In Germany the real estate market was rather unspectacular up to 2005. Munich, Frankfurt and Hamburg’s real estate markets boomed while other regions had severe problems. From 2005 through 2007 to early 2008, Germany’s property market joined the global boom, and in many regions prices for houses and land exploded or at the very least rose considerably. Purchase prices for office and residential buildings increased. In the second half of 2008 and into 2009, the financial crisis reached Germany’s market and prices for real estate dropped, with prices returning back to those of 2005. In lesser-populated areas there were only modifications of a minor nature in prices for real estate, because these cities had not been the focus of any investor. In general, the property market in the nonbooming areas is mostly a reflection of regional economical and demographical changes rather than of the global crisis. With regard to Germany’s top cities, several market players forecasted distressed sales in Germany’s real estate market at the beginning of 2009. In a trend survey of Ernst & Young Real Estate 12 months ago, 98 percent of the people interviewed expected that the numbers of transactions under time pressure will significantly increase. Banks and listed real estate companies were expected to put a lot of offer price properties on the market. In view of the market developments at the end of 2009, it is obvious, however, that large sales with considerable discounts below the acquisition prices have not materialized.

This article summarizes today’s real estate market in Germany. To understand the real estate market, segment distinctions need to be drawn. This article reflects the office market, the retail market, the logistics market, the hotel market, the investment market, the owner-occupied housing market and the residential rental properties market.

Office Market

Since mid 2008, office space rentals have decreased, both for the average and the prime segment. Even though the market was initially strong in the first half of 2008, there was a noticeable drop throughout the rest of the year leading to a result that was about 8 percent lower than the peak year, 2007. In the first half year of 2009, floor space demand decreased by approximately 26 percent compared to the same time period the year before. The drop in demand for floor space continued as companies scaled back their property needs as part of cost-cutting measures and by the lack of new lettings. In view of the higher building completion rates in 2010 and office tenants ongoing space optimization, the vacancy rate will markedly increase. This prognosis is supported by the expected gross domestic product (GDP) growth of 1.5 percent for 2010; because economic growth requires effects on employment which arise only upwards a GDP growth of 2 percent. To attract new tenants, landlords have been offering rent-free periods and the payment of renovation and extension works and other incentives are becoming more common transforming Germany’s office market into a tenants’ market.

Retail Market

While Grade-A retail space remained stable in Germany’s top cities, secondary retail locations and out-of-town shopping centers faced mixed market conditions. With retail turnover on a downward trend since the beginning of 2007, supply levels in these locations continue to rise, leading to rent increases. There is a contradiction with many national and international retail chains continuing to follow their expansion strategies while many department stores and owner-managed shops have to learn how to deal with shrinking market shares and poor profitability. This natural selection process was additionally intensified by the financial crisis. The number of new leases was, in 2009, declining and more space is available at the market. As a result of these negative developments at classic retail locations, retail floor space has become more selective and deals are taking longer. Since the best locations are still in demand, the prime rents witness a positive trend. Despite the financial crisis, planned projects were completed and a pipeline of new developments provides an increase by more than one million square meters for 2011. In 2010 it is expected that even in these top locations there will be no longer any willingness to pay compensation to the previous retail space user, so that the sellers will have to impress the potential buyers. The retail market in Germany is challenging, but is unique in Europe offering high-quality properties and a lot of available space. However, the retail market depends also on the consumers and their spending. Compared to those of other countries, Germany’s consumers are not prone to negative wealth effects to any significant degree and are not faced with mounting debt. However, rising unemployment may entail lower consumer spending which, in turn, influences the demand for retail floor space.

