Transaction activity in the German real estate market is expected to gain momentum in 2025, according to forecasts by the international real estate service provider and investment manager JLL. „We anticipate a transaction volume of approximately 40 billion euros this year, up from 35.3 billion euros in the previous year“, says Konstantin Kortmann, CEO Germany at JLL, in an interview with Börsen-Zeitung. However, compared to the 10-year average of 80 billion euros, activity remains low. In the record year of 2021, it even reached 113 billion euros.

According to Kortmann, a strong revival of transaction activity is still some way off. „Market participants need to be patient.,“ he says. "Anyone selling now is losing money because the property is likely still recorded in the books at a higher valuation.“ Project developers who sell at current (low) market prices would have to admit that their business plan is not working. „After years of hard work, they would exit with zero profit or even a loss. They will delay this as long as possible.“

Market dynamics vary across asset classes. In the industrial and logistics sector, funds can benefit from a relatively old stock in Germany, creating strong demand for well-located new developments.

The office market has changed fundamentally. „Until 2020, the classic model was that higher vacancy rates and increased supply led to lower prices. This has not been the case for about five years. Prime rents and vacancy rates have decoupled and are now rising simultaneously", says Kortmann. There is a distinct market for prime properties, and (at least) one separate market for everything else. Prime rents in Frankfurt, Düsseldorf, and Munich are rising significantly.

In Frankfurt, smaller spaces in top locations are being leased for over 60 euros per square meter, though the „official“ prime rent in Frankfurt stands at 50 euros. „Some prospective tenants are surprised when they expect a wide selection of spaces but find limited availability," he says.

Retail is performing well when anchored by grocery stores, particularly in retail parks. And high street retail is making a comeback. Rental prices were under pressure for years but have now stabilised. Retail activity is largely concentrated on ground floors in select, prestigious shopping streets like the Zeil in Frankfurt. Online retail growth has slowed. The best shopping centres in Germany yield returns of 5.9% to 7.5%, while others yield around 11%.“

With regard the multi-billion-euro programmes currently being prepared in Berlin, Kortmann says that he expects them to impact the real estate sector. Of the two planned investment packages from the German government, one – the defence package – is likely to have a direct but limited effect on real estate, whereas the other – the infrastructure package – is expected to have a significant indirect impact.

„The defence package could lead to demand for high-quality office space from the companies involved, though on a limited scale. Much larger spaces will likely be needed for logistics and production at lower prices", says Kortmann.

He also observes that pharmaceutical companies are increasingly looking for production space in Germany, to avoid supply chain disruptions and quality issues at foreign locations. „For 30 years, Germany prioritised profit margins over resilience," he says. "That is now changing.“

Kortmann expects the infrastructure package to have a much greater impact. „There is a natural link between infrastructure and real estate. For example in the energy supply for residential areas, or logistics.

Given the significant shortages in housing, office, and logistics space, rental prices are rising disproportionately – though not as sharply as interest rates. Rent increases have already offset much of the value loss, but this does not apply to all office locations. In secondary locations, alternative uses such as residential development come into play.

In the struggling housing sector, Kortmann places great hope in finding pragmatic solutions. He points to the rapid adaptation of planning laws when LNG terminals, wind turbines, and power lines were needed. „This shows that when there is political will, such measures can be implemented very quickly. From a real estate perspective, we welcome this.“

For Kortmann, improving transportation infrastructure, including public transit, is key to addressing housing issues. „Metropolitan areas are expanding, and competition for space can be eased by increasing available land. However, we are struggling to make this happen, as seen in the decades-long delays in projects like Frankfurt’s regional tangent West and Munich’s S-Bahn expansion.", he says. Regulatory hurdles, including disputes between regional authorities, residents, and environmental concerns, need to be overcome.

Many small adjustments can improve housing supply, believes Kortmann. For instance, further tax incentives could encourage the development of employee housing. He is also sceptical about rent control policies, which he sees as creating „misguided regulatory incentives.“ „They reward tenants for staying in their apartments as long as possible.“ As a result, the turnover rate in rental properties has more than halved in the past 20 years.

„That means significantly fewer apartments are entering the market. Since smaller newly rented apartments are much more expensive than larger rent-controlled ones occupied for a long time, there is little incentive for tenants to downsize even when their space needs decrease.“ This rising per-capita living space consumption is problematic both from an energy efficiency and an equity standpoint.

„I understand that in Germany, there is reluctance to allow market rents to rise unchecked, which could force retirees with small pensions to move out," he says. "But in such cases, we need alternative instruments rather than rent control.“

Investors particularly favour residential properties exempt from rent control, including all buildings constructed after 2014 (and likely soon after 2019). These properties attract strong interest and fetch good prices. In general, there is demand for all available real estate products. But price expectations between buyers and sellers are still not fully aligned in many areas.

In new construction project developments, investors are unwilling to pay the prices that developers assumed in their business plans. These plans were based on condo sales and a completely different interest rate environment. „Sometimes, return expectations differ by just one percentage point. That may not sound like much, but when calculated per square meter, it makes a huge difference.", he explains.

It is estimated that approximately 70 billion euros in real estate loans will need to be refinanced in Germany this year alone. The process will not always go smoothly, and will depend on individual circumstances. Loans that have been steadily repaid should qualify for refinancing at the same payment level, albeit with a lower loan-to-value ratio. Properties with rising rents and strong cash flow should also be able to handle higher interest rates.

However, many refinancing cases will require additional capital due to insufficient repayments or significant value losses. Regulators also see potential systemic risks here. As a result, banks face increased scrutiny in real estate lending and must hold more capital against these loans. Consequently, banks will tighten lending standards, including for refinancing.

Alternative lenders are ready to step in. German and international debt funds, private equity, and the private credit market have ample capital available. But this capital must be well compensated, making these financing options more expensive than bank loans.