Real estate
Real estate
Podcast
18.4.2025
The office real estate market is currently facing considerable challenges that are characterized by far-reaching changes in usage requirements. The increasing shift towards working from home and flexible workplace models has not only reduced the need for space, but also increased the demands on the sustainability of office properties. As a result, tenant demand has fallen noticeably in recent years, particularly for properties in peripheral locations or those that do not meet modern working requirements. These developments have led to an increase in vacancy rates and have had a negative impact on the transaction market, where achievable sales prices have fallen considerably. In this context, however, the demand for office properties in central locations (CBD) with a high standard of fit-out and good infrastructure remains unbroken. In view of this complex market situation, real estate investors are now faced with the question: is it only possible to invest in CBD office space these days?
CBD stands for Central Business District and describes business districts in large cities that are characterized by commercial space and offices. CBDs are characterized by their central location, good public transport connections and good local amenities. They are also characterized by premium properties that are often geared towards specialized goods or services, such as consultancies, law firms or financial service providers. These factors often result in high rents.
CBDs can be located in the (historic) city center of a city, such as in Frankfurt am Main. At the same time, CBDs can also be located outside the city center. For example, the CBD in Paris (La Défense) is located in the west of the city, while London has several CBDs in the City of London (Square Mile + Lombard Street) and Canary Wharf.
To better understand the role of CBD office space in the real estate market, it is important to take a look at the current market situation. In the six most important real estate markets in Germany - Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne and Munich - prime rents are rising continuously, while vacancy rates are also increasing.1 A look at the last ten years shows the continuous rise in prime rents. While prime rents were still around EUR 27.67/m² in 2014, five years later they were around EUR 34.91/m². In the 4th quarter of 2024, prime rents reached a new high of around EUR 43.54/sqm.
In contrast, vacancy rates for office properties have fluctuated over the last ten years. In 2014, the vacancy rate stood at around 5.73 million m², which corresponds to a vacancy rate of around 7.0 %. By 2019, the vacancy rate had fallen to around 2.74 million m² (3.3%) and increased significantly again during the coronavirus pandemic. Currently, the vacancy rate (as at Q4 2024) is almost at the same level as in 2014 at 5.62 million m² (6.5 %).
However, a differentiated look at the local markets reveals clear differences within the markets. While demand for modern, high-quality office space continues to rise in central city center locations, a stagnation or even a decline in vacancies can be observed there at the same time. At the same time, prime rents in these sought-after locations are increasing or stabilizing, which indicates stable to growing user demand. In contrast, the vacancy rate in peripheral locations continues to rise. Structural vacancies are even emerging in some submarkets. Converting or revitalizing this office space represents a major challenge for the entire sector.
The rising vacancy rate can be explained by the influence of remote work and hybrid working models, among other things, as the space required per employee is reduced. As a result, companies tend to rent smaller office spaces when renting new space or relocating in order to save on rental costs.
At the same time, tenant companies are prepared to pay higher rents for better facilities, location, connections and energy efficiency of the buildings.2
The reasons for the shift in demand for office properties are manifold and are closely linked to the developments of recent years and the changing requirements of companies and employees.
The demand for office real estate is currently undergoing a change that is significantly influenced by the tense global economic and political situation. Recessionary trends are evident in many economies. Against this backdrop, many companies are confronted with declining sales and increasing cost pressure. As a result, potential savings are being specifically examined - particularly in terms of fixed costs. As office space in many cases represents a significant proportion of ongoing operating expenses, companies are increasingly trying to reduce their rental costs. This is reflected in a growing demand for smaller but efficiently usable office units.
While the amount of space in demand is decreasing, competition for qualified specialists remains high, which presents companies with a double challenge: On the one hand, space needs to be consolidated, while on the other, working environments need to be attractive enough to retain employees and attract new talent. For many companies, the solution lies in high-quality, flexibly configurable space in easily accessible locations that offers both efficiency and quality of stay. As a result, the requirements for office properties are increasingly shifting away from pure space size towards functional, modern concepts that meet both business and employee-related requirements.
This change in demand for space goes hand in hand with another international trend, particularly in North America: the increased integration of amenities in office properties. User-friendly additional services such as green roof terraces, modern fitness studios, high-quality canteens or integrated catering concepts are becoming increasingly important. They not only serve to increase the quality of stay, but also to promote employee satisfaction, health and social interaction - aspects that have become increasingly relevant in the context of modern workplace strategies.
From the perspective of owners and investors, this results in a clear requirement profile for future-proof office properties: they must be centrally located, have a flexible space structure in order to be able to adapt to the specific needs of the tenants and offer real added value through an attractive range of additional services.
