Germany at an Inflection Point: Liquidity, Pricing and Selective Opportunity

The German commercial real estate market underwent a significant correction from 2022 through 2024. Rising financing costs and valuation pressure led to sharp declines in transaction volumes—down 50%–60% from long-term averages.¹ Open-end fund outflows amplified stress, with total redemptions rising from €5.9 billion in 2024 to €6.2 billion in 2025 (Figure 1).² Distress was most pronounced in secondary offices and non-core assets, while logistics and residential sectors proved more resilient. Persistent redemption pressure constrains reinvestment capacity for some of Germany’s largest institutional investors, and continued outflows, even at modest levels, represent a structural drag on domestic capital demand that the market cannot fully replace with foreign inflows alone. That said, outflows have accounted for only around 0.6% of net asset value per year,³ and it is worth noting that fund investors face a 12-month delay between their redemption requests and when their cash is paid out, indicating that the current level of outflows reflects decisions from a year earlier when market uncertainty was higher.

Despite these fund outflows, investment volumes continue to showcase a picture of recovery rather than decline, with volumes for all property reaching €35.9 billion in 2025 which is approximately 8% up from 2024 levels and 20% up from 2023 levels.⁴ While secondary assets remain under pressure, prime pricing is stabilizing, suggesting the market has moved past its trough.

Figure 1: German all property transaction volumes, € billions

Germany’s investment landscape has become more complex following the Middle East conflict, as higher energy prices have skewed inflation risks to the upside and kept the European Central Bank (ECB) on more hawkish footing. As a result, markets are now pricing in the possibility of rate hikes in 2026. In our latest European Real Estate House View, we forecast two rate hikes from the ECB before reverting to the prior terminal rate.⁵

At the same time, record German sovereign issuance and expanded defense spending add upward pressure on Bund yields, and as of recently, the German 10-year Bund reached 3.1%, the highest level since 2011. The spread advantage is most compelling for prime assets, while secondary pricing remains vulnerable and investors should be selective in the market they deploy capital.

Despite ongoing geopolitical fragility worldwide, the environment still offers selective stock-pickers meaningful upside: liquidity and transaction activity are recovering, bid-ask spreads are narrowing and capital deployment is rebounding, with Germany expected to see further volume growth in 2027. We are also forecasting German GDP growth to be one of the best placed amongst the rest of Europe (Figure 2). Underpinning this resilience is a structural shift in Germany's energy profile that is often underappreciated: crude oil imports have fallen around 20% since the early 2000s, and per capita energy consumption has declined over the same period (Figure 3).⁶

Figure 2: GDP rebased to 100 in Q4 2025

Figure 3: German crude oil imports, TJ millions

Prime office yields in Germany’s top cities currently range from 4.5%–4.9%, compared to 10-year Bund yields ranging between 2.9%–3.1%. This 140–200 basis point (bp) premium is compelling for income-focused investors. At the top end we can see modern office yields in Germany around 4.9%, offering a cap rate spread over 10-year Bunds of around 200 bps compared to the long-run 25-year average of 35 bps. Additionally, residential prime yields remain around 3.4%, offering a cap rate spread up to 50 bps compared to an average of 30 bps over the long-term average. Spreads are compelling on historical comparison, but worth noting that similar levels persisted through 2023-2024 without preventing further cap rate expansion—direction of travel matters as much as the spread itself.⁷

From a regional standpoint, we forecast German 10-year Bunds to hold steady at 3.1% over our forecast period, which remains the lowest out of the Big Six economies, as shown in Figure 4.

Figure 4: 10-year government bond yields, %

Despite the disruptions at a geopolitical and macroeconomic level, one thing remains consistent for the residential sector: demand drivers are strengthening, benefiting from structural imbalances. Smaller household formation continues to increase, driving demand for apartments, while housing completions remain far below requirement (around 205,000 projected annually against a need for 400,000). Germany’s recently introduced "Bau-Turbo" planning reform should help close this gap over time by shortening approval timelines and enhancing municipal flexibility.

However, planning reform alone does not guarantee delivery at scale; with construction costs and financing rates still elevated, viability constraints make material oversupply an unlikely near-term outcome. If anything, the structural deficit is large enough that even an accelerated pipeline would take years if not decades, particularly in the Big 7 and economically strong areas, to meaningfully rebalance the market. This is especially true given that virtually no green land is being converted for residential or commercial use, meaning demand across all sectors must also be met entirely through brownfield conversions—compressing the viable development pipeline. For investors, this means the structural supply deficit is likely to persist through the medium term—supportive for both income and yield stability, but also a signal that the affordability ceiling may increasingly constrain rent growth, particularly in gateway cities where households are already stretched.

Germany’s commercial real estate market is transitioning from repricing to recovery, though the pace remains uneven. Transaction volumes and financing conditions point toward stabilization, and while we no longer see yield compression as the main driver of growth opportunities going forward, the yield spread over Bunds continues to remain attractive relative to historical comparison. While stabilization is underway, true institutional-scale recovery has yet to fully materialize, and the window of opportunity is likely to crystallize over the near term—albeit at a slower pace, as insufficient core capital continues to temper the volume of deals being brought to market—making disciplined asset selection and sector conviction the primary drivers of return.