Germany enters the first quarter of 2026 with a market that is no longer in reactive correction. The volatility of 2022 through late 2024 has settled into what we treat internally as a new equilibrium: pricing has found a floor, capital is disciplined, and the incremental buyer is valuation-sensitive rather than thesis-driven. Colliers and Savills both place 2026 transaction volumes in a €35–40 billion range — a meaningful recovery from cyclical lows, but still around 30% short of the pre-2022 peak. That shortfall is the point. It tells us this is a selection market, not a re-rating market.

The residential paradox

The sharpest dislocation in the German market is residential. The Ifo Institute expects dwelling completions of just 185,000 units in 2026. The Federal government’s own stated requirement sits at 400,000 units per year. Over 52% of German households rent, and that share is drifting up as elevated build costs, conservative lender underwriting and the energy-retrofit obligation price more would-be owners out of the purchase market. The compounding effect lands on the Big 7 — Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart, and Düsseldorf — where prime rents are forecast to rise at least 5% in 2026, comfortably ahead of general inflation. Capital values are recovering more gradually, around 3.5%, held up primarily by the absence of deliverable stock rather than by any re-rating of cap rates.

For equity investors, the consequence is straightforward. The underwriting case for ready-to-build residential in a Big 7 location does not depend on a yield-compression thesis. It depends on rent growth outpacing cost inflation — a bet we are comfortable making given current supply fundamentals.

Commercial bifurcation and the ESG mandate

In commercial, the “flight to quality” has stopped being a tagline and started being a pricing mechanic. Grade A, ESG-compliant office space in Frankfurt and Munich is holding vacancy near 6.5%. B-grade and peripheral office has widened to 11.5%. The spread is now wide enough that we no longer think of it as one market.

Two regulatory vectors are tightening the screw. The Carbon Border Adjustment Mechanism (CBAM) is reshaping how occupiers assess their own carbon exposure, and the Gebäudeenergiegesetz (GEG) is raising the domestic energy standard floor. Assets that fail either test are moving from “lower-yielding” to “unfinanceable” in a compressed window. Our read is that a refinancing gap of roughly €8.5 billion will emerge across the non-compliant commercial book in 2026 alone. Senior lenders are already declining to roll; the gap will be filled either by equity or by forced sale.

Logistics, defence and the energy layer

Beyond residential, the clearest directional trade sits in industrial. E-commerce is only part of the story. National defence programmes and the Energiewende are generating new demand for specialised industrial formats: high-security manufacturing space, grid-connected logistics, and energy-infrastructure adjacencies. In those formats, vacancy is at record lows and rental growth is pricing well above the German industrial average.

The macro backdrop is supportive. Eurozone rates have stabilised, and the spread between German property yields and 10-year Bunds has reverted to its long-run average of approximately 160 basis points. That spread is thin enough to demand operational quality and thick enough to justify deployment.

What we are underwriting

We see three repeat patterns in 2026 German deal flow:

  • Residential, ready-to-build, Big 7 commuter rings. Approved permits, sensible cost plans, and equity gaps opened by senior LTV compression from 70% to 55%.
  • Grade A office recapitalisations. Owners holding compliant stock but tripping covenants at refinancing need preferred equity, not additional senior debt.
  • Powered industrial with defence or energy-infrastructure tenant profile. Long leases, inflation linkage, and planning moats.

The common thread is that none of these trades require a compressing cap-rate environment to work. They require disciplined sponsor selection, realistic cost inflation assumptions, and speed on execution.

M24 perspective. Germany in 2026 is a capital-selection year, not a beta year. The assets that clear our desk are ready-to-build or ready-to-reposition, located in the Big 7 or their gateway logistics corridors, and compliant with CBAM and GEG trajectory. The opportunity is not the market’s average return; it is the spread between what a disciplined equity provider can price and what a bank-constrained borrower currently pays for subordinate capital.