve later,” says Salas Gómez, 32, as she attaches an orchid to a clay base to help it recover.

Like magnets, the orchids of Santa Rita have exerted a pull on those who have migrated from the area due to lack of opportunity. After years away from home, Salas Gómez was one of those who returned, attracted by the community venture to rescue these flowers and exhibit them as a tourist attraction, which provides residents with an adequate income.

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