Unemployment Builds As Germany Doesn't

Work in the east dries up, and the construction boom busts

Don't worry, keep building. That has been the philosophy of Germany's construction industry for the past eight years. A combination of one-time tax breaks and surging demand from eastern Germany produced one of the country's biggest construction booms in decades.

But now the boom is ending--just when the overall economy faces a dramatic slowdown and joblessness is becoming a hot political issue. In 1996, construction spending, which accounts for one-tenth of gross domestic product, will hit the wall, dropping 1%, to $284 billion, according to industry associations and private analysts. As a result, unemployment among construction workers should rise 55%, to some 250,000 (chart). Bankruptcies among construction companies are predicted to rise more than 10%, to 6,000.

Several events have managed to trip up the industry. Faced with a severe housing shortage, German authorities offered special tax allowances to encourage the construction of owner-occupied houses and apartments. But these incentives ran out at the end of 1994, and the projects launched to take advantage of them are either done or nearing completion. Real estate investors also had a special dispensation to accelerate depreciation charges on properties, an accounting tactic that helped shelter income from taxes. That right expired on Jan. 1, rendering real estate investment less attractive. And public spending for 1996 on roads and other infrastructure projects is projected to drop 7%, to about $46 billion.

EMPTY OFFICES. The changing situation in eastern Germany is another factor. While the pace of commercial and public construction projects has been slipping in western Germany for several years, eastern Germany boomed as roads and buildings that crumbled under Communism were rebuilt or replaced. But in 1996, commercial and public building projects in the east will decline, while construction of apartments will slow markedly, figures Munich-based Hypo Bank, a major real estate lender.

Throughout the east, many industrial parks, office buildings, and shopping centers now beg for tenants. In Leipzig some 22% of the office space is empty, and 7,000 apartments lack tenants. Oversupply is putting pressure on prices across the country. Office rental rates in all major cities have fallen since 1992. Berlin has been hardest hit: Average rates have dropped nearly 40%, to about $27 a square meter. "We underestimated the extent of the structural problems that are hitting us," says Christian Roth, chairman of Bilfinger & Berger Bau, one of the country's largest builders.

SPRING ELECTIONS. The industry's woes will increase the pressure on Chancellor Helmut Kohl and his Christian Demo-cratic Party. With overall unemployment edging toward 10%, jobs have become the main issue in April elections in three of Germany's 16 states. In eastern Germany the situation could become especially grave, since construction has given work to many displaced factory workers.

Critics charge Kohl's party with talking about jobs but doing little to create them. To fight back, a parliamentary committee passed a draft law on Feb. 2 to protect German construction jobs by slowing the flow of low-wage, foreign construction workers into the country (box). But with the budget deficit headed up, no one expects any more tax breaks to boost construction.

Whatever Kohl does, Germany's construction woes will linger. Analysts figure demand for real estate won't catch up with supply until the end of the century at the earliest. And thousands more construction workers, like other Germans, will have to cope with the shock of losing their jobs.

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