Investment Market Overview - Q1 2025

With a transaction volume of 7.9 billion euros, the German real estate investment market has started the year positively, achieving a 26 percent increase in the first quarter of 2025 compared to the previous year. This is the best start to a year since 2022 and also the first quarter in a long time where the office segment is showing positive signals again - both in terms of volumes and the number of transactions.

Rarely has a first quarter been as politically and economically volatile as that of the current year. Not only did the change of government in the USA and the early federal elections in Germany influence the markets - the consequences are currently causing almost daily discussions. Proposed changes to trade and tariff policy in the United States resulted in significant financial market volatility during April, and have raised levels of economic and market uncertainty.

This is frustrating at the beginning of a year in which the real estate markets were supposed to finally recover from their slump. In addition to the possible effects on the real economy, the real estate investment market always keeps an eye on interest rate developments. While the European Central Bank initially continued its interest rate reduction course with a further 25 basis point cut in March, doubts remain as to whether this course can be maintained in view of rising inflation. This is even more true for the USA, where consumers expect a significant increase in inflation and the US Federal Reserve has paused its loosening.

For the German investment market, in addition to geopolitical and global issues, the focus is on the conclusion of coalition negotiations and the formation of a new capable government. Nevertheless, with the reform of the debt brake, a paradigm shift in German fiscal policy has already been initiated in advance, with far-reaching consequences for the real estate markets as well. For example, interest rates (swap rates) rose rapidly within just two days after the adoption of the investment package, from 2.23 percent by almost 30 basis points to over 2.5 percent. Subsequently, interest rates then stabilized again and returned to a range between 2.3 and 2.4 percent. The fact is, however, that such investment expenditures are naturally inflationary and thus interest rate-driving. However, it should not be forgotten that this is an economic stimulus program for the next twelve years and given the capacity bottlenecks in numerous sectors and industries, it remains to be seen how, when, and where exactly concrete investments will materialize.

From an economic perspective, the investment package could significantly boost German growth. According to forecasts by Oxford Economics, GDP growth should average 1.8 percent over the next four years and reach a peak of 2.6 percent in 2027. As a consequence, JLL expects the European Central Bank (ECB) to lower its key interest rate only twice more during the year and then remain at a deposit rate of two percent.

7.9 bn

Volume of transactions in Q1 2025

+26 %

compared to Q1 2024

For real estate investors, it will continue to be about dealing with partly contradictory risks: on the one hand, higher capital costs and a still too high loan-to-value ratio, and on the other hand, rental growth that continues to be above inflation, at least for the best products, which is due to the stable leasing market.

From this mix, combined with continued liquidity and increasing pressure on the sell-side due to devaluations or difficult refinancing, there should be interesting opportunities in selected asset classes during the course of the year. We therefore maintain our forecast made at the beginning of the year with a nationwide transaction volume of around 40 billion euros. There are a number of reliable indicators for this forecast: In addition to the actual completions in the first quarter, JLL also sees a higher volume of structured bidding processes, including with institutional investors outside of the public sector or wealthy private individuals. Lending to companies in Europe has also continued to brighten, with a year-on-year increase of 2.2 percent (as of February). Given the current interest rate level, however, financing leverage has a limited impact on returns, with the greater proportion driven by income and income growth.

As always, looking at just three months is largely a snapshot that needs to be put into perspective. Nevertheless, this good result should be seen as a positive sign given the global situation and the very cautious mood at MIPIM. It seems that some investors used the favorable interest rate window at the end of last year to prepare transactions that have now been realized.

The current transaction volume by asset class reveals a significantly revived demand for offices. With almost two billion euros, 24 percent of the quarterly volume was attributable to this type of use. Only the Living sector, including residential, student, or senior living properties, was able to generate more volume with a total of almost three billion euros (37 percent). At least the relative distribution is reminiscent of past years, in which office properties consistently achieved an investment share of around 30 percent. Of course, the Upper West deal in Berlin in the three-digit million euro range has a significant share in this result, but the revival is also evident when looking at the number of transactions. JLL has recorded 56 office transactions across Germany, which is significantly more than in the last two quarters of 2024. 

Number of portfolios

Volume each ≥ €100 mn

5

Q1 2024

5

Q1 2025

Activities in the logistics segment, on the other hand, have clearly subsided. The relative share fell from 27 to 15 percent compared to the first quarter of 2024, and the transaction volume also decreased to 1.1 billion euros. In view of the current trade discussions and potential disruption to supply chains, it remains to be seen how these will affect manufacturing, warehouse and distribution properties as an investment product in the remainder of the year. Possible overcapacities among users from parts of the industry could be compensated by other currently expanding sectors - including defense and security. Particular focus will be on the automotive sector, whose users have been responsible for around one-third of all warehouse rentals on average over the past ten years.

The retail sector accounted for a share of 16 percent (just under 1.3 billion euros) in Q1, ahead of logistics. The revival that began at the end of 2024 has thus continued. These products particularly benefit from the demand for private capital. JLL expects this to continue and that well-capitalised private investors will continue to seize the opportunity. In the coming year, the company sees further opportunities to acquire top retail properties, especially in the city centers of large markets.

The volume of portfolio transactions has continued to recover in the last three months, which is still primarily due to the stronger dynamics in the Living segment. In the first quarter, portfolio sales with a volume of 2.4 billion euros were recorded, doubling from 2024. The dominance of residential portfolios is significant - more than 70 percent was attributable to these products. Individual transactions accounted for just under 5.5 billion euros, still a slight increase of eight percent. The revival of the portfolio market is relevant insofar as portfolio sales often involve larger volumes. This is also evident in the first quarter, with almost 30 percent of all portfolios exceeding the 100 million euro threshold.

With 3.1 billion euros, around eight percent less was invested in real estate in the seven real estate hotspots Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, and Stuttgart at the start of 2025 compared to the previous year. The share of these markets in the nationwide transaction volume has thus significantly reduced from 53 percent to 39 percent. 

In detail, it shows that the decrease is almost entirely due to Munich. Here, the transaction volume decreased by 67 percent to only 450 million euros. Besides Munich, only Düsseldorf recorded a decrease with a decline of eight percent, while the other five hotspots all recorded increases, which were particularly strong in Berlin at 66 percent and Hamburg at 35 percent. One reason for the slightly decreased transaction volume is that the supply of good quality product was low in many places However, current active requirements and JLL’s transaction pipeline suggest a revival over the course of the year.

Even though transaction volumes increased again in the first quarter, there is still a lack of core deals to provide real evidence in many areas to assess current prime yield levels. Nevertheless, the processes for which JLL has visibility show stable pricing across asset classes compared to last quarter. The reignited interest rate volatility and the associated shrinking risk premium of real estate yields compared to long-term government bonds - this has fallen from 200 to currently 170 basis points in the past three months - has led to renewed discussions about where pricing. The question remains whether the yields of real estate as a long-term investment can or should reflect such a short-term induced interest rate development.

In our forecast for the full year, we still see that competition among buyers for top properties will increase in all asset classes, and yields in the Living, Logistics-Industry, and food-anchored retail property sectors could decrease by 15 to 20 basis points by the end of 2025, while stabilization at the current level is expected for the other asset classes.

Our Capital Markets contacts:

Capital Markets & Office Investment:
Konstantin Kortmann, CEO JLL Germany & Head of Capital Markets Germany

Industrial Investment:
Diana Schumann, Head of Industrial Investment Germany

Residential Investment:
Michael Bender, Head of Residential Germany

Retail Investment:
Sarah Hoffmann, Head of Retail Investment Germany

Research:
Helge Scheunemann, Head of Research Germany