-       Transaction volume up by 11 percent to €1.3 billion compared with the first quarter of 2023

-       Average prime yield in the Top 7 locations stable at 5.01 percent since year-end 2023

-       Seventy-eight percent of the transaction volume accounted for by core or core plus

A good €1.3 billion was channeled into German office real estate in the first three months of this year. Despite ongoing weak market momentum caused by the still problematic price discovery process and the financing environment, as well as changes specifically affecting office buildings – catchwords here: flight to quality, home office and new working worlds – around 11 percent more was invested than in the first quarter of 2023. These are the results of a current analysis prepared by the global commercial real estate services company CBRE.

The ifo Business Climate index, for instance, proved to be somewhat more upbeat in all four sectors of the economy, including the construction industry. Similarly, the ZEW economic indicator also brightened again in March.

At just under €960 million, the Top 7 investment centers accounted for 73 percent of the office investment volume, seven percentage points more than in the first quarter of 2023. Investor favorites in terms of the top locations were nevertheless distributed unevenly, with a clear focus on Munich (€603 million, 248 percent more than in the year-earlier period) and Hamburg (€139 million, reflecting an increase of 88 percent). The other five markets suffered significant declines, and none of them, not even Berlin, reached the 100-million-euro mark. No institutional real estate transactions were recorded in any asset class in Stuttgart.

Office investors are concentrating even more strongly than before on prime properties in top locations. A whopping 58 percent of the transaction volume was attributable to core products, with another 20 percent going to core plus. In the first quarter of 2023, these figures still stood 24 percent and 35 percent respectively. The trend prevailing on the leasing markets also contributed to this scenario: Demand-side polarization and the structural supply shortage of premium office space in central locations are causing asking rents and rents agreed to develop in different directions. “Marketable, ESG-compliant office space with contemporary fit-out in CBD locations is driving prime rents higher. At the same time, rents in peripheral locations and in increasingly dysfunctional old stock are stagnating and partly even trending down due to fiercer competition,” Linsin explains.

Private investors and family offices were the strongest net buyers by a long way: They invested a good €446 million more than they sold. Similarly, open-ended real estate and special funds that are increasingly struggling with fund outflows were the strongest net vendors with a negative balance of €368 million. International investors significantly pared down their exposure on the German office investment market: They invested around one third less than in the year-earlier period on the one hand, while increasing their sales by 47 percent, on the other.

As in the preceding months, investors in the office segment are ultimately opting for cherry-picked single asset investments. There were virtually no portfolio sales. Similarly, virtually no large-scale transactions took place in the first quarter of 2024 either – a deal above the 100-million-euro mark was only recorded for the office space in Munich’s Fünf Höfe. And only three other transactions occurred in the range of between €50 million and €100 million: Schwabinger Arte Fabrik (Munich), Phase 1 of LEIQ (Frankfurt) and an office building in Bonn.

Stable yields in the first quarter

Net initial yields for prime office properties in the top locations in the seven investment centers have remained stable since the final quarter of 2023. Prime yields in the CBDs averaged 5.01 percent, while the spread between city fringe locations and peripheral submarkets continued to widen. In the prime segment, Munich and Hamburg with 4.8 percent and 4.9 percent respectively delivered the lowest prime yields. In the not-so-in-demand Top 5 city fringe locations and peripheral submarkets yields nevertheless continued their uptrend, albeit at a moderate pace. The differentiation between locations is becoming increasingly pronounced, which is also reflected in the different rental price trends on the leasing market. Expressed as an average of the five investment centers, net initial yield stood at 5.39 percent for city fringe and at 6.61 percent for peripheral locations at the end of the first quarter. “We are anticipating that yields will firm up and stabilize in the months ahead,” Klein says.

Outlook for the remainder of the year

“Considerably more distressed real estate investments can be anticipated over the course of the year, also because the office leasing markets have stabilized but have not really picked up again,” Klein predicts. “As soon as the first significant transactions of institutional investors at the new pricing take place as an initial trigger and macroeconomic stimuli emerge, from interest rate cuts for instance, momentum should accelerate in the second half of the year.”

“Inflation continues to fall in Germany. Accordingly, the country’s inflation rate is likely to be around 2.2 percent in March 2024, marking the lowest level since April 2021. Although we do not expect the European Central Bank to cut interest rates at its upcoming meeting in April, the market is anticipating an initial move in this direction at its meeting next scheduled in June. The still cautious approach adopted by the European Central Bank confirms our opinion that interest rates will not be lowered before the summer. The European Central Bank is still concerned about persistently high inflation,” Linsin explains.