JLL: Solid financing and cash flow are the recipe for success in 2026

The review of the real estate industry in 2025 is partly sobering, partly positively surprising. It is therefore worth differentiating beyond the figures, which will be available at the beginning of January: The German investment market will be at such a low level in 2025 that almost every business case that can be calculated under the current parameters is likely to be successful. The players have already priced in many risks and financing conditions gave reason for cautious optimism, at least in the second half of the year – even in a long-term comparison.

The transactions that were successfully completed were mainly handled by "smart money". By this we mean long-term oriented, discretionary family offices that have fast decision-making processes on the one hand, and on the other hand usually have a very good equity base and think long-term. On the other hand, there are also international investors and private equity funds from different sectors, which also act relatively discretionarily and at least in the medium term and pursue a less return-driven approach.

Traditional German capital continued to act very risk-averse in 2025 and under the impression of few new allocations to the asset class "real estate". These are in particular open-ended real estate funds, but also insurance companies and pension funds, which accounted for the largest share of core capital in Germany in the years before the significant rise in interest rates. This capital is now investing very defensively, partly due to the debate about the risk classification of open-ended real estate funds, which have been externally classified differently in the risk class.

On the sell-side, some players have not yet had to realise write-downs and book losses due to the continued availability of debt capital and extensions of loans, so that the hidden burdens on the books have not yet been reduced. However, the lesson after the financial crisis, according to which sitting out with the beginning of the low interest rate phase and a rapid economic recovery was a successful strategy, is likely to apply to this crisis only with a very long time horizon and thus very long-term.

One positive development of the outgoing year is that office products are finding a market again, at least in individual cases, and transactions are being successfully concluded – and in quite a few cases. The dynamics in the hotel segment are just as positive, where, for example, the conversion of empty spaces into hotels is working more strongly again.

As expected at the beginning of the year, the investment market for residential real estate developed in a sideways movement in volume and price. And the crisis in German industry with major job cuts also had a noticeable impact on the industrial and logistics markets – both on the rental and investment markets. These were clearly visible in many industries and were priced into the development of the asset class accordingly.

This year, the data center and defense industry usage types received a lot of attention. This is logical and justified against the background of geopolitical and technological developments. However, they are not a salvation for the real estate market, which is suffering from a lack of acceleration. Defense properties are either "normal" properties with a special use for defense or they are special properties that are rarely or not at all available for the classic real estate market. Military training areas are important for the training of the Bundeswehr and its partners, but they are usually not an investment product. Defense companies also need classic office space, just as they need classic industrial and logistics space. There are also opportunities here – but more as typical public-private partnerships or sale-and-lease-back models than as highly specialized defense products.

The situation is somewhat different with data centers, because they represent a convergence of consumption and production through the topic of energy infrastructure and renewables. At the same time, we see data centers with their very high energy requirements moving more closely to the source of energy production. It will be more of a holistic concept. However, the vacancy rate in the B and C locations for offices is likely to remain unimpressed by either type of use.

Nevertheless, it can be said that rental markets have supported investment markets everywhere this year. This is also my thesis for the coming year: real estate investments must rely very heavily on improving operating cash flow if they are to be successful. Relying solely on yield compression is certainly not enough to increase or maintain value. This is most evident in both the residential and super-core office sectors, where new contract rents have risen by ten percent in some cases. Simply because the supply of attractive, sustainable space in central locations is far too scarce. But the retail rental markets have also surprised positively and stabilized in terms of new lettings at a level that was unthinkable for most just a few years ago.

Meanwhile, the situation on the housing market is complex: the sharp rise in rents means that the incentive to move has fallen further. Meanwhile, the rent brakes are causing existing rents to rise very slowly. So if you have been in your apartment for some time, you have little motivation to give it up. The consequence: the fluctuations at the large portfolio holders have more than halved. Accordingly, only half as much supply is coming onto the market as ten to 15 years ago, which in turn increases the pressure on the few available apartments.

In the course of the year, the market often heads for neuralgic points from which a trend reversal is expected, only to find that the hoped-for signal effect does not materialize after all. This was true on the German market this year for the sale of the Upper West in Berlin, which many expected to define the new core yield for office properties as a crystallization point. As much attention as the transaction was, it did not cut the Gordian knot of restraint in this asset class on the German market.

In my view, however, a real signal point in the market was the sale of Union Investment's iconic Trocadero office building near the Eiffel Tower in Paris to Blackstone. Here, for the first time, classic German core capital has been sold to international capital, which no longer serves purely opportunistic pots, but still has a return requirement that is significantly higher than what classic German core investors promise their investors.

The fact that this transaction was successfully implemented and that the Norwegian sovereign wealth fund Norges did not come into play as an underbidder means that "smart money" can actually make good deals at the moment – with the appropriate conviction and investment intention. This is especially true in the core office area, but also in other core areas.

In international comparison and exchange, however, the conversation in these months also repeatedly turns to the topics of psychology and "mindset". In Germany, the focus is too often on all the things that don't work – the big bureaucracy, the political disputes, the rigidities. Much of this may be factually correct. Nevertheless, I think that if you move outside of Germany and look around at what the situation is like in other countries, then part of the problems is also a question of mentality.

There are also flight cancellations in other countries, serious problems with the railways and the public health system. Bureaucracy is also very pronounced in other countries. But at the same time, there is a different "spirit" of seeing and taking advantage of opportunities. In Europe, this applies to Poland, Finland and Switzerland, among others.

For the coming year, I expect the transaction volume to increase slightly compared to 2025. We are currently seeing a better pipeline than at the same time a year ago. In addition, some owners are now running out of breath – partly on the debt capital side and partly on the equity side. However, prices are unlikely to rise in 2026. I expect a sideways movement – it cannot be ruled out that they will even fall a bit because we will see more and more products on the supply side.

If you want to be successful, you have to secure your financing at an early stage. The topic of super-core offices is a trend that will cause prime rents to continue to rise inexorably. Here, you can practically see how the trend will continue to drive operating cash flow via the sheer lack of good office space in inner-city locations. In addition, the increasing bargaining power of employers will lead to a significant decline in home office options in the private sector. The gap between the public service and the private sector will grow on this issue.

It will also be interesting to see how Berlin's housing market develops under the increasing pressure of the local elections in the capital on September 20, 2026, possibly combined with a vote on the nationalization of large apartment owners.

Politicians will have to continue to drill thick boards in order to achieve sustainable changes at all three levels of the federal, state and local governments. In the complexity of the state, this means that even if something is decided positively at the federal level, this does not mean that it will actually be implemented locally – especially not if political camps have to be skipped or bridged. In this respect, the real estate industry must continue to become active itself and must not wait for impulses from politics alone.