Another significant factor influencing the development of the office real estate market is the increasing regulatory requirements in the area of ESG (Environmental, Social, Governance). Particularly in the context of ESG reporting, companies see themselves obliged - not least due to legal requirements at EU level - to transparently record and reduce their environmental impact . In the service-oriented sector in particular, the focus is shifting to the office space used, as it makes a significant contribution to the company's own greenhouse gas footprint. The demand for energy-efficient, resource-conserving and low-emission properties is increasing significantly in order to optimize this and meet the sustainability targets that companies have set themselves. The focus is increasingly on the "cradle to cradle" principle, in which materials are reused and recycled materials are used. Properties with charging stations for electric vehicles, car-sharing facilities and bicycle parking spaces are also becoming increasingly popular.
For owners and project developers, this means that sustainable building concepts are no longer an optional quality feature, but increasingly a prerequisite for successful marketing. In this context, sustainability certificates such as LEED, DGNB or BREEAM are becoming increasingly important, as they meet both ecological standards and transparency requirements and serve as proof of a property's ESG conformity. Taking these aspects into account is therefore becoming a decisive competitive advantage in an increasingly demanding market.
Smart offices, in which heating, air conditioning and lighting are controlled automatically, are setting new standards in office design. These systems not only contribute to energy efficiency, but also increase employee comfort by automatically adapting to working hours. In addition, smart technologies enable more precise recording and analysis of usage data, allowing space utilization to be optimized and operating costs to be reduced.
For owners and investors, this results in new requirements for the technical equipment and infrastructure of office properties. Buildings must be increasingly digitalized and equipped with intelligent control systems in order to remain competitive. This not only requires investment in modern building management systems, but also in digital interfaces that enable integration with tenants' IT systems. In the future, properties that can react flexibly to new technological developments and have a future-proof digital infrastructure will be in particular demand.
Against the backdrop of changing user behavior and increasing demands on office properties, the question arises as to whether and to what extent new opportunities for investors can be derived from this.
The average prime yield of CBDs in the six top office cities in Germany was recently up to 5.0 %. In Europe, the average prime yield of CBDs in the fourth quarter of 2024 was around 5.03%.3 Before the effects of the coronavirus pandemic were felt on the office real estate markets in 2022, the (net) prime yield for office properties in German A cities was around 2.75%. The achievable yields therefore increased significantly. Both the pandemic and the turnaround in interest rates caused a slump in office property valuations as well as a sharp decline in transaction activity on the market.4
At the same time, the significant fall in prices - particularly for properties in need of development - offers investors new opportunities to increase returns. In particular, properties in peripheral locations or buildings in generally good to very good inner city locations, but with a high maintenance backlog, are currently being offered at significantly reduced prices. While technical and design deficits can be remedied through targeted refurbishment and modernization measures, the location remains unchanged as a value-stabilizing factor. Against this backdrop, many investors and asset managers have adapted their strategies: They are focusing on the targeted purchase of well-located office properties that no longer meet today's requirements in terms of sustainability, fit-out or flexibility - with the aim of revitalizing them comprehensively. The focus is not only on energy optimization, but also on modernizing the spatial concepts and integrating smart building technology in order to meet changing user requirements.
Office properties in peripheral locations, on the other hand, are much more difficult to deal with. These properties often no longer find buyers due to a lack of demand. In many places, there is a lack of viable conversion or revitalization concepts - a situation that is increasingly emerging as one of the key challenges facing the sector. The limited supply of high-quality space in central business districts, on the other hand, suggests that well-located office properties will retain their value in the long term.
Nevertheless, the proportion of office properties in a diversified portfolio should currently be chosen with caution. Despite individual opportunities, the market remains volatile. In addition, competition for suitable properties with potential is increasing - many market participants are now focusing on revitalization strategies. Long-term success therefore depends not only on a sound property and location analysis, but also on the selection of experienced, well-connected partners with strong market access such as FINVIA. Ultimately, the office real estate market is still undergoing structural change, and future changes in user behavior could have a significant impact on the success of current investment decisions.
Particularly in economically and politically uncertain market phases such as the current one, it is crucial for investors to concentrate on strategic focal points and types of use that are supported by long-term stable macroeconomic or social trends. These include, in particular, demographic change, advancing digitalization, the deglobalization of economic processes and significant maintenance backlogs in the German residential real estate portfolio. These developments are creating a sustainable basis for demand, which suggests investments in residential real estate as well as logistics and industrial real estate in particular. A corresponding specialization can not only optimize the risk profile of a portfolio, but also ensure more reliable cash flows in volatile market phases.
