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places spaces
No. 1 | 2010
The Real Estate Magazine of Union Investment
Confidence
US market at
a turning point
Ray of hope
Sustainable
energy concepts
Building bridges
Investors and property managers
pull together in the crisis
CONTENTS COMMENTARY
Keep your property
COVER STORY The case for a global eco-social market economy
portfolio in good 4 A lot of hard work The industry is turning back to the by Franz Josef Radermacher
shape to enjoy established tools of the property business
success even in
difficult times. 7 Interview Hanspeter Gondring, Director of Studies at the
Page 4 Baden-Württemberg Cooperative State University, Stuttgart
T
9 Survey Union Investment property investment climate index
he world is in an extremely difficult situation. As a result of Yet technical progress is not enough in itself. Social innovations
on the rise again
economic globalisation the global economic system finds itself have to be advanced simultaneously so that consumption of resources
MARKETS in a process of increasing unmanageability and blurring of is restricted in a reasonable way. This is now an issue of global
10 US market Investors continue to assess the markets of boundaries. In particular, rapid growth in the world’s population governance. This means that two forms of innovations have to be
New York, Chicago, Seattle and Washington differently towards the ten billion mark and the catching-up economically of pursued at the same time: those in the field of technology, design
14 Budget hotels Low-cost accommodation benefiting from such major emerging nations as China, India and Brazil represent and new materials and those in the field of governance; in other
the credit crunch an enormous challenge from an environmental and resource words, the shaping of political and social structures. If the two can
perspective. Given high CO2 emissions our planet faces the threat be successfully interlinked in an intelligent future strategy there is
PORTFOLIO
of climatic catastrophe, possibly in the near future. One of the visible a realistic prospect of sustainability on the basis of a worldwide
18 Institutional investors Insurance companies and pension funds
consequences of global mismanagement is the worldwide financial eco-social market economy. If this is not successful, environmental
seek to increase the share of property in their portfolios
and economic crisis, an end to which is not yet in sight. Will this meltdown threatens, or even a resources dictatorship in a two-tier
result in a war over resources, over the issue of who can and who global society of a neo-feudal type.
CONCEPTS
may access these resources and to what extent? Or, on the contrary, What does this mean, to sum up? The global situation is critical.
22 Renewable energy Buildings of the future will produce
Changes on the horizon more energy than they consume are we in danger of global collapse as we plunder our finite sources Humankind has the chance of a peaceful future in prosperity only
in New York’s office of energy and raw materials? if further technological progress, especially in the real estate sector,
market. Page 10 26 Location initiatives Owners of office properties join forces
to boost their districts Technical advances are of crucial importance in this regard, making can be successfully combined with innovations in the field of global
28 Movie industry Buildings play more than just a minor role it possible to produce more output from fewer input materials. governance. The approach should therefore be “eco-social rather
The G.Park Blue in films. Sometimes they emerge as the secret stars
Planet logistics There are great opportunities here for innovative companies. This than radically free market”.
park is powered is especially true of the property and construction sector which like
by the sun. MISCELLANEOUS
Page 22 few other industries accounts for a considerable share of resource
3 Commentary Franz Josef Radermacher makes the case for
and energy consumption and of greenhouse gas emissions while
a global eco-social market economy
offering especially great potential for improvement. This is about green
32 News Capitals of culture as sources of inspiration for urban
regeneration; European market for real estate investment; buildings, improving the energy efficiency of existing buildings and a
Hamburg crowned “2011 European Green Capital”; vision for a future aimed at low energy consumption, small volumes
Photos: Marcel Malherbe/laif (cover); blickwinkel/H. J. Igelmund; Construction
New energy directives for buildings in the EU
Photography; Gazeley; PPW/Max Kohr; University of Ulm/Elvira Eberhardt
of waste materials and low greenhouse gas emissions. Society and
33 News Annual financial statement of Union Investment
the market will demand this and push it through. Companies have
Real Estate GmbH; ULI launches online platform;
European market for retail properties; BVI study on to act. Those who initiate the right processes now are set to benefit
fund investor preference substantially in the medium term.
Jackie Chan flying
34 News 2010 Prime Property Award; RICS study on Shaping the future and developing prosperity on a workable basis
through Berlin in his sustainability; Book review: “Futurecast”
for a future population of ten billion is inconceivable in any event
latest film. Page 28 34 Imprint/Contact without fundamentally improved technical solutions. The aim here is
a double “factor 10”: a tenfold increase in global economic output in
the coming 70 years coupled with a tenfold increase in eco-efficiency
COVER PICTURE and a global social balance to be created by then.
View of “The Loop”, Chicago’s financial district. One of the city’s landmarks University professor Franz Josef Radermacher is also
is the Sears Tower with its striking twin antennas. The 442-metre-high office President of the Global Economic Network, Vice-
building with 110 storeys is the highest skyscraper in the “Windy City” on president of the Eco-social Forum Europe and a Club
Lake Michigan. of Rome Member. radermacher@faw-neu-ulm.de
2 places & spaces 1/2010 places & spaces 1/2010 3
COVER STORY
Real estate has to
be managed care-
fully and in a cost-
A lot of hard work
conscious manner.
This virtue pays The industry is turning back to the tried-and-tested tools of the property business. Success is being
off here in Beijing
just as well as achieved by those with a lot of experience and staying power. By Miriam Beul and Anne Wiktorin
anywhere else.
