"Every property needs a story!"

Germany has had two years of recession – with a price- and calendar-adjusted change in gross domestic product of -0.3% in 2023 and -0.2% in 2024, while other European countries achieved robust growth rates. This was not a good macroeconomic environment for the real estate markets. In addition, although the ECB had reacted very quickly to inflation, which was mainly induced by energy prices, by raising key interest rates, it then rewarded the falling inflation rates, which approached the target of 2% in the course of 2024, only with interest rate cuts in small, timid steps.

This combination had a paralyzing effect on the players in the real estate markets. Without an emergency, sellers did not want to lower their prices, while credit-financed investors waited for further interest rate cuts and investors with strong equity lurked for low purchase prices due to the emergency. The market was paralyzed – characterized by non-decisions. In addition, there were blockades by banks, which acted more restrictively in their lending in view of rising insolvencies. Some banks even stopped financing major real estate projects at all in order not to incur additional risks.

Sales usually only took place to full equity partners who do not need financing. However, they currently have plenty of alternatives to real estate, so that the investment quotas have shifted to the detriment of the property. In this difficult market situation, it takes both an extremely motivated buyer who has a vision for the property and an equally motivated seller who is either under pressure or can achieve a good price. No wonder that transaction activity was correspondingly low in all asset classes.

Because there was hardly any supply of new buildings in the office sector due to a lack of pre-marketing quotas, there was also little transaction movement in the rental market for office space. In addition, a trend towards reducing the rented space can be observed in contract extensions, partly because of skeptical economic expectations, partly because the home office is used to save space and rental costs. The resulting growth in supply is putting an additional strain on new construction.

The market for light industry and logistics properties, which has proven to be resilient to crises in recent years, is developing in a differentiated way depending on the location. While demand is still high in locations predestined for logistics, the market elsewhere has been weighed down by the fact that the overall weakening of the economy has led to a flattening of sales, production, demand and rents, especially for older existing properties. However, new demand is coming from data centers and, in the future, also from the booming market for electricity storage systems.

The retail sector has been affected by a gradual shrinkage for decades, resulting not only from the rise of e-commerce, but also from demographic changes – older people are buying less. Top locations always work (in all asset classes, by the way), but insolvencies for chains lead to (temporary) vacancies and falling rents, even in 1a/1b locations. Older properties also often have investment backlogs. And discounts are often made in re-letting. However, dynamism results from the conversion of retail into gastronomy, from new uses (such as boutique fitness centres) and from special uses such as pop-up galleries.

The housing market is characterised by the paradoxical situation that, despite high demand, hardly any new construction is taking place because construction costs have exploded due to a wide range of regulatory requirements from the federal, state and local governments. In addition, there are lengthy approval procedures, which often bring further requirements, the uncertainty of investors due to the rent brake, and in some cities also quotas of price-controlled or publicly subsidized apartments. Transactions in the portfolio still function due to the energy subsidy, but are subject to the risk of possible expiring subsidy programs.

For 2025, however, we see more movement in the market again. More capital is flowing again from abroad, namely from the USA and the UK, which is an early indicator that the German market is picking up again and is a signal for local investors to become active again as well. We have already noticed this in our numerous discussions with a wide variety of market participants. It is evident that demand interest is increasing in all asset classes. As a result, the number of deals will also increase. However, there will still be fewer portfolio deals in 2025, but more selective deals with smaller volumes. ESG criteria in particular mean that the number of stranded assets will continue to increase. This is fueling the market for changes of use: Older office and hotel properties are increasingly being converted, especially into residential housing, which is still economically feasible with serviced apartments, boarding houses, micro-living, student housing, assisted living and other variants.

If markets become more selective, this means that investors and operators will have to become more creative. Every property, regardless of the asset class, needs its own story. The usage concept of the property must be based on current market needs. If the price/performance ratio, the value creation lever or the utilisation concept are right, then properties of all asset classes can also be exploited on the market today.