Dirk Ruppert, CIO, CELLS Group
As 2025 unfolds, Germany’s office market presents a paradox that savvy investors can exploit, with the potential to generate significant returns. Amid sluggish growth and hybrid work adoption overall office vacancy rates are rising. However, prime office rents in Germany’s top seven city centres remain remarkably resilient and continue to grow. This “flight to quality” signals that both, tenants and investors, are concentrating on best-in-class space in top city center locations.
This environment creates a sweet spot: urban CBD redevelopments in cities like Frankfurt am Main, Hamburg, and Berlin offer a compelling balance between risk and return. By revitalizing well-located, outdated offices into modern, sustainable landmarks, investors can meet the surging demand for quality while mitigating cyclical risks. In the current cycle, the key is to be selective and forward-thinking – doubling down on core location fundamentals and ESG excellence to capture outsized returns.
Flight to Quality Amid Rising Vacancies
Major German cities are experiencing divergent office market trends. Overall vacancy rates in the top five markets grew to about 8,2% by the end of2024 (from ~7% a year before) according to different market analysises provided by big real estate service companies such as CBRE and Colliers. Furthermore, increases are expected as new supply is delivered in 2025. Frankfurt’s office vacancy, for example, has reached 10% in Q1 2025 according to CBRE, the highest in years. At face value, rising vacancies suggest a weakening market. Yet prime rents tell a different story. Despite the glut of older space, prime office rents increased in six of Germany’s seven largest markets in 2024, with cities like Munich and Stuttgart seeing high-single to double-digit percent growth. Even in Frankfurt, prime headline rents jumped from €49 to €51 per sqm per month in early 2025 – a new high according to CBRE. In Berlin and Hamburg, prime rents have held steady or edged up (~1–3% YoY) into 2025, even as the vacancy rates in those cities ticked upwards. Berlin’s vacancy hit 7.0% – the highest in a decade – by Q1 2025, yet premium space remains so coveted that top rents there rose ~1% year-on-year to €44.50 per sqm. Hamburg, meanwhile, still boasts the lowest vacancy (just 4.0%) among Germany’s Big 5 markets, and its prime rents have climbed to about €36 per sqm, a ~3% annual gain.
This uncoupling of prime rents from vacancy underscores a clear flight-to-quality trend: companies are willing to pay for high-grade, well located offices, while secondary properties languish.
Market commentators are observing this bifurcation, describing a clear “flight to quality” with tenants focusing on modern, ESG-compliant space. In Hamburg, about 60% of all Q1 2025 leasing volume was for offices with high-quality fit-outs, whereas only 5% of take-up involved spaces with below-average fit-out – and those few deals at least featured excellent transit links according to CBRE. This indicates that lower-grade offices, especially in peripheral or inconvenient locations, are increasingly shunned by occupiers.
This holds true for Frankfurt as well, where much of the recent leasing has skewed toward new CBD developments or refurbished projects, pushing up average rents in central areas while peripheral districts see rent declines. In short, core-location, top-spec assets are capturing the lion’s share of demand.
CBD Redevelopments: Balancing Risk and Reward
For investors, these conditions highlight the opportunity in urban CBD redevelopment projects. The strategy involves acquiring older, underutilized buildings in prime city-center locations and transforming them into state-of-the-art offices that meet today’s tenant expectations. This can hit a sweet spot on the risk/return spectrum. On the risk side, yes, redevelopment is a value-add play carrying construction and lease-up exposure.
However, the location and quality advantages of a successful CBD redevelopment significantly mitigate leasing risk: businesses are actively seeking new premium space in Frankfurt, Hamburg, and Berlin’s central districts, as evidenced by robust prime rents and pre-leasing rates.
Crucially, the current investment cycle offers favorable entry pricing for value-add initiatives. After the valuation corrections of the past two years, prime office yields have evolved to their highest levels in a decade, hovering around 4.8–5.1% in top German cities. Asset values in many markets are at historic low multiples following repricing, meaning investors can acquire prime location properties at a relative discount today. This provides a buffer for redevelopment economics – essentially lowering basis cost – and ups the potential return upon stabilization. History shows that downturns often precede strong recoveries in office values; for instance, after the financial crisis, European office prices rebounded over 20% within a year, according to fund and asset manager Real I.S..
