German residential rents: the new normal is €20 per square metre

German residential rents have risen by an average of 13.7% across major cities since 2022, according to new analysis from Immowelt. Munich leads the national table at €20.74 per square metre, followed by Frankfurt at €16.32 and Stuttgart at €15.02. Berlin has seen the sharpest increase — up 22.3% since 2022, lifting the capital from seventh to fourth place nationally at €14.21 per square metre.

But the league table, striking as it is, understates the more significant shift now underway. According to research institute Empirica, €20 per square metre for new-build rents is no longer an outlier. It is the new structural norm — and it is spreading.

The logic is mathematical rather than speculative. Empirica calculates imputed rents — the floor below which new construction cannot be financially viable — based on current construction costs of around €4,000 per square metre in major cities, land costs, financing and depreciation. At current interest rates of approximately 3.6%, that imputed rent stands at around €20 per square metre in major western German cities, and higher in premium locations. "As it cannot be assumed that interest rates will return to the historically unique low level of one to two per cent," Empirica concludes, "rents of around €20 per square metre must be regarded as the norm." The market, and those seeking housing within it, are only now beginning to absorb that reality.

Supply cannot respond — and won't until 2028

The supply side offers no near-term relief. New-build completions are expected to reach their lowest point in 2026, with any meaningful recovery impossible before 2028 at the earliest due to the time lag between planning, approval and construction. The interest rate rise of 2022 was the decisive trigger: a move from 2% to 4% increases the imputed rent by 50%, making vast swathes of the potential development pipeline unviable at a stroke. Construction cost inflation, which ran at around 28% between late 2020 and early 2022, has since stabilised — but has not reversed. The current ten-year Pfandbrief yield has risen to 3.4%, a development not yet fully reflected in mortgage rates. Empirica notes that the interest rate spread is near its historical low, making further rises more likely than falls.

The VdP - the Association of German Pfandbrief Banks - confirms the pressure from the demand side. New contract rents for multi-family dwellings rose 3.5% year-on-year in the fourth quarter of 2025, with prices for multi-family houses rising even faster at 5.3%. In the top seven cities — Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart — residential prices rose 4.7% year-on-year. Frankfurt recorded the strongest growth at 5.7%. As price growth outpaces rent growth, yields measured by the VdP's property interest rate index fell 1.7% over the year — a mild compression, but one that reflects the weight of capital chasing a structurally undersupplied asset class.

Berlin: the gap between existing and new tenants widens

The Berlin-Brandenburg Housing Association (BBU), whose members manage around 777,000 apartment units — approximately 45% of Berlin's rental stock — provides the most granular picture of how the market is splitting. Average net rents across BBU member properties stood at €7.10 per square metre in 2025, up 3.6% on the year. New tenancies averaged €9.54 per square metre, up 11%. New-build lettings reached €13.55 per square metre, up 7%.

The divergence becomes more striking when portal asking rents are included. Excluding BBU members — who advertise only to a limited extent on commercial portals — average asking rents on major platforms reached €18.76 per square metre, nearly three times the existing stock average. The city's vacancy rate remains at just 1.6%, leaving little buffer. BBU board member Maren Kern draws the policy implication clearly: where construction and financing costs are similar across regions but achievable rents diverge, that differential determines where investment remains possible — and where it does not.

The investor case and the policy gap

For residential investors, the Empirica analysis carries a cautiously positive signal. New-build profitability is returning to the top tier — Munich, Frankfurt, Hamburg and select surrounding districts — where achievable rents are approaching or crossing the €20 per square metre threshold. The medium-term trajectory for re-letting rents in major western German cities points to €15-16 per square metre, with medium-sized cities following at €13-14. Empirica notes that rents in existing stock are already close to those levels in major cities, implying continued upward pressure in smaller markets.

No broad construction boom is expected to follow. Achievable rents remain too low for that in most locations, and the planning and financing environment has not improved sufficiently. VdP chief executive Jens Tolckmitt has called for state guarantees for new-build financing, a reduction in ancillary purchase costs to stimulate home ownership, targeted reductions in building standards and the rapid implementation of the construction turbo. None of these measures is yet in place at scale.

The outlook for tenants is unambiguously harder. Empirica's forecast is direct: declining nominal income growth will push the rent burden higher again in the years ahead. The market is not waiting for conditions to improve before repricing. It is repricing now — and the arithmetic that drives it shows no sign of changing.