• Transaction volume outside the Top 7 cities posts €1.7 billion – 65 percent less than in 2022
• Prime yield of B locations and regional centers rise by an average 0.5 percentage points in 2023
• Mannheim, Regensburg, Dortmund and Ulm as the most active markets

The investment market for office properties in B locations and regional centers sustained a significant decline in transaction activity to €1.7 billion in 2023. In the light of the general reticence on the real estate investment market, and especially in the office investment market – the segment took only fourth place in 2023, after industrial and logistics, residential and retail – the decline in B locations and regional centers was relatively moderate. Compared with 2022, 65 percent less was invested in these markets as opposed to the Top 7 markets where the transaction volume plunged by 81 percent. Consequently, B locations and regional centers have gained in importance: In 2022, they accounted for a mere fifth of the office investment market. In 2023, this was one third. In terms of performance, the strongest markets outside the top investment centers included Mannheim (around €250 million, also due to the sale of LBBW headquarters on the Augustaanlage and the No. 1 in the Glückstein Quarter), Regensburg (including E.ON headquarters), Dortmund (including the Königshof) and Ulm (among other properties, the Telekom building). This is the conclusion drawn in a current analysis prepared by the global commercial real estate services company CBRE.

Consequently, portfolio sales scarcely contributed to the investment volume. Whereas 25 percent of the transaction volume outside the top locations was accounted for by portfolios in 2022, this figure stood at just 10 percent in 2023. Moreover, only one transaction exceeded the €100 million mark took place in the first quarter of 2023. The €20 million to €50 million segment also sustained sharp declines in a year-on-year comparison. Only the €5 to €10 million segment attracted more investments than in the previous year. Consequently, the average deal size contracted to around €18 million (2022: €29 million).

Other than in the overall real estate investment market in which funds increasingly flowed into the value-add and opportunistic segment, the proportion of core and core plus investments in the B location office market and regional centers was on the rise: 78 percent of the investment volume was attributable to this risk class. Volumes from value-add and opportunistic investment strategies declined commensurately, a development attributable to the positive trend of prime rents, particularly for ESG-compliant new buildings. Increasing the value of older office properties is more problematic – achieving market eligibility often entails a considerable amount of investment, which makes obtaining financing commitments more difficult.

Open-ended real estate and special funds in particular were the strongest net buyers, investing a good €400 million but selling virtually nothing. On the vendor side, listed real estate companies and REITs led the way selling a good €180 million more than they bought.

Increase in yields

Similar to premium properties in the Top 7 markets, prime yields in the B locations of Bonn, Hanover and Nuremberg increased by 0.4 percentage points. A more significant increase of 0.5 percentage points was recorded overall across all B locations and regional centers. The spread against the benchmark yield of the 10-year Bund therefore amounted to between 3.4 percentage points and 4.2 percentage points - and relative to the top office markets, between 0.5 and 1.3 percentage points, depending on the market.

“We are seeing the first signs of a trend reversal, however: The recently resumed decline in financing interest and more moderate yields generated by fixed-income securities enable greater planning reliability and make investing in real estate more attractive.” Consequently, the opportunity is opening up most especially in the current market phase for some investors to position themselves on the German real estate market with a view to benefiting from the anticipated future upswing and rental growth potential. An asset-specific risk/return analysis is more important than ever, especially as the discussion about repricing and the future positioning of property with a view to ESG issues is bound to intensify.”

Outlook for 2024

“We anticipate a higher number of distressed property sales – if the financing structure of these properties is not sustainable they will have to be sold. Opportunistic investors in particular will then have exciting opportunities. Consequently, a market recovery can be anticipated in this risk class. Moreover, we also expect institutional portfolio holders to divest properties that no longer conform to their ESG targets,” Keller says in anticipation.

“In the first six months we anticipate an only marginal increase in office yields on the back of stabilizing financing interest rates. This scenario will trigger some recovery in the office investment market – at a new, lower price level,” Linsin predicts.