T
he global crisis has brought about an odd reversal, a kind of back- project in early 2009. The revitalised twin towers together comprise
wards somersault: real estate which was (mis)understood during some 15,000 square metres of rental space. In spite of the decline in
the boom years as a mere financial product is re-emerging, freeing demand Glatzel and his team managed to rent out 70 per cent of this
itself from its virtual prison of numbers and becoming real and concrete. space within nine months. This represents a success in the current cli-
After all, investors, developers, service providers and even banks have mate. The refurbishment of the “Zeilgalerie”, also in Frankfurt am Main,
had to recognise what the old hands knew all along: property creates is currently in full swing. IFM acquired the retail property, first opened
work and quick deals in this product of bricks and mortar promise high in 1992, in 2008. This well-known shopping address is set to reopen at
profits in the short term at best. In the long run, however, only staying the end of 2010 with renewed splendour.
power and the required experience result in success. This is especially “We continue to invest in very well located properties which are no
true in the current climate, with markets in downturn, demand among longer marketable, selling them on again once they have been refur-
tenants falling, prices and rents under pressure, financing shaky and bished. Our business model has not therefore changed. The new aspect
many an ambitious business plan failing. Against this background, the is that there are many more such properties on offer now than before
virtues of the conscientious real estate business are in demand again, the onset of the crisis,” the IFM CEO notes. IFM was therefore adopting
and they are: sound financing, active portfolio management, close con- an even more conservative approach to its acquisitions. Unlike before,
tact with tenants, and careful and cost-conscious management. purchases in 1b locations were now no longer considered. “We pre-
Those who boast these virtues can look to the future with compara- fer to invest in 1a locations and to work more intensively with the
tive calm, whilst those with weaknesses must work on their performance. property in question”, he continues. A further adjustment is now bear-
As Georg Glatzel, CEO of IFM Immobilien, says, putting into words what ing initial fruit: Glatzel’s people are providing property management
most are thinking: “The crisis is not over yet. We assume that 2010 will themselves again. For a time IFM was assisted by external partners
still have some unfortunate surprises in store for us.” He is not plan- but, as Glatzel comments, “The quality was lacking.” He concludes by
ning a fundamental change of strategy at his company. But he will be reminding that happy tenants are the “nuts and bolts” especially in the
realigning certain areas, noting, “There has never been a situation such current climate.
as this.” The listed investment company, engaged in asset management
and project development with a special focus on refurbishment, is one Tenants are the focus
of the major players still active in the national property development “Losing tenants is the biggest risk at the current time”, confirms Klaus
business. In Frankfurt’s Westend, IFM completed the “Romeo & Julia” Franken, CEO of Catella Property. Owing to the recession, office rents
have fallen everywhere in Europe, in some cases substantially. At the
same time the volume of vacant office space is rising, which heightens
European office property clock* competition for users. Falls in rent for retail space are less apparent but
Q3/2009 this applies only to the key shopping locations in major European cities.
Stuttgart 1b locations are coming under considerable pressure. “Take care of your
Düsseldorf tenants” is therefore Franken’s advice to owners and investors. “The
Edinburgh needs of tenants change very quickly. Space which was just right when
Hamburg the lease was concluded can be unsuitable 24 months on,” notes the
Lisbon expert. It was therefore unwise to wait until the lease had expired. “It
Slowdown Accelerated Frankfurt, Rome, Luxembourg is better to remain in continuous contact with your tenants so that you
in rental rental Budapest, Barcelona can respond to changed requirements quickly and keep your tenants,”
growth decline
Athens, Bucharest he concludes.
Amsterdam, Berlin, Madrid, Renewed investment is often required. Union Investment, for
Milan, Munich, Prague
Accelerated Slowdown example, is currently renovating 12,000 square metres of office space
Helsinki, St. Petersburg,
rental in rental
Stockholm
to modern standards in one of its properties in Frankfurt-Niederrad – in
growth decline
Brussels, Dublin, Istanbul
line with the tenant’s requirements. The international high-tech company
Photo: ChinaFotoPress/laif/Tian Baoxi
Atos Worldline wanted large open-plan layouts with an open commu-
Paris
nication structure and a lot of glass. As a sign of this project’s success
Moscow, Kiev, Lyon
even the Group’s parent company, the IT service provider Atos Origin,
City of London, Warsaw, Oslo
* The clock shows where the office markets
currently dispersed at several Frankfurt addresses, is soon to move into
West End of London
are located within their rental cycles (top the building too – and is committing to the location to well beyond the
rent) in the view of Jones Lang LaSalle. The
local market can move within the clock in
year 2020. All this effort is worthwhile, says Ingo Hartlief, Member of the
various directions and at various speeds. Source: JLL, as at: October 2009 Management Board of Union Investment Real Estate GmbH: “We are §
4 places & spaces 1/2010 places & spaces 1/2010 5
COVER STORY
prepared to consistently meet increased requirements in terms of equip- agent negotiates the terms. “One trend is that tenants are entering into for the optimisation of non-performing property portfolios called the longer obtain follow-up financing. As a result, large portfolios, which
ment and space layout with a view to retaining satisfied tenants.” renegotiations with their landlords aimed at reducing the current rent. German Work-Out Platform. “At a time when financial investors have then go to the workout departments of banks, would often require
Those banks and financial investors that have become portfolio In return, lease contracts are often extended beyond the agreed term,” to revise their business and repayment plans substantially downwards, extensive supervision at short notice.
holders involuntarily owing to the crisis are also longing for satisfied reports Martin Drummer, CEO of CB Richard Ellis Deutschland. There are investors are taking a close look at outsourcing the management of Such needs mean that this is not exactly the land of milk and honey
tenants. As a rule, these owners do not maintain their own property direct cost savings to be achieved since this method can eliminate the large property portfolios,” Fritz- Klaus Lange, Managing Partner of RGM for service providers. Even a cost and project manager such as Chandler
management departments. Against this background, as is often the need for a move, he concludes. Gebäudemanagement, observes. KBS has to stretch itself in order to secure new clients. The Düsseldorf-
case during a downturn, the tenant representation business is gain- Service providers are also hoping for an expansion of their manage- The companies affiliated to the German Work-Out Platform offer based company’s business model is that 40 employees nationwide – as
ing in importance. This is how it works: estate agents seek contact with ment business. The Dortmund-based facility manager RGM, for instance, their customers the option of selecting from an extensive range of serv- the owners’ representative – ensure that the cost and time schedules in
the tenant on the property owner’s behalf long before the current lease was quick to respond to changed customer requirements. In May 2009, ices the elements relevant to their properties or portfolios. “It is our aim the developer business are adhered to. Yet in spite of – or even owing
ends, the aim usually being to extend it before it runs out. The estate it established together with CRE Resolution and other partners a group to avoid forced sales, the threat of write-downs or – worse still – insol- to – the pressure on costs, order procurement has become more dif-
vency,” says Michael Kunz, Managing Director of CRE Resolution. With ficult. “Our expertise is still in demand,” says Andreas Schulz, who is
the financial crisis the focus of facility management has also shifted responsible for the German business of the British company. However,
fundamentally, both managers have observed. Whereas in previous the projects had become smaller and customers were taking longer to
years the needs of owners were centred chiefly on transaction man- confirm, he added. One of the last major projects to be managed by
agement, this market had almost come to a complete standstill. “The Chandler KBS was the building of the new Breidenbacher Hof hotel
focus is currently much more on the operational side,” reports RGM in Düsseldorf on behalf of the investor Pearl of Kuwait. “The fees for
head Lange. He assumes that in the years ahead many investors will no services are coming under pressure,” confirms Catella Property CEO §
“The industry must be creative”
An interview with University professor Hanspeter Gondring on the current risks and opportunities
within the real estate industry
Have we really weathered the worst in Does this also apply to the retail space market
property markets? which recently seemed to have stabilised?
