Property bust

When it opened in 2000, the Sony Center on Berlin's Potsdamer Platz was supposed to be a symbol of the capital city's rebirth. Under a giant tent-like roof, thousands of Berliners and tourists visit the complex's massive movie theatre to see first run movies (a film about Michael Jackson's final days opened this week) and dine at its many restaurants. But above the crowds are empty offices and luxury apartments with "for rent" signs discreetly visible.

As a commercial venture, the Sony Center has been a disappointment. Sony unloaded its stake in the project in February 2008 for a 150 million euro loss. German news media reported this week that current owner Morgan Stanley Real Estate Funds is now following in Sony's footsteps and is looking to sell the complex for sum less than the 600 million euros it paid just last year.

When asked by Deutsche Welle, Morgan Stanley would not confirm the reports, which were first published in Die Welt and the Financial Times Deutschland. Real estate analyst Markus Schmidt with Aengevelt Immobilien described the possible deal as an "emergency sale" by Morgan Stanley, which has been hit hard the global financial crisis and falling real estate prices worldwide.

"At the moment, the problem is that the list of potential buyers has shrunk," Schmidt told Deutsche Welle. With banks retrenching and many private equity firms experiencing massive losses, some of the traditional takers for a project of the Sony Center's size are simply not interested in investing, Schmidt said.

Modern German history, on one city square

The area around Potsdamer Platz has long served as a reflection of the course of modern German history. Before World War II Potsdamer Platz was the busiest traffic intersection in Europe. Today, an old-fashioned traffic light stands in the center of the square to commemorate what was allegedly Europe's first traffic signal.

During the war, the area was almost completely reduced to rubble by Allied bombings and house-to-house fighting as Soviet troops closed in on the city. After the war, Potsdamer Platz straddled the dividing line between East and West Berlin.

When the Berlin Wall went up in 1961, the barrier snaked through the square and the East German side became a large expanse of no man's land, stripped of vegetation and patrolled by heavily armed soldiers. After the Wall was breached on November 9, 1989 and Germany and Berlin reunited in 1990, the area around Potsdamer Platz was little more than a vast, empty lot.

With such a large, undeveloped space near the heart of the city - Potsdamer Platz is just 500 meters from the Brandenburg Gate - the local government moved quickly to develop the area after reunification. At one point in the 1990s, Potsdamer Platz was often referred to as Europe's largest construction site.

Automaker Daimler (known then as Daimler Chrysler) and Sony both signed on to massive developments in the area. The sprawling Daimler Quartier opened in 1998 and the Sony Center, designed by star architect Helmut Jahn, followed in 2000.

Unrealistic expectations after reunification

Currently, commercial real estate rents in Berlin are around 20 to 22 euros per square meter, said Deutsche Bank economist Tobias Just. That's far less than in Munich or Frankfurt, where the same space would draw 30 and 38 euros per square meter respectively.

Potsdamer Platz's pre-war role as the heart of Berlin's commercial district drove up some of the expectations for the area after reunification in 1990, Just said.

"Potsdamer Platz was prime, prime, prime real estate before the war so investors speculated that it would become prime, prime, prime again after the Wall came down," Just said, adding that investors assumed rents would be around 30 to 40 euros per square meter when construction around the area began.

Investors also mistakenly assumed that large companies would choose to resettle their headquarters in Berlin after 40 years of being exiled to West Germany, said Aengevelt Immobilien's Schmidt, and designed office buildings in the Sony Center accordingly.

"They need a specific kind of leaseholder," Schmidt said. "They need to be big companies, people that are looking to lease 5,000 square meters."

Instead, the German capital has experienced stagnant growth over much of the past 20 years since the Wall fell. The large companies have mostly stayed away and deindustrialization has opened up even more sizeable parcels of land throughout the city. Many of those drawn to Berlin have been creative types and small start-up firms that have very different budget constraints and space needs.

A brighter future?

Although Morgan Stanley may take a bath on its investment, the Sony Center and Berlin real estate as a whole may yet have a healthy outlook.

"I am sure growth will take place long term," said Deutsche Bank's Just, who noted that the presence of Germany's federal government in Berlin, along with four large universities, a trendsetting reputation and cheap rents will make the city an economic dynamo over time.

Aengevelt Immobilien's Schmidt concurred, saying, "We have very cheap rents and good office spaces [in Berlin]." But he said future real estate projects in Berlin were likely to be designed to attract start-ups as tenants instead of large corporations.

Although its reputation might be tarnished by two sales within two years, Schmidt said the Sony Center would be a sought-after purchase by a bargain-hunting investor.

"We also can't forget that there is still money on the market, of course not necessarily from the US, but there is interest from Israel, from Egypt, and Asia is still there," Schmidt told Deutsche Welle. "There weren't only losers in the financial crisis."

Author: Brett Neely
Editor: Sam Edmonds