While we may not predict a similar upswing overnight, signs of market stabilization are emerging. Take-up in Germany is forecasted to rise in 2025, and new construction activity is slowing. CBRE expects the peak of the vacancy cycle in 2025, after which reduced development and improving demand will gradually rebalance the market. By undertaking redevelopment now – during the late downturn phase – investors could deliver new prime space just as the tide turns.
The return profile is attractive: yield spreads for refurbished core assets are healthy, and once leased, such assets may command premium valuations (given the weight of capital seeking core ESG-compliant product). In essence, CBD redevelopments allow investors to buy low (distressed or neglected assets) and create high, capturing both rental uplift and value appreciation in the next expansion.
Location and Sustainability: The New Non-Negotiables
To fully capitalize on this strategy, discipline in location and design criteria is paramount. Not every older office is worth redeveloping – it must tick all the right boxes to attract the flight-to-quality demand. What does that entail? Connectivity, visibility, flexibilty, walkability, and a rich amenity mix are critical. Offices in the heart of Frankfurt, Berlin or Hamburg benefit from unrivaled connectivity – whether it’s regional transport hubs like Frankfurt’s Hauptbahnhof (central station) or underground networks that put the workforce within a short commute. Properties with excellent public transport links and central visibility (landmark sites or located at busy downtown intersections) enjoy a competitive edge in drawing tenants.
Studies confirm that good accessibility and proximity to transit are key factors for today’s office users, alongside an attractive working environment and service amenities. Walkable surroundings – think lunch options, retail, green space and cultural venues within a few minutes’ stroll – greatly enhance an office building’s appeal to tenants focused on employee experience. These amenities have become non-negotiable in top-tier office projects. In practice, this means investors should favor city-center micro-locations that offer vibrancy and convenience for workers (for example, Berlin’s City-West, Hamburg’s Innenstadt and HafenCity, or Frankfurt’s banking district). If a building lacks these locational advantages, even a shiny renovation may not overcome the location discount in a flight-to-quality market.
Equally crucial is sustainability performance. Institutional investors and blue-chip occupiers now scrutinize ESG credentials as closely as rent rolls. To meet this demand, redevelopments must aim for the highest sustainability certifications – LEED Platinum or DGNB Platinum. These certificates signal that a building aligns with stringent environmental and wellness standards, from energy efficiency and low-carbon operations to indoor quality and community impact.
High sustainability standards are essential as they directly influence an asset’s long-term success among tenants. Properties that meet Paris Climate Agreement targets and EU Taxonomy criteria tend to secure higher occupancy and value retention over time. Conversely, buildings that fall short on sustainability risk obsolescence (“stranding”) as regulatory requirements tighten and corporate ESG commitments intensify.
A new JLL report highlights a looming supply shortfall of green offices: in major cities worldwide, roughly 30% of the projected demand for low-carbon, high-performance office space will not be met by 2025, and this gap could widen to over 70% by 2030. This points to a clear mandate – and opportunity – for developers: retrofit and build more sustainable space, or see demand overflow to the limited stock that is available. Investors who deliver LEED/DGNB Platinum caliber redevelopments in prime locations position themselves to ride this wave of pent-up demand.
In Germany, the trend is already evident: green-certified buildings accounted for nearly one-third of commercial investment volume in recent years, a record share according to BNP Paribas. Top institutional landlords now often require new acquisitions to carry an ESG certification or at least demonstrable path to obtain one.
Achieving Platinum-level certification not only expands the pool of interested tenants (many of whom have net-zero carbon goals), but also aligns the asset with the criteria of leading funds and lenders focused on sustainability. Pursuing the highest green rating is worth the effort: it future-proofs the asset and satisfies the due diligence checklists of most institutional investors today.
About the Author
Dirk Ruppert is CIO of CELLS Group, a Munich-based real estate investment and asset management firm specialising in high-quality commercial and residential properties in Germany’s leading urban centres. With more than two decades of experience in acquiring, developing and repositioning complex inner-city assets, he has been directly involved in some of the country’s most prominent redevelopment projects. His perspective on the risk-return dynamics of top-city-centre real estate is shaped by years of navigating the regulatory, architectural and economic realities that come with working in Germany’s most contested locations.