German Office Property Market Hits 15-Year Low Amid ECB Rate Hikes and High Vacancies

Key Takeaway

• Germany's office property market hit a 15-year low with €700 million in deals, driven by ECB rate hikes and high vacancies.
• Foreign investment in German commercial real estate fell to 35%, the lowest since 2013, impacting market recovery.
• Despite property market woes, Germany's PMI rose to 52.2 in May, signaling potential economic growth.

Decline in Office Property Deals

Germany's office property market has experienced a significant downturn, with deal volumes reaching their lowest point in nearly 15 years. According to a report by German lender PBB, investments in office properties amounted to only €700 million ($758 million) in the first quarter of the year, marking the lowest level since the second quarter of 2009. The PBB composite performance index, which tracks the market, dropped for the sixth consecutive quarter during the three months through March.

The decline in office property valuations is largely attributed to the European Central Bank's interest rate hikes, which have increased funding costs and made it more challenging for buyers and sellers to agree on pricing. Additionally, the sluggish German economy and the shift to remote working have led to higher vacancies, further impacting property values. "Office markets are expected to continue their underperformance and demand for office space will remain depressed," PBB stated in its report. The report also noted that office space vacancies are significantly higher than a year ago.

Foreign Investment Retreats

Foreign investors have been scaling back their involvement in the German property market, contributing to the ongoing slump. Data from BNP Paribas Real Estate shows that foreign buyers accounted for only 35% of commercial real estate purchases in the first quarter, the lowest level since 2013. This is a significant drop from pre-pandemic levels, where foreign investors often accounted for half of all commercial property deals.

Kurt Zech, a prominent German developer, emphasized the importance of foreign investment for market recovery. "The Americans have to come back. When the Blackstones, the Blackrocks, the Morgan Stanleys of this world and Carlyle and Apollo buy in the German market, that will be noticed and then we will all know that we have now reached the bottom," Zech said in an interview. The German property sector, which contributes approximately €730 billion ($1.1 trillion) annually to the nation's economy, has been hit hard by high interest rates, inflation, and economic uncertainty.

Economic Indicators Show Mixed Signals

Despite the challenges in the property market, there are some positive signs in the broader German economy. S&P Global's purchasing managers' index (PMI) for Germany rose to 52.2 in May, indicating the fastest pace of private-sector activity growth in a year. This was above analyst expectations and marked the second consecutive month of growth. Services continued to lead the advance, while the manufacturing sector, although still in contraction, showed improvement.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, noted signs of a potential turnaround in the industrial sector. "These numbers offer hope," he said. "Those predicting a prolonged weakness in the German economy might be proven wrong soon." The euro zone's two largest economies, Germany and France, expanded more than expected in the first quarter of 2024, helping to pull the 20-nation bloc out of the recession experienced in the latter half of last year.

Street Views

• PBB (Bearish on the German office property market):

  "Office markets are expected to continue their underperformance and demand for office space will remain depressed. Office space vacancies continue to increase and are significantly higher than a year ago."

• PBB (Cautiously Optimistic on the future of the German office property market):

  "The first-quarter decline in PBB’s index was less than in previous periods, suggesting that office markets have started to bottom out. If the economy recovers, office markets could stabilize over the course of the year and ultimately embark on an upward trajectory."