The office real estate market is undergoing a far-reaching transformation process that brings with it both challenges and new opportunities for investors. While peripheral locations are becoming increasingly less attractive and structural vacancies are emerging, centrally located office space with high structural quality, modern fittings and ESG compliance remains in demand. Demand is increasingly focused on flexible, user-oriented concepts in well-connected locations. Investors are finding attractive yield opportunities above all in the targeted revitalization of developable properties in central business locations. Nevertheless, the volatile market environment requires a prudent portfolio strategy, sound location analyses and a high degree of market proximity. Long-term success will largely depend on the extent to which investments can anticipate and integrate the changing requirements of users, regulation and technology.
Sources:
1Savills 08.01.2025: Market in Minutes: Top 6 office markets in Germany, Savills Germany | Market in Minutes Top 6 office markets in Germany January 2025
2 Engel & Völkers Commercial 27.01.2025: Offices: Top locations sought, vacancies on the periphery, Offices: Top locations sought, Vacancies on the periphery
3 Savills 08.01.2025, Market in Minutes: Investment Market Germany, Savills Germany | Market in Minutes Investment Market Germany - January 2025
4 BNP Paribas Real Estate 31.12.2024, At a Glance Q4 2024 Office Investment Market Germany, Office Real Estate Investment Market Germany Q4 2024 | BNP Paribas Real Estate
Savills, 22.01.2025, Spotlight: European Investment - Q4 Preliminary Results and Forecasts, Savills Germany | Spotlight: European Investment - Q4 Preliminary Results and Forecasts
Thomas Daily 10.02.2025, Office prices pick up again for the first time since 2022, Office prices pick up again for the first time since 2022 - THOMAS DAILY
Real estate
18.4.2025
Annchristine New
The office real estate market is currently facing considerable challenges that are characterized by changes in usage requirements. In view of the complex market situation, real estate investors are asking themselves the question: is it only possible to invest in CBD office space these days?
The office real estate market is currently facing considerable challenges that are characterized by far-reaching changes in usage requirements. The increasing shift towards working from home and flexible workplace models has not only reduced the need for space, but also increased the demands on the sustainability of office properties. As a result, tenant demand has fallen noticeably in recent years, particularly for properties in peripheral locations or those that do not meet modern working requirements. These developments have led to an increase in vacancy rates and have had a negative impact on the transaction market, where achievable sales prices have fallen considerably. In this context, however, the demand for office properties in central locations (CBD) with a high standard of fit-out and good infrastructure remains unbroken. In view of this complex market situation, real estate investors are now faced with the question: is it only possible to invest in CBD office space these days?
CBD stands for Central Business District and describes business districts in large cities that are characterized by commercial space and offices. CBDs are characterized by their central location, good public transport connections and good local amenities. They are also characterized by premium properties that are often geared towards specialized goods or services, such as consultancies, law firms or financial service providers. These factors often result in high rents.
CBDs can be located in the (historic) city center of a city, such as in Frankfurt am Main. At the same time, CBDs can also be located outside the city center. For example, the CBD in Paris (La Défense) is located in the west of the city, while London has several CBDs in the City of London (Square Mile + Lombard Street) and Canary Wharf.
To better understand the role of CBD office space in the real estate market, it is important to take a look at the current market situation. In the six most important real estate markets in Germany - Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne and Munich - prime rents are rising continuously, while vacancy rates are also increasing.1 A look at the last ten years shows the continuous rise in prime rents. While prime rents were still around EUR 27.67/m² in 2014, five years later they were around EUR 34.91/m². In the 4th quarter of 2024, prime rents reached a new high of around EUR 43.54/sqm.
In contrast, vacancy rates for office properties have fluctuated over the last ten years. In 2014, the vacancy rate stood at around 5.73 million m², which corresponds to a vacancy rate of around 7.0 %. By 2019, the vacancy rate had fallen to around 2.74 million m² (3.3%) and increased significantly again during the coronavirus pandemic. Currently, the vacancy rate (as at Q4 2024) is almost at the same level as in 2014 at 5.62 million m² (6.5 %).
However, a differentiated look at the local markets reveals clear differences within the markets. While demand for modern, high-quality office space continues to rise in central city center locations, a stagnation or even a decline in vacancies can be observed there at the same time. At the same time, prime rents in these sought-after locations are increasing or stabilizing, which indicates stable to growing user demand. In contrast, the vacancy rate in peripheral locations continues to rise. Structural vacancies are even emerging in some submarkets. Converting or revitalizing this office space represents a major challenge for the entire sector.
