Real estate markets:
“First signs of recovery”
The commercial real estate market has been challenging of recently. The rapid rise in interest rates in 2022 put the brakes on the entire market and led to a massive drop in transactions. In the meantime, interest rates have fallen again, and Peter Axmann, our Head of Real Estate Clients, comments on the implications for the German commercial property markets.
17 December 2024 | reading time 5 Minuten
The ECB has cut interest rates several times this year – is this having an impact on the property markets?
Peter Axmann: The overall market situation is still difficult, but we see light at the end of the tunnel. The ECB’s three rate cuts this year were a positive signal, although they were largely priced into the long-term segment, which is crucial for property finance. Nevertheless, with interest rates at three to four percent, we are currently at a historically normal level.
Almost more important is the growing conviction among market participants that interest rates have peaked and are stabilizing. This gives investors more security and enables them to make more reliable calculations for potential projects.
Germany’s economic performance in 2024 remains below expectations. Are there any commercial real estate asset classes that are particularly cyclical?
Peter Axmann: Yes, office properties, for example, are particularly affected by the weak economy. Many companies have postponed decisions on new leases or expansions. In addition, demand for space is estimated to be down by 15 to 20 percent as people work from home. Those companies that are though planning to relocate are looking for modern and energy-efficient office space in prime locations, where demand currently clearly outstrips supply. This will remain the case in the medium term, as a number of developments have been halted or abandoned in recent years due to economic uncertainty. The situation is different for older office buildings in peripheral city locations. Here, there is already a lack of tenant interest and vacancies, as companies want to move to ESG-compliant premises, also in order to do something about their own carbon footprint.
What about residential property?
Peter Axmann: Residential property is and will remain in sougth-after due to persistent excess demand. There is currently a shortage of around half a million apartments in Germany, so we actually expect prices to rise slightly. International investors in particular are looking at smaller and medium-sized residential portfolios with a view to consolidating them into larger portfolios and selling them later at higher rents and at a profit.
Market participants are becoming increasingly convinced that the peak in interest rate peak is behind us and that interest rates are stabilizing – this enables investors to make more reliable project calculations again.
Peter Axmann, Head of Real Estate Clients
In addition to residential and office properties, HCOB also finances hotels and retail real estate and recently more logistics properties. What are your expectations for these asset classes?
Peter Axmann: The hotel market has recovered very well, showing that the decline in hotel values was very much pandemic induced. We have to differentiate between retail properties: Local supermarkets with everyday products are stable, while large shopping centres are still struggling.
The logistics sector has actually performed very well, driven by the growth of online retailing, the demand for distribution centres and the need for stockpiling. However, in this niche asset class, we are now seeing longer rental periods and flat rents. One of the reasons for this is that online retail is not growing as fast as it used to, and the general economic trend is having a dampening effect.
What is the role of international investors in the current market environment?
Peter Axmann: International investors, especially from Anglo-Saxon and Asian countries, are showing great interest in the German market. Many are waiting for a good entry point to enter the market and for prices to bottom out. Transactions are also picking up again, although the prices being offered are still mostly below sellers’ expectations. There are also investors who have been speculating on fire sales for more than a year, but so far these have only been isolated cases.
What’s next for the commercial real estate market?
Peter Axmann: We expect 2025 to be a transition year as investors gain confidence in the market and become more active. Provided interest rates and inflation remain stable and there are no further negative geopolitical events, we expect a full recovery in 2026. With our capital strength and experienced property team, we are well prepared for a market recovery.