Let’s put it like this: the paralysis which This is true. We saw only small fluctuations
prevailed in the markets especially during in this segment in 2009. Buyer confidence
the first six months of 2009 has loosened. seems to have been less dented by the crisis.
And that is certainly a positive sign. On But here too I must sound a warning – this
the other hand, the risks are by no means may not last if the economy does not rally
averted. Even if the economy picks up again quickly. Steady consumption is not in
The new “Looper” office building in Duisburg’s Inner Harbour (above) still belongs to developer Kölbl Kruse. again we will continue to feel the our view the result of genuine value creation.
“Westend First” in Frankfurt has been sold by IFM Immobilien for €55 million to Bayerische Apothekerversorgung. consequences of the recession, especially Consumers draw on their reserves to be able
in the labour market and with private afford things. We can see evidence of this in
consumption. Both are areas that are the rising number of life assurance policies
of crucial importance to the state of the that are being redeemed. Economists also
property industry. see evidence of this in the flat inflation rate –
a sign that consumer demand has not grown
What does this mean in specific terms? in real terms. In short, the consumer climate
The real estate cycle lags behind the could certainly deteriorate further this year
general economic climate. We should not and next.
forget that. The economic downturn which
is accompanied by the loss of jobs or an What can investors and real estate owners Hanspeter Gondring lectures as a
Photos: Kölbl Kruse/krischerfotografie; IFM; Sebastian Lasse
expected rising number of insolvencies therefore do now? professor at the Baden-Württemberg
affects the office real estate market directly. Warning of risks does not mean sinking into Cooperative State University in
Landlords will continue to experience pessimism. There are still risks, yes. Investors Stuttgart.
difficulties in this regard throughout and owners must focus on retaining their
2010 – competition for tenants will intensify, tenants, further developing their portfolios,
vacancy rates will increase and rents will streamlining their portfolios where this is there are opportunities for making very
decrease. We are not expecting a turnaround possible and makes sense, and above all successful investments. You simply have to
until the turn of the year at the earliest. on showing more creativity in developing identify them – and then seize them.
The market has certainly not bottomed new business segments. This would do the
out yet, even if property investment industry good altogether. I am convinced The interview was conducted by
markets are already picking up again. that even and especially during these times Anne Wiktorin.
6 places & spaces 1/2010 places & spaces 1/2010 7
COVER STORY
have built several office properties and remodelled listed warehouses. more marketable projects in future of around the €20 million level,” he risk real estate investments. Similar to the Essen-based Hochtief
Close to the new “Dortmunder U” creative location in Dortmund city says. But the Essen-based project developer will have to live with delays Projektentwicklung, the Hamburg-based HIH has also been focusing
centre the new company headquarters of the BIG health insurance com- to its Eastern European projects. In Bucharest, the risk premium on increasingly since the start of the crisis on the construction of rental
pany is currently taking shape. Just recently the two sold the property at financing demanded by the banks is preventing the start of a planned, and owner-occupied apartments.
a good price to the closed-end property fund initiator Hannover Leasing. major Hochtief commercial project. “And in St. Petersburg a lot depends If service providers and project developers change their course then
The new “Cäcilium” office complex in Cologne was purchased by the on whether we can attract a financing partner for the planned project. estate agents and consultants inevitably have to follow suit. Many of
SEB Immoportfolio Target Return property fund in October. “Premium In both cases we do not own the plots of land concerned, however,” them have already downsized or reshuffled their teams. The German arm
properties will find a buyer even now. At a sensible price, this is no notes Eichholz. of the Scandinavian estate agency Catella based in Berlin, Düsseldorf,
problem,” notes Kruse. The conclusion of the two men from Essen is Frankfurt am Main and Munich, for example, has even changed its sys-
that they can continue to rely on their clearly defined business model. Light and shade with developers tem of remuneration in response to the sluggish investment markets.
“We only build properties if 80 per cent of their space has already been Stefan Best, Managing Director of the project development arm of “We no longer pay our employees an internal commission. The fees have
rented out and if they are so appealing in their own right that we would HIH Hamburgische Immobilien Handlung, is having a similar experi- been based on the team result since the start of 2008,” notes Catella
keep them ourselves,” explains Kruse. ence, with many of his plans not coming to fruition. “Major projects in Deutschland Manager Klaus Franken, commenting on the changed strat-
particular with an investment volume of over €100 million are being egy. This was also due to the slack investment business. Yet a lesson was
Projects getting smaller postponed to a later date,” notes the Hamburg-based investor. also being learnt from the crisis: fee-driven business transactions were
Yet even these two developers spoiled by their success to date have Of the four business segments in which HIH is engaged – not always the best. From the experience of success on a personal level,
had to come to terms with the market downturn. “Properties in asset management, property management, investment products as previously reflected in individual commission, the management have
B-locations are suffering from sluggish demand,” says Kruse. With the and project development – the first two did not require any strate- therefore created “group experiences” – thus encouraging stronger
new “Cäcilium” complex in Cologne this was less apparent than with gic adjustment. “These service sectors are not susceptible to market team-oriented and cross-departmental efforts. The message from this
the “Looper” in Duisburg’s Inner Harbour, which was also ready to move cycles,” comments Best. With its investment products HIH responded consultancy could be representative for the whole industry: a crisis
into. Astoundingly, the two have barely had to shift even in their deal- to the increased demand for self-explanatory and above all low- which hits everyone can only be overcome by working together. $
ings with banks: firstly, because they finance each project themselves
and can theoretically retain it within their own portfolio and, secondly,
because their network provides a cushion even in the current climate.