The rising vacancy rate can be explained by the influence of remote work and hybrid working models, among other things, as the space required per employee is reduced. As a result, companies tend to rent smaller office spaces when renting new space or relocating in order to save on rental costs.
At the same time, tenant companies are prepared to pay higher rents for better facilities, location, connections and energy efficiency of the buildings.2
The reasons for the shift in demand for office properties are manifold and are closely linked to the developments of recent years and the changing requirements of companies and employees.
The demand for office real estate is currently undergoing a change that is significantly influenced by the tense global economic and political situation. Recessionary trends are evident in many economies. Against this backdrop, many companies are confronted with declining sales and increasing cost pressure. As a result, potential savings are being specifically examined - particularly in terms of fixed costs. As office space in many cases represents a significant proportion of ongoing operating expenses, companies are increasingly trying to reduce their rental costs. This is reflected in a growing demand for smaller but efficiently usable office units.
While the amount of space in demand is decreasing, competition for qualified specialists remains high, which presents companies with a double challenge: On the one hand, space needs to be consolidated, while on the other, working environments need to be attractive enough to retain employees and attract new talent. For many companies, the solution lies in high-quality, flexibly configurable space in easily accessible locations that offers both efficiency and quality of stay. As a result, the requirements for office properties are increasingly shifting away from pure space size towards functional, modern concepts that meet both business and employee-related requirements.
This change in demand for space goes hand in hand with another international trend, particularly in North America: the increased integration of amenities in office properties. User-friendly additional services such as green roof terraces, modern fitness studios, high-quality canteens or integrated catering concepts are becoming increasingly important. They not only serve to increase the quality of stay, but also to promote employee satisfaction, health and social interaction - aspects that have become increasingly relevant in the context of modern workplace strategies.
From the perspective of owners and investors, this results in a clear requirement profile for future-proof office properties: they must be centrally located, have a flexible space structure in order to be able to adapt to the specific needs of the tenants and offer real added value through an attractive range of additional services.
Another significant factor influencing the development of the office real estate market is the increasing regulatory requirements in the area of ESG (Environmental, Social, Governance). Particularly in the context of ESG reporting, companies see themselves obliged - not least due to legal requirements at EU level - to transparently record and reduce their environmental impact . In the service-oriented sector in particular, the focus is shifting to the office space used, as it makes a significant contribution to the company's own greenhouse gas footprint. The demand for energy-efficient, resource-conserving and low-emission properties is increasing significantly in order to optimize this and meet the sustainability targets that companies have set themselves. The focus is increasingly on the "cradle to cradle" principle, in which materials are reused and recycled materials are used. Properties with charging stations for electric vehicles, car-sharing facilities and bicycle parking spaces are also becoming increasingly popular.
For owners and project developers, this means that sustainable building concepts are no longer an optional quality feature, but increasingly a prerequisite for successful marketing. In this context, sustainability certificates such as LEED, DGNB or BREEAM are becoming increasingly important, as they meet both ecological standards and transparency requirements and serve as proof of a property's ESG conformity. Taking these aspects into account is therefore becoming a decisive competitive advantage in an increasingly demanding market.
Smart offices, in which heating, air conditioning and lighting are controlled automatically, are setting new standards in office design. These systems not only contribute to energy efficiency, but also increase employee comfort by automatically adapting to working hours. In addition, smart technologies enable more precise recording and analysis of usage data, allowing space utilization to be optimized and operating costs to be reduced.
For owners and investors, this results in new requirements for the technical equipment and infrastructure of office properties. Buildings must be increasingly digitalized and equipped with intelligent control systems in order to remain competitive. This not only requires investment in modern building management systems, but also in digital interfaces that enable integration with tenants' IT systems. In the future, properties that can react flexibly to new technological developments and have a future-proof digital infrastructure will be in particular demand.
Against the backdrop of changing user behavior and increasing demands on office properties, the question arises as to whether and to what extent new opportunities for investors can be derived from this.
The average prime yield of CBDs in the six top office cities in Germany was recently up to 5.0 %. In Europe, the average prime yield of CBDs in the fourth quarter of 2024 was around 5.03%.3 Before the effects of the coronavirus pandemic were felt on the office real estate markets in 2022, the (net) prime yield for office properties in German A cities was around 2.75%. The achievable yields therefore increased significantly. Both the pandemic and the turnaround in interest rates caused a slump in office property valuations as well as a sharp decline in transaction activity on the market.4
At the same time, the significant fall in prices - particularly for properties in need of development - offers investors new opportunities to increase returns. In particular, properties in peripheral locations or buildings in generally good to very good inner city locations, but with a high maintenance backlog, are currently being offered at significantly reduced prices. While technical and design deficits can be remedied through targeted refurbishment and modernization measures, the location remains unchanged as a value-stabilizing factor. Against this backdrop, many investors and asset managers have adapted their strategies: They are focusing on the targeted purchase of well-located office properties that no longer meet today's requirements in terms of sustainability, fit-out or flexibility - with the aim of revitalizing them comprehensively. The focus is not only on energy optimization, but also on modernizing the spatial concepts and integrating smart building technology in order to meet changing user requirements.
