-       Office transaction volume outside the Top 7 cities at €354 million – 12 percent lower than in the first quarter of 2023

-       Prime yield of B locations and regional centers stable since year-end 2023

-       Strongest markets were Bonn, Marburg and Leipzig

Of the €1.3 billion invested in office property in Germany in the first quarter of 2024, €354 million – more than 27 percent – was allocated to B locations and regional centers. As opposed to the overall office investment market that grew 11 percent compared with the first quarter of 2023, the transaction volume of B locations and regional centers dropped 12 percent. This is the conclusion drawn in a current analysis prepared by the global commercial real estate services company CBRE.

“The first quarter of 2024 is likely to have seen the economy dip again. But the cloudy economic sky has some silver linings,” says Dr. Jan Linsin, Head of Research at CBRE Germany. 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.

Core and core plus property accounted for 68 percent of the office investment market’s transaction volume in B locations and regional centers. In this context, the capital invested in the core segment reported the lowest decline compared with the year-earlier period (down six percent). By contrast, only around half of the previous year’s volume was invested in core plus. No opportunistic investments have been recorded so far. “This serves to highlight the fact that investments in prime areas in B locations also win back investor confidence faster. Contemporary floor space concepts in energy-efficient buildings are particularly relevant in the investment market at the moment and therefore more tradable,” says Arthur Loosen, Co-Head Major Provincials / Überregionales Investment at CBRE.

Special funds on a shopping spree

Special funds were by far the strongest net buyer investing around €100 million more than they sold. The strongest net vendors with a negative balance of around €80 million consisted of property companies. Private investors and family offices also played an active role on the market although activities did not always translate into deals. Similar to corporates and listed property companies/REITs, they had a close-to-balance position. International investors with an anticyclical approach increased their exposure significantly by 42 percent compared with the previous year’s quarter. Their share in the overall volume rose accordingly by 14 percentage points to 37 percent. By contrast, German investors proved to be more reticent, investing 28 percent less than in the first quarter of 2023.

Investors in the office segment continued to opt for select, single asset investments, with basically non-existent portfolio acquisitions (three percent of the investment volume). Large-scale transactions did not materialize either in the first quarter of 2024. The markets with the highest volumes proved to be Leipzig, Marburg and Bonn, with Bonn securing first place as the best performer outside the Top 7 with more than €90 million. The sale of the West.side Spark (Bonn), a deal brokered by CBRE, marked the only transaction around the 50-million-euro mark.

Yields remained stable

Net initial yields for premium office properties in the CBDs of the Top 7 investment centers have remained stable since year-end 2023 at an average of 5.01 percent. The spread compared with the city fringe and peripheral submarkets has nevertheless widened. Prime yields in B locations and regional centers also proved stable in a range of between 5.50 percent and 6.30 percent. This applies to city locations – similar to the Top 7 locations, price markdowns had to be factored in in areas outside the city centers. “This yield trend shows that investors have not reassessed the risk of B locations and regional centers benchmarked against the Top 7 locations. We anticipate that yields will bottom out increasingly soundly and that the process of stabilization will therefore also continue in the months ahead,” states Sebastian Tiemann, Team Leader Valuation Advisory Services Office at CBRE.

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. Furthermore, insolvencies will have to be reported now and then. “Generally speaking, buyer and seller price expectations have meanwhile become more realistic again and are converging. There is still plenty of interest in German office real estate. As soon as the first significant transactions of institutional investors at the new pricing take place as an initial trigger for the office segment and macroeconomic stimuli emerge, from interest rate cuts for instance, momentum should accelerate in the second half of the year,” Keller says in anticipation.

“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.