Frankfurt property market in freefall

As far back as May, I had warned that commercial property was destined for a bust — collateral damage in the real economy. In particular, I mentioned the U.S. commercial real estate (CRE) market as a particular problem for local and regional banks, which have large exposure to the CRE market. In May, I also mentioned incipient declines in the London commercial property market.

However, Marshall Auerback recently alerted me to an article about the downturn in the Frankfurt property market, a casualty of downsizing in the global banking system. Unfortunately, this news provides another headwind for the ailing German economy.

Below is a translated snippet from the article (original text in German).

The international financial crisis has precipitated a tumble in the office markets in banking metropolises. In London, New York City and Frankfurt a dramatic price decline is underway. Investors are afraid to take on deals. Some properties are being discounted 30 percent.

The crisis in the capital markets is reverberating back to the great financial capitals. With redundancies at large banks, less and less office space is needed. Therefore, the real estate market in the financial centers is coming under pressure. “The crisis in Frankfurt is palpable,” complains Edwin Black, planning agent in the metropolis on the Main river. It is even worse in London and New York. There, the price for office towers during the global real estate boom was shooting to absurd heights – and is now crashing to new depths. About 60,000 employees of international banks such as Bear Stearns, Citigroup, Lehman Brothers and UBS have already been dismissed because of the worldwide capital market crisis, according to a study of the Swiss Bank Staff Association already dismissed. More will follow. Wachovia, the fourth largest U.S. bank, has recently proposed the elimination of 6950 additional jobs alone – after a loss of 8.9 billion U.S. dollars (5.97 billion euros) in the second quarter.

This is driving up vacancy rates in the amount of office space and driving down rents and prices of real estate in the major financial centres. In the German banking metropolis of Frankfurt am Main, office buildings with a total value of only 373.5 million euros changed owner in the first six months of this year, according to a just released expert committee report. This represents a decrease of 88.5 percent compared with the transaction volume of 3.3 billion euros in the year-earlier period. The cause was “almost complete withdrawal of American investors, the rise in interest rates and restrained financing by the banks,” says planning agent Schwarz.
–Der Markt für Bürogebäude kracht zusammen, Die Welt

I reckon Deutsche Bank, with its huge U.S. CRE exposure is the bank most exposed here as it also has large exposure in Frankfurt – though it owns all of its own buildings. But, the report has implications for commercial property in London and New York as well.

Given this news, one might consider avoiding Commercial Real Estate REITs.