“We recently secured financing from the Sparkasse (savings bank).
There are no constraints. Because they know us and trust us we are still
getting good terms,” Kruse concludes.
Investors are more confident again
Rainer Eichholz, Chairman of the Board at Hochtief Projektentwick Union Investment’s property investment climate index rises for the second time in succession
The “Breidenbacher Hof” in Düsseldorf lung, has had a different experience over recent months. “The banks
belongs to a wealthy investor from Kuwait. are certainly demanding higher pre-letting rates and higher equity than
I
before the financial crisis. We therefore now calculate our developments nvestors in Europe’s biggest three econo- age points. At a score of 66.1 points, this only 38 per cent in Germany. “Investors in
on the basis of an equity ratio of 40 per cent. And we have raised our mies are entering the year 2010 with more national index remains behind the climate France and the UK have more confidence in
Klaus Franken. Where financing plans wobble because future rental implementation hurdle ourselves. We don’t start building the founda- optimism than was to be expected even as indices for France (68.3) and the UK (68.2). their property markets than their counter-
income was set at far too optimistic levels in the business plan, money tions until we have reached a pre-letting rate of between 50 and 70 per recently as mid-2009. These are the findings “The catching-up by the Germany index can- parts in Germany,” says Janssen. The British
is lacking for external expertise – however much sense it would make. cent depending on the project,” he says. In working with the banks it of the current investment climate survey con- not conceal the fact that the trend in the and French property professionals are antic-
All those who kept their feet on the ground during the era of cheap helps, of course, that Hochtief Projektentwicklung is a wholly-owned ducted by Union Investment, in which more three European core markets is again diverg- ipating in their respective markets a vastly
money have every reason to laugh now. “We did not get involved in any subsidiary of an MDAX company, he concedes. than 220 investment decision-makers from ing, presumably in the short term,” notes improved climate for office space invest-
excesses. We may appear brash and sharp to the outside world but inter- In its acquisition strategy the Essen-based company is adopting property companies and institutional prop- Janssen, putting the results into context. ment and as a consequence a significant
nally we operate in an ultra conservative manner,” says Marcus Kruse, some new methods, however. The residential share in the development erty investors in Germany, France and the UK During the first half of the year the recov- rise in interest from investors at home and
Managing Partner of the Essen-based project developer Kölbl Kruse. portfolio is to be increased and the healthcare properties segment is took part in December 2009. The property ery in the UK is set to accelerate. Some 60 per abroad. London is regarded by those sur-
The owner-managed medium-sized company develops and revitalises to be expanded. With hotel and retail properties, on the other hand, investment climate index, which has been cent of investors based there are already sig- veyed as the market currently offering the
office and retail properties, predominantly in the Rhine-Ruhr region. In Eichholz intends to adopt a very selective approach. “Office properties systematically recording the expectations nalling rising property investment for 2010, best possible conditions for property invest-
Duisburg’s Inner Harbour alone Kruse and his partner Stephan Kölbl still form our core business. Yet here too we intend to tackle smaller, and views of European real estate investors compared with 52 per cent in France and ment worldwide, with Germany, France, USA
since 2005, increased for the second time in and Scandinavia also faring well. Apart from
succession. It currently stands at 67.5 points. The mood among property investors Spain, the property markets in Central and
Falling demand More vacant space again “The investment climate has left behind its Eastern Europe and in Japan are viewed
has improved markedly
Rented office space in Germany and Europe Vacancy rates in the office market in Germany and Europe low of the autumn of 2008. The climate indi- especially critically.
2003 to Q3/2009 in million m2 2003 to Q3/2009 in per cent Investment climate index: change in per cent
ces in all three regions of the survey point The majority of British property experts
Germany* Europe** Germany France UK
20 10 Germany* Europe** to an upturn in investment markets,” says 8 (64 per cent) continue to base their invest-
20.4
19.0 Olaf Janssen, Head of Real Estate Research ment decision-making strictly on yield criteria.
15 16.7 9 4
14.8
16.3 at Union Investment. The pressure on initial Whereas in France a stronger focus on yield
10
12.9 8 yields in the UK and France was very likely to 0 is also discernible compared with the spring,
Photo: Breidenbacher Hof/Robert Reck
8.7 increase further. “In the next twelve months –4 German property investors are remaining true
5 7
we should also see an increase in cross-border to themselves – “security” will continue to
–8
0 1.3 1.6 2.0 2.2 2.5 2.3 1.3 6 transactions in Europe,” he goes on. be the key criterion in property investment
2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 Although well behind the other two, –12 in Germany in 2010. “Only very few German
1 2 1 2
* 4 markets: Berlin, Frankfurt, Hamburg, Munich; 2003 excl. Q1 * 4 markets: Berlin, Frankfurt, Hamburg, Munich; 2003 excl. Q1 the property investment climate registered 2005 2006 2007 2008* 2009* investors are likely to carry out a change of
** 15 markets: Amsterdam, Barcelona, Berlin, Brussels, Dublin, Frankfurt, Hamburg, London ** 15 markets: Amsterdam, Barcelona, Berlin, Brussels, Dublin, Frankfurt, Hamburg, London
(Central, North, South and Thames Valley), Madrid, Munich, Paris (Île-de-France), Vienna (Central, North, South and Thames Valley), Madrid, Munich, Paris (Île-de-France), Vienna in Germany is also on an upward trend, * Survey conducted each spring (1) and autumn (2) strategy from core to value added going for-
Source: CB Richard Ellis, as at: Q3/2009 Source: CB Richard Ellis, as at: Q3/2009 showing the strongest rise of four percent- Source: Union Investment, as at: January 2010 ward,” predicts Olaf Janssen. $
8 places & spaces 1/2010 places & spaces 1/2010 9
MARKETS
T
he rush of global financial investors into the property world, “There are growing signs
fuelled by cheap money, is now taking its toll. This is particularly that the worst is over
An equation with high where the crisis first began – in the United States of America.
The biggest economy in the world still has a long way to go to recover
from the consequences of the property and credit crisis. Heads are spin-
ning. And even the billions of aid from the US government cannot set
on the US market.”
