Rethinking retail real estate investments
Germany’s city centres are in a state of upheaval – visible in more and more empty shop windows, closed traditional pubs and the withdrawal of established retailers. What did not affect many investors for a long time is now increasingly developing into an economic risk: the structural change in brick-and-mortar retail is having a direct impact on the intrinsic value and rentability of retail properties.
Particularly affected are actually heavily frequented city locations – i.e. precisely those locations that were traditionally considered particularly valuable. But even in Munich’s city centre, where the highest commercial rents in the German-speaking world are called at up to 340 EUR/m², shops are empty. In Frankfurt, owners in prime locations demand up to 270 EUR/m², and in Düsseldorf the rent level is at a similar level. In Berlin, commercial rents in popular districts have even doubled within ten years. However, this development has long since ceased to be accompanied by stable earnings.
High frequency no longer guarantees stability
Kaufingerstraße in Munich is considered the most visited shopping street in the entire DACH region. In February 2025, it had 1.8 million passers-by. Nevertheless, even here retailers have to close – the ratio of sales to rent is no longer right for many. The situation is similar in Frankfurt’s Nordend: Café Lido, which had been established for over 23 years, gave up after a 70% rent increase was announced. In Berlin-Prenzlauer Berg, for a long time synonymous with flourishing gastronomy, several traditional restaurants are currently being closed, including the cult object “WATT”. The reason: expiring or non-renewed leases – no longer economically viable.
These cases are not isolated cases, but part of a Germany-wide development. According to the German Retail Association (HDE), around 40,000 retailers have already disappeared from the market since the beginning of the pandemic. One forecast assumes that another 46,000 farms will follow in the next four years. This is due to rising rental costs, a change in consumer behavior and the high burdens of inflation-related index-linked leases – a model that is common practice in the commercial segment.
Indexed rents and inflation: A risky combination
In contrast to residential tenancies, commercial leases often provide for index clauses that allow several adjustments per year. Especially in the inflation years of 2022 and 2023, over 50% of traders had to pay higher rents. While at the same time customer frequency fell in many parts of the city, numerous tradespeople were no longer able to compensate for this additional burden – neither through price increases nor through sales growth. This hits owner-managed businesses particularly hard.
An analysis by the Baden Chamber of Industry and Commerce shows that around 30% of all commercial inner-city businesses (retail, services, gastronomy) are so poorly positioned today that they will no longer exist within the next ten years without a course correction. Particularly problematic: Larger chains are also affected – and their withdrawal has a disproportionate effect on the surrounding infrastructure.
Macro effects on entire city districts – also relevant for investors
The economic consequences go beyond individual tenancies. If a large shop or department store closes, the entire environment often collapses – smaller shops lose their walk-in customers, visitor opportunities decrease, entire streets become deserted. This spiral of vacancy, declining footfall and loss of attractiveness endangers not only the rental yield, but also the market values of properties in the medium term.
Even gentrified districts such as Maxvorstadt in Munich or Berlin-Prenzlauer Berg are not immune. In both locations, real estate prices have been stagnating for almost three years despite lower interest rates – a clear warning signal for investors that pure location quality is no longer enough.
Solutions: Rental partnerships and new usage concepts
The HDE and numerous Chambers of Industry and Commerce now advise turnover-based rental models. These enable flexibility: If business is good, landlords benefit directly. In weaker phases, the economic burden on the tenant is reduced – this reduces the risk of default and stabilizes the cash flow. Combinations of minimum rent plus turnover component are also gaining in importance. Due to the regulatory limitation of “active entrepreneurial management”, this is only possible to a limited extent, especially for regulated real estate special funds.
In addition, landlords have to rethink – strategic questions from an investor’s point of view. The changed market logic requires new approaches to existing properties. Anyone who invests or maintains in inner-city retail locations today must deal with the following central questions:
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Which types of use will be sustainable in the future?
Traditional retail is losing economic substance in many locations. Instead, other concepts are gaining relevance: showrooms with online connections, medical services, local supply or specialized manufacturing formats offer stability because they are less dependent on walk-in customers. Hybrid use (sales + consulting + shipping) is also becoming increasingly relevant. -
What mixed forms – such as retail, gastronomy, culture, services or temporary use – can be realised?
Mixed concepts ensure frequency, create synergies and increase the quality of stay. The combination of daytime gastronomy with co-working elements, micro-cultural offerings or pop-up spaces can provide new impetus, especially in neighborhoods with high fluctuation and a young target group. -
How sustainable is the previous usage concept under the new conditions?
A well-founded usage analysis reveals weaknesses at an early stage: Does the tenant profile still fit the micro-location? Is the property barrier-free, energy-efficient, ESG-compliant? Can the surfaces be flexibly adapted to different formats? -
How high is the reinvestment potential or capital requirement for a conversion or repositioning?
Not every conversion pays off – but targeted investments in substance, space efficiency and third-party usability improve rentability and secure long-term values. A location and rental price forecast is mandatory here. -
How can the risk of structural vacancies be reduced?
Flexible rental models (e.g. turnover-based rent, graduated models, temporary interim use) reduce the risk of termination and enable adaptation to market fluctuations – a decisive advantage in volatile phases. -
What role does the ESG strategy play in commercial real estate?
Energy efficiency, social use concepts (e.g. neighbourhood integration) and governance issues are also increasingly becoming the focus of institutional investors in commercial real estate. Those who ignore ESG factors risk valuation discounts and limited access to finance in the future. -
How does the quality of the location change as a result of the decline in frequency anchors (e.g. department stores)?
The withdrawal of large retail chains can trigger negative spillover effects. A reassessment of the macro and micro location – including accessibility, mobility, social environment – is essential in order to realistically assess location opportunities.
In times of structural change, value retention and rent stability are no longer self-evident. They require active management, creative usage concepts and a reliable understanding of urban development. Especially in B-locations or changing neighborhoods, it is not yesterday’s rent, but tomorrow’s usage potential that determines the success of an investment.
Advice as an instrument of value protection
Especially in a market environment that is changing dynamically, sound advice is crucial. Owners should have the current performance and potential of their properties professionally analysed – with a focus on the rental structure, usage concept, ESG compliance and marketability. Without such measures, there is a risk of rental problems, loss of value and expensive conversion measures without a strategy.
Proactively supporting change – recognizing opportunities
The times when locations alone determined success are over. Today, the focus is on intelligent usage concepts, fair rental structures and the ability to react flexibly to structural market changes. For owners and investors, this change offers not only risks, but also opportunities – if it is actively supported.
The days when locations alone determined the success of a retail property are over. Today, the focus is on intelligent usage concepts, fair rental structures and the ability to react flexibly to structural market changes.
