CLS Holdings
A CLS Holdings property, The Yellow office building, 9,600 sqm leased to the City of Dortmund
Germany's office investment market outside the Big 7 cities is showing unexpected resilience as 2025 unfolds. According to CBRE, office transaction volume in B-cities and regional centres rose sharply to €415 million in the first quarter, an 11% increase year-on-year and a 246% jump compared to the muted final quarter of 2024. By contrast, office investment in the Big 7 fell 6% over the same period.
The dynamic start to the year is being driven almost entirely by domestic capital. German public-sector buyers, including municipalities such as Dortmund and Aachen, accounted for 24% of total investment volume, ahead of open-ended and special funds, wealthy private buyers, and real estate companies. International investors played a minimal role, comprising just 5% of transactions. In Dortmund, for instance, the city spent over €85 million on offices, including a major deal on Rheinische Straße involving a building formerly owned by Hannover Leasing.
Recent analysis from DIP Deutsche Immobilien-Partner supports the view that B- and C-cities have proved more stable than the top-tier cities through the current cycle. While leasing turnover in the Big 7 slumped by 24% in 2023, B- and C-city office markets recorded only a 7% decline. Vacancy rates in the nine leading B-cities, including Bremen, Leipzig, Hanover and Nuremberg, averaged 4.8%, compared to 5.5% in the major centres. Total take-up in these medium-sized cities represented a growing 22% share of the national market, up from 17% the year before.
Winners and losers split on ESG compliance
There is, however, a growing bifurcation between winners and losers within the B- and C-segments. Offices meeting modern ESG and energy-efficiency standards in prime city-centre locations continue to attract tenants and command premium rents. Older, outdated stock with poor layouts and high energy consumption is coming under increasing pressure. Despite solid average vacancy rates, supply reserves are rising sharply in some cities: Hanover and Bremen each saw vacant space increase by over 30% in 2023.
CLS Holdings, one of the leading investors in secondary city offices, offers a revealing case study. The UK-listed group secured a record year for leasing activity in Germany in 2024, with over 50,500 square metres of new or renewed leases. As Rolf Mensing, Head of Germany at CLS Holdings, noted, "despite the lettings market remaining subdued in a long-term comparison, CLS is reaping the rewards of highly active, first-class asset management, a clear customer focus, and a best-in-class strategy." The firm's focus on high-quality, energy-efficient assets aligned with strong demand from mid-sized firms and public sector tenants, underlining the value of modernisation and tenant-centric strategies.
A standout deal included the City of Dortmund's 20-year lease of 9,600 square metres at 'The Yellow' property, consolidating multiple municipal offices into a single location. Einar Osterhage, Head of German Asset Management at CLS Holdings, highlighted a broader trend: "Tenants are increasingly looking for flexible solutions, a significantly higher proportion of space for communication and events, and strong energy efficiency. The hybridisation of commercial real estate, particularly through mixed-use spaces, is becoming an important factor in long-term asset performance."
Buyer-seller expectations stabilise
Yields have stabilised. CBRE reports prime net initial yields for top properties in B-locations at 5.5%, while non-central assets are trading closer to 6.3%. Asking price expectations between buyers and sellers have largely converged, restoring greater predictability to the investment process after the dislocation of 2023. Financing conditions are also easing slightly as swap rates and government bond yields soften, with the ECB expected to provide additional monetary stimulus.
Yet risks remain. Liquidity for secondary assets is fragile. Portfolio transactions are absent from the B- and C-city markets, with individual deals dominating. Demand remains heavily focused on core and core-plus assets let to creditworthy tenants. The supply of such assets is limited, and ESG compliance is now a near-mandatory screening criterion for investors.
The resilience of Germany's B- and C-city offices is real, but increasingly selective. Institutional investors must combine sharper credit analysis, greater refurbishment budgets, and precise location strategy to secure returns. Simply buying "regional" is no longer a guarantee of outperformance.