Ross J. Moore, Vice President, Colliers, Boston
a lot of unknowns
the ailing economy back on its feet again straight away. The whole of
the property sector is still dependent on drip feeding from Washing-
ton. “The early indicators for an upturn are good but the economic
recovery is only just beginning” says Ulrich Wortberg, financial analyst
with Landesbank Hessen-Thüringen (Helaba). Above all, the US Federal
Reserve will only signal a rise in interest rates when the employment of Research at the Colliers agency network. Admittedly, landlords have
Investors still have differing views on the American property market. Where do New York,
market has recovered, he says. But for the moment there can be no talk had to accommodate a growing proportion of sublet office space in
Chicago, Seattle and Washington stand one year after the great crash? By Miriam M. Beul of an upturn in the jobs market. A good 9 per cent of Americans had the last 18 months, according to research carried out by the invest-
no job at the turn of the year. Unemployment rates have not been this ment bank Metzler North America. However, in statistical terms, 7 to
high for 26 years. According to Wortberg, “2010 could see them bot- 12 per cent of all “empty space” is sub-let. “So even if the excess sup-
toming out and consumption taking off again”. The analyst believes ply is likely to increase somewhat in the course of 2010, we expect
that a revival on the employment market is a prerequisite for sustained that little will change in the ratio of direct and hidden vacancies”, says
recovery in the US economy and in the property markets there. Steven A. Franceschina, Senior Managing Director with the Metzler
This is not an easy path, particularly for the commercial property North America in Seattle.
markets. Their position at the turn of the year is by no means comfort-
able. Since the start of the crisis prices have crashed by up to 40 per Chicago: the uncertainty continues
cent. Empty office space and abandoned rows of shops are now a A glance at the national statistics reveals that Chicago, Seattle, Wash-
common sight even in big cities. And as long as potential investors ington and the three New York locations of Downtown Manhattan,
cannot get loans, prices will continue to fall and the default rate on Midtown Manhattan and Midtown South Manhattan are not feeling
borrowing will rise. At the end of 2009 the default rate was 8 per the pinch on the employment market to the same degree. But around
cent and had thus more than doubled since the beginning of the crisis. Lake Michigan the situation has been the most exacerbated. Chicago,
“In the current phase of the market people rarely buy good value the third largest city in the United States and the second largest econ-
US properties from the owner. In most cases people buy the finance omy in the country, had no tenants for 15.4 per cent of all its office
from the bank. That way you can get 100 per cent of the property space at the end of the third quarter, even though public occupiers –
for the price of 60 per cent”, says Volker Arndt, CEO of US Treuhand. the US Government, the State of Illinois, the school system and the city
For equity-rich investors such as funds and pension funds there must of Chicago – are among the biggest employers. The previously consist-
undoubtedly be opportunities here. He thinks the quietness on the ently low unemployment rates in Chicago have climbed from the 5 per
transaction markets is just the calm before the storm. cent of recent years to 11.3 per cent, according to a location rating by
“The banks are holding on to the properties, hardly anything is the analyst firm Feri. Since the start of the crisis the former jazz metrop-
coming on to the market. There is no doubt that the good opportuni- olis is reported to have lost about 4.8 per cent of all its jobs. Feri there-
ties to buy will only come up in the next one to two years”, says the fore assesses the investment risk as a modest C. “Yet the economy in
German fund manager, who has been investing in American office, res- Chicago is still pretty diversified, which is a great advantage. But con-
idential and hotel properties for two decades. “The world is not going struction activity was strong in the past and in the present climate it is
to return tomorrow to what it was two or three years ago. Vacancies only the top locations like Wacker Drive that are performing well” says
are going to rise further. There is a lot of overcapacity, particularly in Karl-Joseph Hermanns-Engel, Member of the Management Board of
the office and retail segments. Only prime properties will survive this Union Investment Real Estate GmbH. The John Buck Company (JBC),
competition”, is his view. But “there are increasing signs that the a Chicago property consultant, takes a similar view. According to their
Photos: Gettyimages/Photographer‘s Choice/Steven Puetzer; Colliers International
worst is over”, says Ross J. Moore, Executive Vice President and Head report from autumn 2009 it is principally the secondary locations §
The biggest national economy US economy and employment market are only slowly recovering
in the world GDP, price index, unemployment and income in percentages 2007 2008 2009* 2010*
The US economy in figures
10 9.9
Population *** in millions 306.9 9.2
8
Gross domestic product 14,268
(GDP)* 2009 in $ billions 6 5.8
4 4.6
National debt 2010* as 61.4 3.8
2 2.1 0.4 2.7 2.8
a percentage of GDP 2.0 2.2 0.5 0.5
1.4
0
GDP* per capita in 2009 in $ 46,491 –0.4
–2 –2.4
High unemployment is putting strain on the office Percentage population 0.9 –4
growth in 2009
market in Seattle in the US state of Washington. Gross domestic product** Consumer price index Unemployment Disposable income**
* Prognosis ** real change compared with previous year *** As at: June 2009 Source: GTAI, as at: 30/11/2009
10 places & spaces 1/2010 places & spaces 1/2010 11
MARKETS
currently 8.22 per cent, thus 50 basis points higher than the rate in The four principal office markets in the USA
the first quarter of 2009”, says Guy Benn, Vice President Cross Border Available space, completed projects, vacancy rate, average rent, space
with the property consultants Savills LLC in New York. under construction, each Class-A office buildings downtown/CBD Office space available in m2 (100,000 m2 each)
New York: big losses in values
Although Chicago is suffering from massive vacancies, the bigger
losses in prices and values have been seen in New York. The city’s high
New York
dependence on the banking and insurance system has had its effect Seattle 5,686,000 m 2
on the market. “As a result of the growing office vacancies, real rents Drastic decline 2,691,000 m 2
have fallen by an average of 45 per cent”, says Benjamin Breslau, Direct investments by European
American Research Director with Jones Lang LaSalle (JLL). No won- investors in US commercial Chicago
der. Since the employment peak in August 2008 with around 4.42 mil- property in $ billions 5,006,000 m 2
lion jobs in New York, about 121,000 jobs have been lost. Of these, 10
according to Colliers’ research, about 80,000 were office jobs. It is 8
8.4
worth noting that in this crisis even prime office properties are among 6
4 5.5
the losers. In the last decade, consultants, bankers and stock market Washington DC
2 3.0
After the crash the New York property market speculators could afford prestigious addresses. But property prices 1.0* 5,212,000 m 2
0
might soon be recovering. exploded and with them the rents. “The New York market is currently 2006 2007 2008 2009
suffering the most – it was completely overheated”, says fund man-
ager Volker Arndt. He claims that since the millennium office rents in
that are suffering from a massive drop in demand. In the third quarter good New York business locations have risen by 50 per cent. In Chi-
