Shortage of new construction in major cities, partial oversupply in rural regions
New residential construction in Germany will remain at a historically low level in 2026. By the end of the year, completions are expected to total around 211,000 units – only slightly above the previous year’s figure and thus one of the lowest values in the current cycle. As a result, fewer apartments are being built than are needed to meet demand. However, the true extent of the new construction crisis is obscured by national statistics: The actual new construction deficit amounts to around 80,000 units per year, which is significantly higher than previously assumed (see chart below).
These are the results of the JLL analysis “Perspectives in New Residential Construction 2026”, which sheds light on the current situation and development trends for the German housing market. According to the study, a regional imbalance exacerbates the housing shortage. “It is often built in the wrong place. While there is an oversupply in rural regions in some cases, there is a shortage of new housing in metropolises and growth centres,” explains Dr. Sören Gröbel, Director of Living Research at JLL Germany.
According to JLL’s analysis, around 50,000 new apartments are built every year in regions with stagnating or even falling demand. These units are not available to meet actual demand in the dynamic growth regions. Unsurprisingly, the situation in Germany’s eight largest cities is particularly serious: Here, only 42 units per 10,000 existing apartments will be completed, but 62 new apartments would be needed. In contrast, construction output in rural areas of 41 units significantly exceeds the actual demand of 23 units.
In addition to the regional disparity, the JLL study identifies another structural problem: In many local markets, there is an increased demand for smaller residential units due to demographic changes, while an oversupply is building up in the larger unit segment.
“Around 21 percent of regional markets have such a qualitative imbalance. While small residential units are urgently needed, there are too many large ones – two types of housing that are usually not substitutable – also because the larger units are often large single-family homes,” explains Gröbel. This local, qualitative disparity alone results in an additional demand of 16,300 apartments per year in the coming years in the aggregation, which is otherwise not recognized.
Construction costs at an all-time high
One of the main reasons for the generally too low new construction activity is the construction costs. “Building has never been as expensive as it is today,” Gröbel emphasizes. The cost explosion took place in several phases: First, stricter technical requirements drove up costs from 2002 onwards, followed by a material price shock from 2020 and an interest and capital cost shock from 2022.
Profitability has been slowly recovering since 2024 – the difference between the cost-covering minimum rent and the rent for new buildings achievable on the market fell from 6.40 euros/m² in the first quarter of 2024 to around 1.60 euros/m² at the end of 2025. But the recovery remains fragile: The Iran conflict will lead to further cost increases in the short and medium term, especially for oil-based bitumen and the energy costs for operating construction machinery. In addition, increased upward pressure in interest rates has been observed again since the beginning of 2026. Although the ECB’s latest interest rate move is already priced into the current level of financing rates, no interest rate cuts are expected in the coming months.
Although profitability has improved, construction activity is not noticeably increasing. Roman Heidrich, Lead Director Residential Valuation JLL Germany, knows the reason: “New construction projects are currently profitable almost exclusively in the top price segment with rents above 21.50 euros/m². However, only around ten percent of households can afford this premium segment.”
The limited demand and the high requirements for the micro location limit the number of possible projects in this segment. “This niche market cannot compensate for the lack of construction activity in the broader and more affordable market segments. This is the real dilemma of new German residential construction,” says Heidrich.
While 62 percent of households in the mid-price segment (8.50 euros/m² to 11.00 euros/m²) would be solvent, this pool is shrinking dramatically in the premium segment. In addition, in order to successfully address the small, demanding target group, the project must be perfectly positioned – locations that meet these strict criteria are rare. In addition, there is political resistance in many municipalities to the construction of high-priced apartments.
Investments in cost innovations such as modular construction and the active use of regulatory simplifications such as the planned “Building Type E” could fundamentally improve profitability and make projects in broader rental segments profitable again. These have a significantly lower marketing risk than the pure premium market.
Cautious positive signals despite increasing uncertainties
Despite the tense situation, the first cautious positive signals emerged at the beginning of 2026: the number of building permits rose slightly. The lack of orders in the construction industry fell to 43.4 percent – the lowest level since July 2023. In addition, the cancellation rate for approved projects fell to 10.8 percent in March and remained stable in April.
However, Gröbel warns of increasing uncertainties: “Business sentiment deteriorated significantly in April and May 2026, falling by 28.2 points and minus 29.3 points, respectively. This is mainly due to more pessimistic expectations for the future in the face of interest rate concerns and geopolitical uncertainty. The recovery path remains extremely fragile.”
Despite the challenges, there are attractive opportunities for institutional capital in new residential construction in Germany. “Strong fundamentals – high demand from tenant households meets a currently very low volume of new construction – create interesting investment opportunities,” says Gröbel.
