B location office real estate investment market evidencing investor reticence

  • Transaction volumes outside the Top 7 cities at €812 million in the first half of 2023
  • Prime yield of B locations and regional centers up 1.40 percentage points compared with the cyclical low in May 2022
  • Mannheim, Regensburg and Ulm as the most active markets

At around €812 million, markets outside the Top 7 locations accounted for around 29 percent of the investments across the whole of Germany in the first half of 2023. Compared with the year-earlier period, the decline in the transaction volume of 73 percent was therefore marginally lower in B locations and regional centers measured against the overall office market (down 79 percent) and the Top 7 cities (down 81 percent). Since, against the backdrop of the current market and financing environment, investors are now inclined to be more selective when investing, the volume traded in the context of portfolios contracted sharply. Only 17 percent of the entire volume was recorded in the form of portfolio acquisitions. This selective investment behavior is also evident in the risk classes. Other than on Germany’s overall real estate investment market, the proportion of core and core plus investments outside the top investment centers rose tangibly by 10 percentage points. This is the conclusion drawn in a current analysis prepared by the global commercial real estate services company CBRE.

Mathias Keller, Head of Major Provincials

No different from the prime markets, and similar to real estate in general, office properties in B locations and regional centers do not currently take pride of place on most investors’ shopping lists. There are exceptions, above all with high net worth investors who do not have to resort to borrowing.

Mathias Keller, Head of Major Provincials
Dr. Jan Linsin, Head of Research

A large majority of professional investors are currently focusing on fixed income, which allows them to diversify their portfolios and adjust them to their target returns. Accordingly, office properties have perceptibly lost their appeal for now. Institutional investors in particular require a risk premium over and above their investment alternatives – even if they are still fundamentally interested in office properties.

Dr. Jan Linsin, Head of Research
Sebastian Tiemann, Teamleader Valuation Advisory Services Office

Repricing is in full swing on the market, whereby, outside the top locations, the lower rental prices tend in principle to result in technical limitations with regard to tenant improvements and the like.

Sebastian Tiemann, Teamleader Valuation Advisory Services Office

Lower exit factors from the outset in B locations and regional centers mean that declines here are less pronounced than in the top locations.

While the Top 7 markets saw office property prime yield climb by 0.17 percentage points to 4.07 percent compared with the first quarter of the year, yields rose by 0.25 percentage points to 4.55 percent in the Top B markets of Bonn, Hanover and Nuremberg, and by 0.3 percentage points to 5.25 percent expressed as an average across the B locations and regional centers. Compared with the last cyclical low in May 2022, office real estate prime yields have therefore increased by1.40 percentage points (Top 7, along with Bonn, Hanover and Nuremberg) and by 1.80 percentage points (B locations and regional centers as a whole), as opposed the benchmark yield on the capital market that is currently running around 1.60 percentage points higher at 2.56 percent.

International investors opting for caution

International investors have curtailed their activities in this market segment compared with the year-earlier period. Whereas, in the first half of 2022, a good third still originated from abroad, capital from this source came in at only 23 percent in the period under review, which is just €187 million. “Regional and local players are finding it easier to make their moves as institutional investors have scaled back their exposure and are forming a strong basis in the B locations and regional centers,” Keller observes.

Only open-ended real estate and special funds expanded their portfolios

The strongest net buyers consisted of open-ended real estate and special funds that bought without selling any properties, followed by developers. The lion’s share of the investor groups, with closed-end real estate funds, real estate companies and REITs leading the way, sold a great deal more than they added to their real estate portfolios.

Most active markets in Germany’s southern federal states

The largest transactions in the first six months included the sale of the e.on property in Regensburg, along with Deutsche Telekom’s Ulm branch. The transaction volume of these two locations was only exceeded by Mannheim.

The number of deals has more than halved compared with the first half of 2022. Market activity slowed markedly particularly in the case of transactions above the €100 million mark and in the entire market (down 91 percent). In terms of market share, however, the volumes in the small and mid-size purchase price segments increased. The decline in purchasing transactions between €5 million and €10 million was the least pronounced (down 37 percent). Approximately one third was attributable to transactions between €20 and €50 million. As a result, the average deal size contracted to around €21 million compared with €32 million in the year-earlier period. “Investors, especially in the institutional segment, are focusing even more than before on size categories of between €10 and €50 million. If the quality of the property and the location are right, as well as the energetic performance, larger investments are most certainly also made,” Keller says.

Outlook for the full-year 2023

“Until interest rates come down again, which we expect will take a while, investment activity on the office real estate market will likely remain subdued. A compounding factor consists of banks significantly reducing their real estate financing in response to more stringent regulation. However, interest rates cuts will get momentum going again,” Keller comments.

“Since occupiers are becoming increasingly selective in terms of property location and quality, and because ESG criteria are growing in importance, with a hybrid approach to working triggering structural change, office real estate is set to remain under considerable pressure to adapt in our view,” Tiemann says.



Matthias KellerSebastian Tiemann
Head of Major Provincials/Überregionales InvestmentTeam Leader Valuation Advisory Services Office
+49 (0)69 17 00 77 657+49 (0)69 17 00 77 690
Dr. Jan Linsin 
Head of Research Germany 
+49 (0)69 17 00 77 4040   

About CBRE

CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2022 revenue). The company has more than 115,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

CBRE Germany has been represented by its head office in Frankfurt am Main since 1973; there are further branch offices in Berlin, Düsseldorf, Essen, Hamburg, Cologne, Munich and Stuttgart.