alone 84,000 square metres of office space were vacated in non-cen- cago in the same period they dropped. “New York was totally overval- Average rent in Vacancy rate Completed projects Space under construction**
tral Chicago locations. Here the vacancy rate, including sublet space, hit ued”, says Arndt. Savills consultant Benn takes a more positive view. $/m2/month in percentage III/2008 to III/2009 in 1,000 m2 III/2008 to III/2009 in 1,000 m2
a record 18.9 per cent. The prices reflect the uncertainty on the market It is precisely New York’s dependence on the financial economy that
New York 37.6 8.7 186 242
and the drop in demand for space. In the space of five quarters office improves its prospects for a speedy recovery. “The office market will
rents in central Chicago locations dropped by 7.4 per cent, and out- be the first to recover because of the absolutely tiny new build pipe- Washington DC 44.4 17.8 404 491
side the centre by 4.9 per cent. There are no holds barred in the battle line and the rapid downward adjustment of office rents”, he says. Chicago 31.2 15.4 227 188
for financially sound tenants in the former gangster city. “Owners with Although the financial industry is still facing enormous challenges, Seattle 29.1 16.1 104 321
access to credit and the possibility of offering tenants various incen- upward tendencies are discernible throughout. 0 10 20 30 40 50 0 4 8 12 16 20 0 100 200 300 400 500 0 100 200 300 400 500
tives are enjoying greater success with new lets and renewals than * as per first half 2009 ** incl. modernisation measures Source: JLL * as of November 2009
property owners with limited capital” – that is the experience of the Washington: a rock in the breakers
JBC consultants. But only very few have financial room for manoeuvre. At this moment Washington is best placed. The US capital is benefit-
Even the transaction market seems to have dried up. “In the busi- ing from the immense public sector demand for space, reports JLL’s “Washington has been less affected by the crisis than other cities – the Investment Company (FREIC) even talks of 17.8 per cent. It is notable
ness districts of Chicago there were no property deals in the first Breslau. The Department of the Treasury, the Federal Reserve, the Secu- market will recover very quickly”, says Guy Benn. The investment market that there is little difference between central (17 per cent) and non-
three quarters of this year”, write the Chicago property consultants rities and Exchange Commission, the Federal Deposit Insurance Cor- will return to its former strength earlier than other markets. However it central districts (18.5 per cent) – offices throughout the municipal
in their report and talk of market events “far beyond historical bench- poration and many other state institutions have fuelled the demand offers investors less potential gain, since prices and rents have dropped area are all affected by the job losses.
marks”. The Metzler North America investment bank offers further fig- for office space. “At the end of 2009 Washington was the only prop- less than elsewhere. German investors are known to like security, so it And the forecasts are not rosy. “2010 will be another hard year
ures: within one year (October 2008 to September 2009) the transac- erty market in the US to show increased demand”, says Breslau. This is no surprise that they see Washington as a good investment market. for us. We shall not see any growth in jobs, but there will be new
tion volume on the Chicago investment market collapsed by 88 per is also underlined by Franceschina, the Metzler North America expert: That is why Deka Immobilien Investment bought a large office building buildings coming on to the market in the next few months” – these
cent. Even New York, with a drop of 87 per cent, came out marginally “Investors are finding opportunities there which they cannot find any- of 23,000 square metres in the central Washington business district in are the words of the FREIC experts. Excess available space has already
better. In Seattle the drop was 69 per cent and in Washington, cur- where else in the USA at this time”. The large number of government September 2009 for their global fund. The fund subsidiary of the sav- reached “record levels”, and not without consequences for office rents.
rently the most stable market, it was 53 per cent. “Low demand for buildings on long leases, the continuing growth of employment fig- ings bank paid $208 million for the Murphy/Jahn Building with LEED-CS In the third quarter of 2009 alone prices dropped 5.3 per cent on aver-
investment resulted in a domino effect on property prices. We reckon ures and the low proportion of fire sales make Washington interesting Gold certification. “Washington has always been a conservative mar- age against the previous quarter. Since the end of 2008 rent levels in
that the average capitalization rate for the Chicago office market is for conservative buyers, he says. Savills also see this location positively. ket. The city has not seen the sort of excesses of New York or Chicago. Seattle have actually dropped 18.6 per cent. Bearing in mind the gen-
That is why demand from authorities and lobbyists has been steady for erally quiet investment market, the property consultants in Seattle – as
years”, says Thomas Schmengler, Managing Director of Deka. in all the other locations – expect more problem properties to be sold
this year than in 2009. For equity-rich investors this means that the US
The market for commercial property finance has been largely paralysed Seattle: 2010 will be a trying year market might have some “gems” in store. $
The Puget Sound conurbation in the north-west of the US state of
• Recovery: The market for property • Financing: The credit squeeze is • Securitization: The US issuing bank, Washington was less in the investors’ sights in 2009. The biggest
finance in the USA is showing first particularly precarious for the commercial the Fed, has promised help for the town in the region, stretching mainly to the east, 150 kilometres “Investors are finding
Photo: Siegfried Kutti; Metzler North America
cautious signs of recovery. In the property market. If potential investors virtually paralysed market. As it has along a bay full of islands and with a wealth of inlets, is Seattle. Ama- opportunities in Washington
opinion of the American economic lack the necessary finance for acquisit- already done for private mortgages, zon, Starbucks, T-Mobile and above all Microsoft are among the main that they cannot find anywhere
research institution Moody’s Econo- ions, property prices will remain under the Fed is now going to get the employers, although the Microsoft headquarters are in Redmond, else in the USA at this time.”
my it will probably take at least until pressure. In addition, according to estim- market for commercial mortgage- an independent suburb of Seattle. Just about half of all Microsoft Steven A. Franceschina, Managing Director,
the autumn of 2010 before the upward ates from Deutsche Bank, by 2013 more backed securities (CMBS) moving employees, around 40,000, were employed in the Puget Sound region Metzler North America, Seattle
trend of the last few months has than $2 billion of property credit will again, so that the banks can pass at the beginning of 2009. However, by the end of 2009 more than
stabilised. fall due. this on to the capital market. 15,300 jobs were lost in Seattle alone. According to consultants JLL
the vacancy rate in Seattle rose to 16.1 per cent. Falcon Real Estate
12 places & spaces 1/2010 places & spaces 1/2010 13
MARKETS
The Travelodge hotel
Travelling on a small budget
“Tower Bridge” in London Budget hotels are profiting from the economic crisis – since companies are saving on business trips,
promises business travellers
and tourists bargain prices. bargain hotels are well-occupied. Property investors are exploiting this too. By Anette Kiefer
The British company soon
wants to expand to Germany.
