Construction costs are rising. Interest rates are rising. Rents now have to rise.

Rising construction costs were cushioned by low interest rates in recent years. But with construction financing rates climbing in spring 2022, it is clear that new-build projects no longer stack up in many places. According to Brockhoff calculations, rents would have to rise substantially in more than 75% of German cities for new developments to be worthwhile for developers and investors. This applies particularly to residential and office properties.

In Essen, known as the “desk of the Ruhr region”, office rents of €15–20/m² would be needed to justify the risk of a new development. Few developers will build below that level. Yet the prime office rent in Essen is currently just €17.50/m². As a result, new projects are now being realised almost exclusively by owner-occupiers, usually with substantial equity.

At current achievable rents, building homes simply does not pay. The German government’s pledge to build 400,000 new homes a year must be questioned. There will be too few cranes on construction sites unless federal funding provides the financial injection needed to meet this ambitious target.

One attempt to encourage construction is the use of stepped rent agreements. They are increasingly incorporated into leases to give developers greater certainty in their calculations. Under these agreements, rent adjustments are linked to general cost-of-living increases during the construction phase.

Logistics rents present a different picture. The substantial excess of demand, particularly for sites close to city centres and with good transport links, is making tenants more willing to pay higher rents. Rent growth is already well under way, says logistics expert Tobias Altenbeck: “Just a few years ago, rents in the Ruhr region averaged €3/m². Today they are already €6/m². In some cases, they have even reached €8–9/m².”