Finance  ·  Leases

German Capital Flow Into U.S. Commercial Real Estate Drops Sharply

Blame higher borrowing costs and hybrid work


After emerging as one of the biggest global buyers of core U.S. commercial real estate assets following the Global Financial Crisis, German institutional investors have drastically adjusted their focus amid a rising tide of higher interest rates.

German institutions invested $1.2 billion in U.S. real estate during the six quarters leading up to the fourth quarter of 2023, marking an 85 percent decline from the $8 billion invested in the six quarters prior to that period when borrowing costs were near zero percent, according to Alex Foshay, a vice chairman and division head of international capital markets at Newmark (NMRK).

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“That dramatic decline in German investment was not only driven by the Fed’s raising of rates, but also by German open-ended funds’ concern over retail investor redemptions, preserving equity for approaching refinancings, and by the increased cost of hedging between the dollar and the euro,” Foshay said. 

The most significant pool of equity for CRE investments in the U.S. from Germany derives from open-ended funds, the largest being Deka Immobilien, Commerz Real and Union Invest. Forshay noted that these funds guarded against concerns of redemptions when opting to reduce exposure to U.S. real estate as the Federal Reserve began to aggressively hike interest rates in March 2022. 

“There are reasons why a lot of the bigger players have been very tentative over the last 18 months, not least of which is general market conditions and not wanting to catch a falling knife,” Forshay said. “There has been a significant pullback, but there are instances of deals being done and the appetite still remains.”

The big German funds have focused on diversifying their U.S. CRE holdings recently, including Deka, which has been heavily targeting U.S. logistics and life sciences properties of late with plans to reduce its office exposure. 

Of all the money German investors put into U.S. commercial real estate in 2023, 30 percent went into the office sector, down from 78 percent between 2020 and 2022, according to Foshay. On the flip side, the share going into multifamily rose to 43 percent in 2023 from just 6 percent in the 2020-2022 period.

Signs of a German retreat have also been evident on the CRE debt investment side. Aareal Bank sold a roughly $65 million nonperforming loan on the Caxton Building office property at 229 West 28th Street in Manhattan in late January at a heavy discount to borrower Lexin Capital four months after Newmark began marketing the sale. Aareal sought to offload the loan after it experienced maturity default in December 2022 amid leasing struggles from hybrid working trends. 

The German lender began pursuing buyers for the Caxton Building loan in September at the same time it was also looking to offload nonperforming debt associated with L&L Holding’s Metropolitan Tower and RXR’s 61 Broadway, both also in Manhattan.

It didn’t stop there, with Aareal also selling a $110.6 million nonperforming senior loan on Meringoff Properties’ 462 Broadway in early January with Newmark marketing the note sale. 

Aareal declined to comment for this article. 

Charles Balch, head of real estate finance for the U.S. and U.K. at Deutsche Pfandbriefbank, said selling nonperforming loans is always an option, but stressed the practice is far less common in Europe. 

“It is certainly something we are taking into consideration, as for all banks there comes a point where you look at each individual asset and you look at your views on that marketplace and you look at who the sponsors are,” Balch said. “The U.S. is a far more transactional market, so the stigma around handing back the keys is higher in Europe than it is in the U.S.”

Deutsche Pfandbriefbank was very active with originating New York deals in 2022, which included providing a $155 million acquisition loan for Meadow Partners’ $288.2 million purchase of 95 Morton Street, an eight-story West Village office building. The bank also refinanced Aurora Capital Associates’ retail building at 809 Washington Street in the Meatpacking District with a $123.4 million loan. 

An investor presentation from Deutsche Pfandbriefbank in November noted that property values of nonperforming loans in its U.S. portfolio dropped 41 percent on average in 2023, with performing loans falling 24 percent. As of September 2023, 80 percent of the German lender’s U.S. portfolio was concentrated in the office sector with 63 percent focused in New York, 12 percent in Chicago, 8 percent in Washington, D.C., and 5 percent in San Francisco. 

The Deutsche Pfandbriefbank presentation said that, at the time of origination, all U.S. office properties the bank financed were considered Class A properties, but now 5 to 10 percent are considered Class B locations. 

“Structural changes have led to partially fast and steep value decreases in formerly prime locations, also driven by short refinancing cycles in the U.S. going along with a faster and more significant increase in interest rates compared to Europe,” the bank said at the time. 

German CRE investment in the U.S. decreased 89 percent from the second quarter of 2022 to the fourth quarter of 2023, according to finance firm MSCI. There was also a 97 percent dip in quarterly volume of German CRE capital flows to the U.S. from late 2021 to late 2023, the MSCI data showed. 

The same data showed that top U.S. markets experienced a wide range of changes with German capital flows over the last two years. The New York and San Francisco metropolitan regions saw German CRE investment declines of 99 percent and 97 percent, respectively. On the flip side, German CRE capital investment grew in Atlanta and Austin, Texas, by the high triple digits over the same two-year period.

Jim Costello, chief economist at MSCI, said decisions from German funds on U.S. investments were driven by headwinds from rising interest rates as well as new challenges facing office properties in central business districts from increasing hybrid working trends.

“As they go through all the math there, the expected internal rate of returns are not lining up to deliver the returns they need,” Costello said. “If an asset is offered at too high of a price to achieve my desired return, I’ll just hold out for lower prices unless the other parts of that equation change. We are showing a wide gap between buyer and seller expectations for offices these days, CBD offices in particular.”

The big German institutional investors aggressively started to push into U.S. CRE investments in the mid-2010s, highlighted by Union Invest’s $452 million purchase in 2016 of 101 Seaport Boulevard, a 440,000-square-foot office building in Boston’s Seaport District from Skanska USA.

The spree appeared to end just before the Federal Reserve began a 16-month streak of interest rate hikes. That’s when Deka acquired a Google-occupied office property in Seattle called Lakefront Blocks for $802 million in a deal facilitated by Newmark.

“While German institutions have retreated significantly from U.S. investment since early 2022, their long-term desire to invest in the U.S. and increase their overall allocation to this market remains strong,” Foshay said. “The German open-ended funds in particular now form a consistent and significant share of the U.S. core real estate investor makeup. As the market stabilizes and investment volumes increase, the German funds will return and do so across a wider spectrum of real estate sectors.” 

Andrew Coen can be reached at