Composite: REFIRE, Unsplash
Eastern German secondary and tertiary cities have stabilised sufficiently to attract renewed institutional interest, according to a panel of investors and advisers assembled by RUECKERCONSULT — but the opportunity is selective, requires active management, and carries a structural demographic challenge that any credible investment strategy must address directly.
Cities such as Magdeburg, Erfurt, Chemnitz and Dresden have undergone significant transformation over the past decade. Vacancy rates and rent levels are increasingly comparable to equivalent western German markets, while purchase prices and rents remain well below the major metropolitan centres. The yield premium to the Top 7 cities — running at 230 to 300 basis points depending on location and asset class — has sharpened the focus of investors seeking returns that are no longer readily available in Germany's most established markets.
The panel discussion, attended by REFIRE, brought together Johannes Rost, Associate Director Residential Capital Markets at Colliers Deutschland, Dominik Barton, Managing Partner of Barton Group, and Dirk Wichner, Managing Director of Deutsche Bürohaus GmbH, part of the DVI Gruppe.
A residential market tightening from below
The residential story in eastern German B and C cities is one of supply contraction meeting stable demand. New construction activity has fallen sharply in recent years, reducing the number of available rental apartments and creating the conditions for moderate but sustained rent growth. The rent-to-income ratio in the cities surveyed stands at around 25% — well below the levels seen in Germany's major metropolitan regions — meaning that rising rents are being partially absorbed by income growth without yet creating the affordability crisis visible in cities like Munich or Berlin.
"Despite an overall tense market environment, residential markets in East German B and C cities are developing comparatively well," said Johannes Rost of Colliers. "The excess demand in existing stock will intensify further due to declining new construction activity, so moderate but continuous rent increases are to be expected going forward. At the same time, housing in these markets remains affordable by national standards."
The picture is not uniform, however. Magdeburg presents a more competitive dynamic than other cities in the region, with a larger supply of available apartments creating a tenant's market that demands more active asset management from landlords. The city's profile was not helped by the high-profile cancellation of Intel's planned €30 billion semiconductor investment in 2024 — a blow to long-term economic expectations — yet Barton argued that the residential market there remains investable for those prepared to manage actively. "In Magdeburg we currently see a competitive rental market where active asset management plays a decisive role. The choice for tenants is greater than in many other cities, and competition among landlords is correspondingly intense. Apartment modernisations, for example, are necessary to generate lettings."
The rent differential between cities in the region illustrates both the challenge and the opportunity. Average rents in Magdeburg run at around €7.00 to €8.00 per square metre, while comparable properties in Dresden achieve €10.00 to €12.00 per square metre. For investors willing to accept the additional complexity of active management in more competitive markets, that gap represents meaningful upside potential.
From an investment perspective, existing residential stock in many East German cities offers above-average returns by national standards when managed actively. The yield spread to the Top 7 — 230 to 300 basis points — combined with the price corrections of recent years, has created entry points that Barton described as attractive for value-add strategies. "The market has become significantly more demanding," he acknowledged. "Buyer and seller price expectations still diverge in places, and investments require a very selective approach and careful scrutiny of both location and asset."
The office market: quality wins, legacy stock struggles
The office markets in eastern German B and C cities present a bifurcated picture that will be familiar to anyone following the broader German office market. Modern, ESG-compliant space continues to attract demand, while older stock is coming under increasing pressure. Prime rents are rising faster than average rents, most visibly in more dynamic markets such as Dresden, while vacancy across the region remains moderate by Top 7 standards.
Dirk Wichner of Deutsche Bürohaus GmbH pointed to sub-4% vacancy in his firm's portfolio as evidence that well-managed, modernised office space in these markets continues to perform. "Many companies deliberately choose more cost-effective locations and seek office space in more peripheral locations at lower rents," he said. "At the same time, the market is very selective: modernised space lets well, while user price sensitivity has increased overall."
A structural support that is sometimes underestimated in these markets is the public sector. Government and public institutions represent a stable source of long-term demand, frequently signing lengthy leases that provide reliable cash flows in markets where private sector demand can be more volatile. "The public sector plays an important role as a stable source of demand, often with long-term leases. That provides comparatively reliable cash flows in these markets," Wichner noted.
On the investment side, office yields have risen since the capital market shift of 2022 and price discovery between buyers and sellers remains incomplete. Transaction activity is selective and capital access remains constrained, creating a market in which patience and precision are rewarded over speed.
The demographic reality
Any honest assessment of eastern German B and C city markets must confront the demographic constraint directly. Population decline and ageing in many of these cities will dampen long-term demand for both residential and office space, even where short-term fundamentals appear stable. That dynamic does not invalidate the investment case — the yield premium exists precisely because the market prices in this risk — but it does make city-level and asset-level selection the defining variable for long-term performance.
"East German B and C cities remain a target-rich but demanding investment environment that requires an active and long-term oriented strategy," said Rost. Barton echoed the point: "Investments require a very selective approach and careful scrutiny of both location and asset."
Wichner framed the operational implication clearly: "What matters is actively developing assets further and adapting them to user requirements. Only in this way can the existing market potential be utilised over the long term."
The structural case for selective investment in East German secondary cities rests on a combination of factors unlikely to change quickly: a meaningful yield premium to established markets, supply contraction in the residential sector, stable public sector demand in the office market, and entry prices reset by two years of correction. The risks — demographic pressure, incomplete price discovery in offices, and the active management demands of more competitive residential markets — are real and should not be underweighted. But for investors with the expertise and patience to navigate them, the opportunity is genuine.