Logistics Market

The logistics market is probably most affected by the crisis. The drop in output and transport volume has enormous influence on the demand for logistics services and logistics facilities. The logistics market is characterized by falling rents in all major cities and an overall vacancy rate between 5 and 5.5 percent. Future demand must be adjusted to the new economic environment. As pressure on cost increases, logistics services will be more frequently outsourced. While the vacancy rates in modern facilities are relatively low and have not changed noticeably, older properties will be most affected by this trend: The weak state of demand and the growing shortfall in users will lead to rising vacancy rates, especially as recent years have seen shortened lease periods of three or five years, so that users can quickly terminate the lease agreement. However, falling levels of construction activity will have a stabilizing effect on future logistics market development. This reduction is caused not only by decreasing user demand but also by financing difficulties: Requirements for credit worthiness rose for both users and developers and lease terms were tightened. These criteria are likely to continue and will limit the supply of new developments.

Hotel Market

The number of foreign guests fell by about 8 percent in 2009 and the number of German guests also fell by approximately 2 percent. Due to the global recession, this trend will continue, but affect cities in different ways. While the markets of cities strongly visited by business travelers are suffering losses, the tourist cities like Berlin or Munich remained relatively stable. These last mentioned markets profit from consumer sentiment which has so far remained robust. However, the need for renovations and renewals as well as a trend to build cheap accommodation facilities located some distance from the expensive centers of major cities will continue the weakened hotel market conditions.

Investment Market

Due to the financial crisis, the investment market suffered dramatically. Transaction activity was continually reduced in recent quarters and close to a standstill. Investment volumes slumped by around 70 percent. The relatively low risk puts the focus on investments in core assets, i.e. real estate with long-term tenants. Despite everything, uncertainty due to the low numbers of transactions and the differing price expectations of buyers and sellers still exists and it will take some time to stabilize. Investors with a sound equity capital base, private individuals and open funds are concentrating on the highest quality office locations in Germany’s major cities, using the new competitive environment to buy these Grade-A buildings for themselves. Even though portfolio transactions are now extremely rare, interest in rented residential property remains thoroughly intact. Additionally, peak yields in the retail market have stabilized so that a clear price level is given. In 2009 the total value of retail transactions was about €3.4 billion. What has not changed is that open funds, special real estate funds and sometimes closed-end funds as well as family offices and private investors determine the market development. Nearly 90 percent of invested capital came from local investors. This dominance is expected to continue into 2010. Furthermore, the recovery of banks will go on, but loan-to-value ratios will slowly begin to recover. This development is characterized by the noticeable restraint of banks to call the loans in and to push for a short-term sell – even in the event of a breach of contract. For banks to initiate execution proceedings it is quite simple and more convenient to restructure a problematic credit in a way that capital adequacy requirements not increase.

Owner-Occupied Housing Market

Compared to those in other countries, prices in Germany’s owner-occupied housing market have been relatively stable over the last few years. Nevertheless, sales prices have started to stagnate in some regional hotspots such as Munich and Hamburg. In these locations, price increases have been noticed in recent years, which resulted from a relatively high investment activity and a lack of adequate supply. The low level of mortgage interest rates should sustain demand in the housing sector to some extent. However, the uncertainty regarding the development of the economic situation should deter significant price increases and thus the outlook for Germany’s owner-occupied housing market remains relatively solid.

Residential Rental Properties Market

Germany’s residential sector and its prices have been, up until now, not affected by the financial crisis. There are no apparent slumps in rents, prices or transaction volumes. The sought after cities continue to enjoy steady population growth and building activity in the multifamily housing sector is leveled low: In the last six to eight years, Germany’s builders have been providing sufficient new houses and apartments. The reason for this is the tax situation, because all benefits for private home owners as well as for the investors have been either nullified or greatly reduced, and on the other hand, there is a low assumption of risks in financing of building projects by banks. Therefore, the 2010 outlook for residential rental property remains positive, at least in the major cities.


As a whole, Germany’s real estate market has not been as affected by the economic crisis as other countries. Germany escaped rather unscathed because its assets are characterized by a slow upward trend, corresponding in the years of crisis to a relative stability on the downward motion. However, a high overall vacancy rate and increase in unemployment affect the real estate market by continuing to cause uncertainty. Sellers have to respond to this situation by offering incentives and consequently ameliorating rental conditions. Regarding investments, in particular in retail real estate, 2010 is expected to be a good year with stable prices.