German retail defies digital disruption as investors return

The ever-twisting tale of German retail has taken another unexpected turn. Just as e-commerce was supposed to deliver the final blow to physical stores, retailers are planning their most aggressive expansion in seven years while institutional investors show renewed appetite for defensive retail properties as yields compress selectively across prime assets.

Sixty-one percent of retailers plan to increase store numbers by year-end 2025, up from 42% previously and representing the highest expansion rate since 2018, according to the latest Hahn Retail Real Estate Report. Only 17% intend to reduce locations—a record low signaling confidence in physical retail's resilience despite the digital headwinds that dominated industry discourse for much of the past decade.

"It is remarkable that the crisis has apparently had little impact on consumer spending in Germany so far," notes the Hahn Report, reflecting on retail's persistent strength through multiple economic disruptions. This resilience now translates into expansion confidence that catches many observers off guard.

The expansion drive concentrates in food-anchored segments, with drugstores leading growth at 67% planning increases, followed by general consumer goods (88%) and catering (100%). Food retailers maintain steady expansion momentum at 61%, while textile retailers show continued caution with 44% reducing networks. Market data supports the optimism. Drugstore chains added 65 locations in 2024 to reach 5,258 stores, continuing multi-year growth trends, while traditional supermarkets lost 101 locations and hypermarkets declined by 40, reflecting ongoing format rationalization toward smaller, more efficient operations.

EDEKA retained market leadership with €78.3 billion sales (+2.6%), followed by Schwarz Group (owner of Lidl) and REWE, with the latter posting strongest growth at 4.5%. Total retail sales reached approximately €670 billion, significantly exceeding 2015 forecasts of €490 billion, while e-commerce captured just under 14% market share—close to earlier projections but representing larger absolute volumes. "In fact, retail sales in Germany have grown more strongly in recent years and now total around €670 billion (+37%) and around €93 billion for online retail (+24%)," according to the latest report, highlighting how both channels expanded simultaneously rather than competing in a zero-sum game.

"Systemically important local supply is separating itself from systemically irrelevant retail concepts," noted CBRE, the report's investment partner since 2010. The COVID-19 pandemic accelerated this bifurcation, with essential retail formats demonstrating defensive characteristics that attract institutional capital.

Investment appetite returns

Institutional investors are cautiously re-entering retail property markets after two years of retrenchment. Thirty percent plan moderate portfolio expansion versus 20% previously, while 9% target significant acquisitions compared to 7% in 2024. No investors plan substantial disposals, contrasting with previous cycles of forced selling.

Food-anchored retail parks dominate investment preferences, followed by supermarkets and discount stores. Mixed-use properties rank third, while shopping centers share fourth position with other retail formats. The preference shift toward necessity-based retail reflects institutional focus on defensive cash flows amid economic uncertainty. Core and core-plus strategies dominate investor approaches, with 69% pursuing core strategies (down from 78%) and 66% favoring core-plus (up from 63%). Value-add strategies declined to 16% from 24%, while opportunistic approaches fell to just 3% from 5%, indicating continued risk aversion.

"We are at the beginning of a new upturn in the investment market," stated Hahn CEO Thomas Kuhlmann at the presentation of the 2025/26 edition, echoing the perpetual optimism that has characterized the report since its 2006 inception. This confidence appears supported by financing availability, with one-third of surveyed banks planning to increase retail lending moderately while another third maintain current volumes.

Prime retail yields in Germany's top seven cities compressed 0.2 percentage points to 4.64% in Q4 2024, marking the first significant movement after stability through the first three quarters. Food-anchored retail parks saw slight compression to 4.60%, while broader food retail yields declined 0.1 percentage points to 4.90%. However, secondary locations diverged sharply, with B-location shopping centers recording net initial yields of 7.50%, creating record spreads versus prime properties. This polarization reflects institutional capital concentration in defensive assets while secondary properties struggle for financing and investor interest.

ESG premiums emerging

Sustainability considerations increasingly influence investment decisions, with 91% of investors rating ESG as relevant or very relevant. Eighty-four percent incorporate building certifications into acquisition analysis, while 62% accept price premiums for compliant properties.

Specifically, 45% accept premiums up to 5% for ESG-compliant properties, while 17% tolerate premiums reaching 10%. Only 3% exceed 10% premiums, but 34% reject any ESG-related price increases, suggesting market segmentation around sustainability priorities. Green leases represent 38% of new contracts among surveyed investors, with 44% viewing standardized inclusion as desirable, though actual portfolio coverage remains limited with only 22% achieving green lease ratios up to 5% of space.

Energy efficiency measures dominate ESG implementation, with 63% of investors prioritizing energy improvements and 44% installing smart meter systems. Photovoltaic expansion appeals to 44% currently, while 47% plan medium-term installations.

The 2025/2026 report marks the 20th anniversary of Hahn Group's annual market analysis, conducted with CBRE, research group bulwiengesa, and EHI Retail Institute. The survey base included 71 retail expansion managers and 32 institutional investors and financiers, providing institutional perspectives on Germany's €670 billion retail market. Retail sales outlook remains positive, with 50% of retailers expecting second-half growth versus 61% previously—still indicating majority optimism despite some moderation in the most bullish expectations.

The data suggests German retail property investment is transitioning from defensive positioning toward selective growth, with institutional capital targeting necessity-based formats offering stable cash flows and inflation protection. Prime asset scarcity supports yield compression, while secondary properties face continued pressure from changing consumer patterns and investor selectivity.

REFIRE: For institutional portfolios, the findings suggest several strategic implications. Food-anchored retail parks and supermarkets offer defensive characteristics with modest yield compression risk, making them suitable for core allocations seeking stable income. The 86 basis point spread between prime and B-location shopping centers creates value-add opportunities for investors with asset management capabilities, while the ESG premium acceptance signals potential alpha generation through sustainability-focused acquisitions. The expansion plans of 61% of retailers indicate occupier demand strength that should support rental growth, particularly in necessity retail formats where e-commerce penetration remains limited.