How smaller German cities are beating prime office markets

With investor appetite for Germany’s Big 7 office markets still subdued, attention is turning cautiously to regional alternatives. New research from Wüest Partner and data from CBRE suggests that the country’s B- and C-city office markets are not just surviving but, in some cases, outperforming. Yet while yields are stabilising and leasing momentum is recovering, the gap between opportunity and overexposure is becoming more difficult to ignore.

CBRE reports that office transaction volume in Germany’s B-cities rose to €415 million in the first quarter of 2025. This marks an 11% year-on-year increase and a sharp rebound compared to the muted final quarter of 2024. In contrast, investment in the Big 7 cities—Berlin, Hamburg, Munich, Frankfurt, Düsseldorf, Stuttgart and Cologne—fell by 6% over the same period. It is a reversal of the usual order. However, investors are not blindly rushing into smaller markets. “We’re seeing capital pivot to regional markets, but it’s highly selective,” noted one fund manager active across mid-sized portfolios. “It’s less about geographic diversification and more about targeted asset picking.”

New data from Wüest Partner in its Office Report Germany 2025 offers a clearer sense of how this selectivity is taking shape. Cities such as Regensburg and Karlsruhe are achieving prime net initial yields well above 5%, with risk scores that compare favourably to Munich or Düsseldorf. They combine higher yields with relatively low volatility, a combination now in short supply. At the other end of the spectrum, cities such as Ludwigshafen, Erfurt and Bremen may offer even higher headline yields, reaching up to 6.3% in Ludwigshafen’s case, but come with significantly greater structural risk. The Wüest Partner report warns that top-line returns in cities like Ludwigshafen often mask deeper fragilities, including weak employment growth and long-term demographic decline.

Wüest’s index of projected office employment growth places Ludwigshafen, Jena, Offenbach and Duisburg firmly at the bottom. All score well below 25 on a scale where the national average is 100. By comparison, Berlin scores 654. Even modestly sized cities like Leipzig and Bonn come close to or exceed the average, suggesting stronger underlying demand. Nationally, the number of office workers is expected to increase by around 159,000 annually through 2030, broadly in line with trends since 2021. But growth in employment no longer translates directly into demand for space. Hybrid working models and space-efficiency gains are now firmly embedded in tenant behaviour.

Wüest Partner highlights that many companies have reduced their floorplates by up to 30% in recent years through relocations, downsizing and desk-sharing strategies. Vacancy rates, already elevated in many locations, have continued to rise despite healthy employment numbers. The report finds no evidence of a return to full-time office attendance. Space-per-head ratios are still declining.

Not all buildings are created equal

Some markets are already showing signs of stress. Hanover and Bremen each saw vacancy increase by more than 30% in 2023, despite continuing demand from public sector and mid-sized tenants. The decisive factor, increasingly, is no longer geography but ESG compliance. Leasing activity in regional markets is dominated by energy-efficient, flexible properties in central locations. Older, inefficient buildings are struggling to compete, even in cities that otherwise enjoy demographic or employment tailwinds. “You can’t just be in the right city anymore,” observed one Düsseldorf-based asset manager. “You need to be on the right street, in the right building, with the right layout.”

Buy-side activity reflects a similar shift in thinking. CBRE data shows that 95% of regional office transactions in the first quarter involved domestic buyers. Public-sector entities, including municipalities such as Dortmund and Aachen, accounted for nearly a quarter of total deal volume, more than Spezialfonds and family offices combined. International investors were responsible for just 5% of transactions. The trend reflects a more operational, locally grounded approach to office investing.

One exception is CLS Holdings, the UK-listed investor with a long-standing presence in Germany. The company reported a record leasing year in 2024, signing more than 50,000 square metres in new or renewed leases across its B-city portfolio. Its strategy focuses on modern, energy-efficient buildings, typically let to mid-sized firms or public sector tenants. A standout transaction included a 20-year lease with the City of Dortmund for 9,600 square metres at “The Yellow”, consolidating multiple municipal offices in a single location. Einar Osterhage, Head of German Asset Management at CLS, said tenants are now demanding more flexible layouts, more space for interaction and events, and stronger energy performance. The hybridisation of commercial real estate, he noted, is becoming central to long-term asset performance.

Both CBRE and Wüest Partner arrive at a similar conclusion. There is no longer such a thing as a generic B-city strategy in Germany. Regensburg and Karlsruhe offer strong yield and risk fundamentals. Leipzig and Münster have solid demographic tailwinds. But elsewhere, headline yields can disguise deep structural risks. Vacancy, regulatory tightening and demographic decline are quietly reshaping the regional office map.

For institutional investors, the message is clear. Yield alone is not enough. ESG filters and demographic trends must now be part of every underwriting process. And any buy decision must include a clear and realistic exit plan. Regional markets still reward those who know where to look, but they no longer tolerate lazy capital or generic strategies.