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JLL’s briefing this month (see story above) showed a market caught between two truths: prime office space is scarce enough to justify investment, yet capital remains on the sidelines. Bernhard Grabowski’s shorthand—“nobody is buying because nobody is buying”—captured the mood without explaining the mechanism. Newmark’s research has now put a number on that mechanism, suggesting the standoff is more calculable, and more stubborn, than sentiment alone implies.
The analysis centres on the yield spread between prime offices and government bonds: the additional return investors receive for accepting property risk rather than buying the sovereign benchmark. At the end of the first quarter, that premium stood at 150 basis points across Germany’s seven major office markets. By the end of June it had widened to 185 basis points, as prime net initial yields rose from 4.5% to 4.7% and gross purchase-price multiples fell from 20.3 to 19.4 times annual rent.
For some buyers, that already represents an opportunity. For the lower-risk institutional capital required to restart a broad office-market recovery, Newmark believes it remains substantially short of one.
The market remains at least 65 basis points short
Marcus Lütgering, Newmark’s head of Germany, argues that a spread of at least 250 basis points is needed to attract core and core-plus capital in meaningful volume, with 275–300 basis points preferable for a market emerging from a prolonged correction. That leaves the current premium at least 65 basis points, and preferably 90–115 basis points, below the level Newmark considers sufficient.
The firm bases the upper end of that range partly on the recovery following the global financial crisis. German office investment did not regain broader momentum until the premium over government bonds approached 300 basis points; during the middle of the following decade, it averaged around 330 basis points.
Assuming interest rates and bond yields remain unchanged, Newmark calculates that prime office yields would have to reach between 5.35% and 5.60% before investment recovered more broadly. Gross multiples would need to fall from 19.4 to approximately 16.3–17.1 times rent, implying a further contraction of roughly 12%–16% if rents remain unchanged.
The mechanics behind that number matter more than the number itself. Newmark research head Helge Zahrnt describes a broken chain: “Transactions require liquidity; liquidity is generated through fundraising; and fundraising requires a sufficiently high yield spread.”
Preqin’s figures show where the chain has broken. Property fundraising by private equity managers has fallen from €51.7bn in the record year of 2021 to €28.3bn. More damaging for offices, the proportion allocated to lower-risk core and core-plus strategies has fallen from around one-third to approximately one-tenth of that reduced total.
Recent increases in headline office transaction volumes do not necessarily contradict Newmark’s argument. The firm says activity has been driven predominantly by opportunistic and value-add buyers rather than the core and core-plus capital needed for a broad recovery. Large deals and the occasional institutional acquisition demonstrate that offices remain tradable; they do not establish that market-wide liquidity has returned.
Newmark’s modelling suggests that every ten-basis-point increase in the risk premium is statistically associated with approximately 2% more office transaction volume in the following year. But the spread does not have to widen entirely through falling prices. Rental growth can close part of the gap.
Munich illustrates where that may be possible. Office vacancy stands at around 8.2% across the market but below 2% in the city centre, while top rents have exceeded €60 per sqm. Hamburg shows the same mechanism at an earlier stage, with prime rents at €38 per sqm and BNP Paribas Real Estate forecasting €43–€50 within two years as modern central space remains scarce. Nicole Arnold of Commerz Real puts standard prime rents in Frankfurt and Munich at €55–€60 per sqm, with individual transactions already above €70.
That rental performance can support values in the buildings and locations tenants prefer. It offers much less protection to secondary offices whose leasing prospects, refurbishment requirements and operating costs prevent them from capturing prime rents. Newmark’s aggregate pricing gap will therefore not close uniformly: rent may do more of the work for the best properties, while weaker assets require a larger adjustment in capital value.
Frankfurt will provide another test after the Bundesbank launched a formal tender on 13th August for a turnkey headquarters within the city, accommodating around 2,500 workstations. Any resulting acquisition would be significant in a market where only around €350m traded during the first half.
Counter-cyclical does not mean correctly priced
Not everyone believes investors should wait. Tim Schomberg, chief executive of Kingstone Real Estate, argues that high-quality offices in major European cities can now be bought at multiples unavailable for years, and that investors avoiding the sector entirely are missing a genuine counter-cyclical opportunity.
Traditional institutions, he says, are constrained by risk aversion and existing over-allocation to property, leaving family offices and private equity buyers better placed to act. These investors can tolerate uncertainty, pursue active strategies and buy before the broader market produces the comparable transactions core capital prefers.
That case is credible, but it does not disprove Newmark’s analysis. “Counter-cyclical” describes when an investor is buying; it does not establish that the price adequately compensates for financing, leasing, capital-expenditure and obsolescence risk.
Arnold makes the related point that the next property cycle will reward operational competence rather than passive appreciation. Investors who bought during 2018 and 2019 on the assumption that market-wide value growth would carry their business plans may still face significant difficulties. Active management and rental growth can create value, but only where the location, building and acquisition price provide something worth improving.
REFIRE: Newmark’s spread and JLL’s scarcity are two readings of the same market, not competing ones. One explains why capital is staying out; the other why it should eventually return. Scarce modern space, major tenant requirements and rising prime rents can support investment demand, but they cannot make an inadequate risk premium disappear.
Sellers can wait for rental growth to close part of the gap, or accept lower prices to close it sooner. What they can no longer safely assume is that stronger leasing alone will bring institutional buyers back at yesterday’s valuations.