Office properties in peripheral locations, on the other hand, are much more difficult to deal with. These properties often no longer find buyers due to a lack of demand. In many places, there is a lack of viable conversion or revitalization concepts - a situation that is increasingly emerging as one of the key challenges facing the sector. The limited supply of high-quality space in central business districts, on the other hand, suggests that well-located office properties will retain their value in the long term.
Nevertheless, the proportion of office properties in a diversified portfolio should currently be chosen with caution. Despite individual opportunities, the market remains volatile. In addition, competition for suitable properties with potential is increasing - many market participants are now focusing on revitalization strategies. Long-term success therefore depends not only on a sound property and location analysis, but also on the selection of experienced, well-connected partners with strong market access such as FINVIA. Ultimately, the office real estate market is still undergoing structural change, and future changes in user behavior could have a significant impact on the success of current investment decisions.
Particularly in economically and politically uncertain market phases such as the current one, it is crucial for investors to concentrate on strategic focal points and types of use that are supported by long-term stable macroeconomic or social trends. These include, in particular, demographic change, advancing digitalization, the deglobalization of economic processes and significant maintenance backlogs in the German residential real estate portfolio. These developments are creating a sustainable basis for demand, which suggests investments in residential real estate as well as logistics and industrial real estate in particular. A corresponding specialization can not only optimize the risk profile of a portfolio, but also ensure more reliable cash flows in volatile market phases.
The office real estate market is undergoing a far-reaching transformation process that brings with it both challenges and new opportunities for investors. While peripheral locations are becoming increasingly less attractive and structural vacancies are emerging, centrally located office space with high structural quality, modern fittings and ESG compliance remains in demand. Demand is increasingly focused on flexible, user-oriented concepts in well-connected locations. Investors are finding attractive yield opportunities above all in the targeted revitalization of developable properties in central business locations. Nevertheless, the volatile market environment requires a prudent portfolio strategy, sound location analyses and a high degree of market proximity. Long-term success will largely depend on the extent to which investments can anticipate and integrate the changing requirements of users, regulation and technology.
Sources:
1Savills 08.01.2025: Market in Minutes: Top 6 office markets in Germany, Savills Germany | Market in Minutes Top 6 office markets in Germany January 2025
2 Engel & Völkers Commercial 27.01.2025: Offices: Top locations sought, vacancies on the periphery, Offices: Top locations sought, Vacancies on the periphery
3 Savills 08.01.2025, Market in Minutes: Investment Market Germany, Savills Germany | Market in Minutes Investment Market Germany - January 2025
4 BNP Paribas Real Estate 31.12.2024, At a Glance Q4 2024 Office Investment Market Germany, Office Real Estate Investment Market Germany Q4 2024 | BNP Paribas Real Estate
Savills, 22.01.2025, Spotlight: European Investment - Q4 Preliminary Results and Forecasts, Savills Germany | Spotlight: European Investment - Q4 Preliminary Results and Forecasts
Thomas Daily 10.02.2025, Office prices pick up again for the first time since 2022, Office prices pick up again for the first time since 2022 - THOMAS DAILY
About the author
Annchristine New
During her studies, she completed a Bachelor's degree in Finance and Accounting at the JGU in Mainz and a Master's degree in Real Estate Management at the University of Leipzig. During her studies, she gained experience in institutional real estate transactions as a working student in the Investment Office of BNP Paribas Real Estate. Her focus there was on data preparation, analysis and valuation of transaction properties.
Ms. Neu is a member of gif (Gesellschaft für Immobilienwirtschaftliche Forschung e.V.), which has set itself the goal of creating professionalized, higher industry standards.
Matthias Schmidt is an Associate Investment Manager in the real estate division of FINVIA.
Mr. Schmidt completed his bachelor's degree in real estate management at HSRM Wiesbaden. During his master's degree in construction and real estate management at Mainz University of Applied Sciences, he began his professional career in real estate consulting at Drees & Sommer, where he assisted institutional investors with the technical due diligence of real estate acquisitions and sales as well as the ESG analysis of real estate portfolios. Matthias Schmidt has been with FINVIA since January 2024, where he is responsible for the acquisition and management of direct real estate.