T
here was a time when the hotel landscape was clearly demar- to the guest in advance, making even the reception manager redun-
cated. The top hotels enticed travellers with the greatest lux- dant. Sometimes vending machines with fresh pastries and fruit from
ury, the more economic guesthouses offered just simple rooms nearby businesses replace the 24-hour room service, as is the case
with few extras. “At a lot of German hotel property conferences with the Dutch provider Qbic. And in the German A&O hotels and
the budget hotel business was still being dismissed as an unwork- hostels guests even have to provide their own bed linen and towels
able business model ten years ago”, says Michael Mücke, Manag- for multiple occupancy rooms.
ing Director of Accor Hotellerie Deutschland. But with the advent of
the 21st Century, the internet boom and the economic crisis, a lot Plenty of luxury, few staff
has changed. However, most budget hotels today are as well-equipped as the more
Budget and economy hotels are very much on the way up and expensive establishments – rooms with solid wood floors, genuine
in the German accommodation industry this is the sector which is Egyptian cotton bed linen, bathrooms with stylish mosaic tiles, a fully
currently seeing the most profit. Turnover in the prototype business air-conditioned building and central inner-city locations. “The only
Motel One, currently represented in Germany with 25 hotels, rose in difference between our rooms and those in four or five star hotels is
the first nine months of 2009 by almost a fifth, to €50 million, and the size of the rooms”, says Sascha Gechter, who is one of the three
profits by 8 per cent to €10 million. These figures are particularly Managing Directors of the Meininger hotel group. Their rooms meas-
impressive since at the same time the average revenue per available ure an average of 15 to 16 square metres, including the bathroom,
room (RevPAR) dropped by 14 per cent. and are thus in the mid-range for budget hotels.
The concept is catching on rapidly – the rooms in the Motel One
Germany needs to catch up chain based in Munich were only 57 per cent occupied on average
And yet Germany clearly has a long way to go. While about 30 per up to two years ago. Just a year later the occupancy rate had risen
cent of hotels in the UK and almost 60 per cent in France belong to 71 per cent. In talks with hotel operators and investors two cata-
to the budget and economy hotel sector, in German they currently lysts always emerge clearly as the main reasons cited for the rapid
represent only 8 per cent, as a study by business consultants PKF rise in budget hotels in Germany – on the one hand the internet,
Hotelexperts shows. At least the institutional investors have done which enables every guest to make an easy and quick comparison
their homework: “The dread of hotel properties and indeed of the of the accommodation available, and on the other hand the financial
budget segment as a whole has receded”, says the German boss crisis, which has caused businesses to cut back their travel budgets
of Jones Lang LaSalle (JLL) Hotels, Ursula Kriegl. For instance, a few and driven many company bosses and business travellers to check
months ago Union Investment purchased the Motel One develop- into a budget hotel perhaps for the first time in their lives. “This is a
ment in Hamburg Neustadt for one of its open-ended real estate great opportunity for us. We budget operators can now show them
funds. In some of these establishments guests do not see a single what we are about”, says Sascha Gechter. He believes that the cri-
hotel employee the whole time they are there, as is the case with sis has done away with a lot of the reservations among more sen-
the Finnish budget chain Omena Hotellit. Check-in and access to the ior employees, even up to managerial level: “Business travellers are
rooms are operated by means of a computer code that is e-mailed suddenly realising that our hotel rooms are not half as bad as they
maybe thought, that there is very little they have to do without and
yet they only have to pay a third of the normal price”. A study by
Small price differences in the budget segment the business consultant Treugast also confirms: “Design-orientated
Average room prices in € budget hotels currently have an opportunity because they fully meet
Two-star hotels Four-star hotels
the most pressing requirement of the day, which is to offer good
value for money, and demand compromises within limits which are
Paris 93 211
acceptable at this point in time.”
Munich 87 137
The big question the hotel industry is currently facing is there-
London 84 182
fore how permanent are these changes, and will they still persist
Hamburg 80 119 when the consequences of the financial crisis are finally overcome
Cologne 80 117 and the economy is once again on the up? Will senior employees still
Frankfurt 67 117 be prepared to look for a suitable restaurant near their budget hotel
Berlin for a business appointment because the hotel does not have a res-
Photo: Travelodge
65 104
Dresden 65 85
taurant of its own? In any case, social trends seem to suggest that
0 50 100 0 50 100 150 200 250 clients are far more careful and more individual in choosing what
Source: Trivago, as at: 30/11/2009 they are still prepared to pay for. Today’s consumer – and the hotel §
14 places & spaces 1/2010 places & spaces 1/2010 15
market
be stronger as it emerges from the crisis. It was precisely in the one evenings, snooker or table football or even free concerts. All of
guest – drives “his Porsche to shop at Aldi or takes his bicycle to a top calculate than in the luxury sector. “Someone offering just over- and two star sector, where the budget hotels belong, that standards which serves to promote customer loyalty, explains Sascha Gech-
restaurant”, is how Treugast describes the altered attitudes of many night accommodation and a basic breakfast has far less trouble with were previously very variable. It included both robust middle-rank- ter, Managing Director of Meininger: “The focus is not on trying to
clients today. fluctuating turnover in the house restaurant, a lack of conference ing businesses with modest prices and private guesthouses clearly in generate more revenue but on getting the guests to spend time in
bookings or catering sales”, says Kriegl, the JLL expert. She believes need of renovation – and guests would often only find out what to the hotel and thus create a congenial atmosphere.”
