Gentle recovery for German commercial real estate

The commercial real estate market is on a gentle recovery course ...

The commercial real estate market has experienced an even greater crisis in recent years than the private residential real estate market. In 2022 and 2023, rising financing costs also caused commercial real estate prices to fall, with the decline of 17% almost twice as large as that of residential real estate prices (title chart). In addition, the outbreak of the coronavirus pandemic had already brought the rise in commercial real estate prices to a halt in 2020, while residential real estate prices rose by another 25% during this period.

However, the market correction now appears to be over and prices seem to have begun a gradual recovery. Prices have been rising again since mid-2024, and the number of transactions has at least stopped falling recently.

... which should continue

Several factors suggest that this moderate recovery is likely to continue for the time being:

• As a result of the ECB's interest rate cuts between mid-2024 and mid-2025, financing conditions have improved significantly again. We expect key interest rates to remain at their current low levels for the foreseeable future. In the short term, the risk is more likely to be lower rather than higher key interest rates.
• Supply is tight in many areas, and this is unlikely to change for the time being due to relatively low construction activity. As a result, rents are likely to rise somewhat more dynamically, which will improve returns on investments in the relevant properties.

Against this backdrop, although investor sentiment remains more negative than before the crisis, it has brightened since the beginning of 2024. This is largely due to greater confidence in commercial residential real estate. However, surveys show that other areas of commercial real estate have also regained their appeal for investors.

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