Germany’s market for commercial real estate plunged to the lowest level since at least 2017 in the latest sign of the turmoil triggered by soaring interest rates.
Deal volumes in the first half of 2023 declined 50% from the previous six months to €14.9 billion ($16.2 billion), according to data provided by real estate firm JLL. The figure was about two-thirds below the average over the past five years.
The standstill in Germany mirrors developments across European countries such as Sweden, Ireland and the UK. Commercial property markets have seized as buyers and sellers struggle to agree on pricing.
Rising interest rates have driven up borrowing costs, prompting potential property investors to demand higher yields. That results in lower offer prices, and owners are resisting granting steep discounts to book values on concerns that could cause debt ratios to surge.
Still, there are signs the pace of the market’s contraction is slowing, with year-on-year drops getting less severe, according to JLL data. Halting the declines would be the first step toward an eventual rebound.
Certainty about the future path of interest rates could help get the market going again by making it easier for buyers and seller to find common ground. Markets currently expect the European Central Bank to end the historic series of interest rate hikes later this year.
“There is a realistic chance that price expectations could converge by the end of the year” if the ECB stops raising rates, BNP Paribas Real Estate said in a separate release on Wednesday that showed similar developments. This “would significantly improve planning security for both buyers and sellers” and usher in a rebound.
Still, deals volumes will likely remain at a low level for the rest of the year since the flagging German economy will provide “very little, if any, tailwind” to the real estate industry, BNP said.
(Adds details from separate BNP release in final two paragraphs)
