Brisk Demand Produces
New Office Space in Munich

New office buildings are set to rise near Munich's charming cobblestone streets and speedy autobahn, as developers bet on the recovery of the Bavarian capital's commercial-real-estate market.

About two million square feet are set to be completed this year, according to Property & Portfolio Research Inc., a real-estate research firm based in Boston. That is nowhere near the city's peak development volume of some 8.1 million square feet delivered in 2002 in the wake of the tech boom. But it is a clear sign that the Munich region's office market, already Germany's largest, is pulling out of a slump that followed the technology bust of 2001 and a stagnant German economy.

At the same time, the continued new supply is expected to increase competition for tenants and restrain rent growth in an otherwise strong leasing market. "While it's an ongoing recovery, it's a protracted recovery," says Kevin White, a senior economist with PPR who is based in London.

Developers are bullish because office rents and vacancies are heading in opposite directions. As Germany's economy has improved, Munich office vacancies edged down to 9% in the third quarter from a high of nearly 11% in 2004, though they are still well above the 0.6% low seen in 2000, according to Inga Schwarz, head of research for Cushman & Wakefield Inc. in Germany. Third-quarter prime office rents were about 7% above 2005 levels.

The developers' enthusiasm is bolstered by the local economy's recent standout performance in comparison to other German cities. Unlike Frankfurt's economy, which leans heavily on the financial center, Munich's economy is more diverse. It is the country's tech hub and home to a diverse group of some of Germany's largest companies, including insurance companies, electronics giant Siemens AG and auto maker BMW AG. The region, with a population of about 1.6 million, is expected to post a 3.3% rise in its gross domestic product this year, compared with rates of less than 2% for Frankfurt, Hamburg and Berlin, according to Cambridge Econometrics of the United Kingdom.

Munich's prospects helped it earn the No. 2 spot after London in a recent ranking by LaSalle Investment Management, a unit of Jones Lang LaSalle Inc., of European cities based on their economic potential and expected appeal to real-estate investors and developers.

In recent years Munich has gained on Frankfurt as the corporate location of choice because of the addition of its international airport in the 1990s, its proximity to the Alps and its educated work force skilled in technology, says Christian Ulbrich, chief executive of Jones Lang LaSalle in Germany.

The city's popularity has helped keep home prices high. In 2006, the average price of a single-family home in Munich was €670,000, or about $997,000, more than double the €330,000 average of homes in Germany's largest cities, according to Tobias Just, a senior economist with Deutsche Bank AG.

Housing prices don't seem to have put off such companies as Google Inc., the Mountainview, Calif., Internet giant, which opened a Munich office last month.

Among the planned projects hoping to meet the rising demand is the as-yet unleased 23-story Skyline tower, designed by the Chicago architectural firm of Murphy/Jahn, which is slated to start construction next year. Meanwhile, Hines Interests LP of Houston is finishing a six-story building this year in the central city that is 60% preleased.

Alexander Moll, senior project manager for Hines in Germany, says demand is brisk and tenants are willing to pay a premium for modern space in Munich's height-restricted downtown. That will make it relatively easy to find tenants for the remaining space available in the building, he predicts.

SJ Berwin LLP has leased about 44,000 square feet in the building, which will nearly double the law firm's office space in Munich.

"There's hardly any risk you face as a developer in the inner city," Mr. Moll says.

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