Basic price with extras that the budget hotel operators obtain between 80 and 85 per cent expect when they got there. A further advantage offered by many budget hotels is their cen-
“Guests today are no longer prepared to spend money on unneces- of their revenue from room bookings. tral location, which was previously the exclusive preserve of the
sary extras”, as Michael Kirsch of Accor confirms – their subsidiary That is also why they can allow themselves to enter into fixed The internet offers the chance to compare luxury hotels – in the middle of the town, right by the main shopping
Ibis has been operating budget and economy hotels in Germany rate leases without too many problems. It is different for their col- Now rooms can usually be inspected in advance on the Internet, street or the trendy bar district. This has become possible thanks
since 1974 and can therefore be seen as a pioneer in this field. leagues in the three and four star sector, who prefer management standards are always the same in the individual hotel chains and to the smaller space required for the budget establishments. Those
“Nowadays booking a hotel increasingly resembles buying a car – contracts with turnover components. “In the luxury hotel trade fixed the pressure of competition is causing the differences between the offering smaller rooms and no conference rooms or restaurant facili-
there is a basic price and then guests can put together a package rate leases are the exception, whereas in the budget sector they different establishments to disappear. The Treugast study has shown ties can easily make do with residual or corner sites or if necessary
of the accessories they need.” And it is not just guests who ben- predominate – with standard market rents” – that is the view put that “As the market becomes saturated, the quality in the budget can even do without a fancy entrance – so then there might be a
efit from this, but also the operators’ group. Their bonus lies in the forward by PKF, the hotel experts, in their market report. These sector is improving. It is ensuring increasing transparency in the shop on the ground floor and with a side entrance leading to the
fact that the costs and revenue of budget hotels are far easier to experts therefore expect the whole of the German hotel industry to German accommodation sector, which has traditionally been hotel on the first floor.
characterised by small and individual businesses”, they say. For
instance the fact that most budget hotels offer their guests a wire- The market will continue to grow
less internet connection from their room or the lobby is no longer “The market for event and city trips will continue to grow enormously
considered a special feature but has become standard. Anyone who worldwide and therefore there is also a big need for well-equipped,
cannot keep up with this will find it earns them their first black centrally located hotel rooms”, says Carsten Hennig of CHD Expert,
marks among their clients. “In the bottom segment names are not an international market research institute specialising in the hotel
as important as the price-performance ratio”, says Malte Siewert, and catering trade. Indeed studies of the sector have shown that in
Managing Director of the hotel search engine Trivago. The main the first six months of 2009, reasonably priced city hotels suffered
issue for the seven million visitors who click on the Trivago site every considerably less than the luxury and airport hotels.
month is unanimously: where can I get the most for my money? Trivago predicts that even in the future, budget hotels in towns
This includes the range of extras and the atmosphere which the known for their high hotel prices will be more than averagely
budget hotels offer. Some establishments tempt visitors with hi- successful. This includes for instance the major Scandinavian cities of
tech communal kitchens, which then also serve as meeting points Stockholm and Oslo, but also the classic travel destinations like Paris
for travellers looking for company. Other chains offer communal TV and London. Trivago has one of the most comprehensive databases
on hotels in Europe and regularly publishes its own hotel price index
for the main European cities. For example, in November 2009 the
average room price in Berlin in the budget range was between €55
Categories of bargain hotels and €65, a survey by the hotel search engine reveals. By contrast, in
London a budget guest was paying €71 to €84, while in Paris there
• Low budget: Bunk beds for up to eight people per room; were budget beds available at €63 but at the top end people were
The Dutch operator Qbic (above left) employs design with an economical look. The A&O Hostel in Prague (above communal bathroom on the corridor. Examples: A&O Hostels, paying up to €93.
right) looks like a youth hostel. Motel One on the Alexanderplatz in Berlin (below) offers a lounge atmosphere. Formule 1, Wombats The “second division” of German cities now offers great poten-
www.aohostels.com; www.hotelformule1.com; tial for the budget chains. “The five to seven main locations already
www.wombats-hostels.com have so many new hotels and there is still a long list of projected
ones”, says Ursula Kriegl of JLL Hotels. “The next tier is now the
• Budget: Smallest rooms with a basic standard but with their most interesting because there is still not so much competition
own bathroom. Normally private rooms rather than shared there.” According to Kriegl this particularly includes towns with a
bedrooms. Examples: Easyhotel, Etap (France, Germany), high number of business travellers and little fluctuation in occupancy
Motel 6 (USA), Red Roof Inn, Yotel rates – for example Nuremberg, Mannheim, Constance and Trier.
www.easyhotel.com; www.etaphotel.com; www.motel6.com; She even thinks that the bigger German chains might expand into
www.redroof.com; www.yotel.com other German-speaking countries, for example to Vienna or German-
speaking Switzerland.
• Economy: Room sizes from about 18 square metres, elegant On the other hand foreign budget names also want to gain a
design. Limited service, but reception is usually staffed foothold in Germany – the construction of the first Toyoko Inn Hotel
24 hours a day. Examples: Ibis, Meininger, Motel One, Qbic in Frankfurt has been talked about for a long time now, and this
(Holland), Travelodge (UK) year building is finally supposed to begin. The same applies to the
www.ibishotel.com; www.meininger-hotels.com; www.motel- British leader Travelodge as a promising candidate for entry into the
one.com; www.qbichotels.com; www.travelodge.co.uk German market, and also the innovative concept of Qbic from
Photos: Qbic; A&O Hotels; Motel One
Maastricht in Holland. The name says it all – Qbic has developed
• Economy Plus/Mid-Class: Statistically these are often included in the a big synthetic cube which can house a double bed, a TV set and
budget bracket but by definition do not belong there; the “Budget” a wash and shower booth. These cubes are then built into existing
label is an advertising ploy because it is expected to produce a better properties, for example in office buildings which are standing empty.
occupancy rate. Examples: Holiday Inn Express, Hyatt Place, Tulip Inn That way a budget hotel can be set up in no time at all and the first
www.hiexpress.com; www.hyatt.com/hyatt/place; guests can check in after just a few weeks. The generation of modern
www.goldentulip.com budget hotels is breaking down the old traditions in every way. $
16 places & spaces 1/2010 places & spaces 1/2010 17
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