Over the 10 years, the top seven cities, i.e., Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Mu-nich and Stuttgart, have accounted for around three quarters of the overall office transaction vol-ume in Germany. The reasons for this are obvious. Not only are these the most liquid office in-vestment markets, they also provide the greatest transparency in the German real estate markets. Moreover, they offer investors the opportunity to invest larger sums per deal, meaning lower transaction costs per euro invested. Those investors that have invested in the last years in the top seven have profited from rapid rental growth in recent years and hence attractive capital growth on their properties. The prime rent across the top seven office markets has risen by an average of 36% over the last ten years. In Berlin, the corresponding increase was as much as 81%. A majority of this growth can be attributed to the rising growth in office employment, which the new-build volume has been unable to keep pace with. Office employment rose by approximately 22% between 2010 and 2019 while the vacancy rate fell from 10% to 3%. However, this rental growth is expected to lose momentum over the coming years. This is both because more office space will be completed and since remote working is causing increasing uncertainty surrounding future demand for office space (see also: How is the pipeline unfolding in the top six office markets?). In view of the already low net initial yields in the office sector, therefore, it may be worthwhile for investors to shift their attention beyond the top seven office markets.

The B, C and D cities particularly stand out for their relatively stable rental growth, which is less volatile than in the A cities. The swings are far less pronounced both to the upside and the down-side. At the same time, some of these cities also exhibit remarkable rental growth, with Dresden and Leipzig particularly worthy of mention. Rents in these two cities have risen by around 35% over the last 10 years. However, population growth has also been above average during the same peri-od. The population has grown by 9% in Dresden and 20% in Leipzig (average across all B cities: 6%). The Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) ex-pects further growth of 7% in both cities by 2035. In addition, some university cities are showing promising growth prospects. By way of example, office rents have witnessed above-average growth in Regensburg (+57%), Passau (+48%), Bamberg (+47%) and Oldenburg (+46%) over the last ten years. University cities may well be more appealing to companies going forward in any case. A ma-jor reason for this is that, in competing for the best talent, companies will be seeking locations clos-er to universities.  

The attractiveness of B, C and D cities is also evident from analysing current investment activity. In the first quarter of 2021, these cities accounted for approximately 25% of the office transaction volume. By way of comparison, the 10-year average is 15%. Hence, while the top seven cities re-main the first choice for investors, it is also evident that the B, C and D cities offer attractive invest-ment alternatives. In view of current developments, investors could benefit from giving these cities greater consideration in their investment strategies.