The Art House Tacheles used to be the epicentre of the alternative art and culture scene in Berlin, an impressive five-storey building in the heart of the capital dating back to 1908 and occupied by artists after the fall of the Berlin Wall.

But in 2012 the raves were over and the artists were kicked out when the building was sold to a New York investor and renovated to make room for apartments, offices, stores, a supermarket and a Swedish photography museum.

For Oliver Putzbach, a 52-year-old Berlin native who used to live nearby, Tacheles' transformation symbolises that of the capital itself.

While its economy grows and investment capital pours in, long-time residents like Putzbach fear it is losing its edgy character and bohemian charm that had its former mayor famously declaring over two decades ago that Berlin was “poor but sexy."

"It looks the same as a typical train station in Germany ...just like a mall," Putzbach said about the building he remembers as a multicultural village where he used to perform with his band Beat Organization three times a week.

"Berlin has sold its soul," he said.

For decades, Berlin stood out among European capitals, poorer than the rest of the country because of its unique history as a divided city and its costly reunification.

For the past 10 years, however, the capital's growth has outpaced the sluggish overall performance of Europe's largest economy.

Last year, Berlin's economy grew by 0.8% while the national one contracted for the second year in a row, data showed on Friday. As a result, Berlin's economic output per capita, which long lagged that of Germany, moved further above the national average, with 54,607 euros and 50,819 euros, respectively.

Berlin outperforms Germany in GDP growth

"Berlin was not wealthy, but that became the foundation for getting richer: Berlin attracted young talent who came here to reshape their lives and make their ideas reality," said Martin Gornig, researcher at the German Institute for Economic Research DIW Berlin.

The city has become Germany's startup capital, overtaking Munich with around 500 companies founded each year, and digital consumer services companies, such as e-commerce group Zalando (ZALG.DE), opens new tab or fintech N-26, calling Berlin home.

Tesla's (TSLA.O), opens new tab gigafactory about an hour away and the city's new airport that opened in 2020 after multiple delays, also brought thousands of new jobs to the area.

Berlin's unique blend of high culture, counterculture and history has also made it a major tourism destination, Europe's third behind London and Paris in terms of overnight stays.

NOW RICH AND EXPENSIVE?

Now, however, Berlin is becoming a victim of its economic success.

Rising costs are threatening livelihoods of artists and bohemians who after the fall of the Berlin Wall flocked here, drawn by low rents and many abandoned buildings.

Rising prices are also now starting squeezing the budgets of those who followed the startup boom decades later.

Rents have been rising faster than the German average, soaring food and drink prices have spurred calls for a doner kebab price cap and Berlin's techno clubs have begun charging costly entry fees, with some, such as Watergate, forced to shut down.

"Prices are getting very high and if you go to Berghain or Kitkat, now it's not sexy," said Sergei Egorchenko about two of its most iconic clubs. "Now it's like commercial sexy, you know?"

Egorchenko, a cloud engineer, who moved to Germany in 2016, has lived in Berlin since 2021 and is now sharing with his partner, Claudia Marti, a 70 square metre (753 square ft) three-bedroom apartment in the Mitte neighbourhood. They sublet one of the rooms to be able to cover 1,800 euros ($1,950) in rent.

"We are sharing but it is fine," said Marti, who works as a cancer researcher at the Charite hospital.

Berlin's notoriously tight housing market meant it would be hard to find another place they could afford on their own, she said.

Prices and rents in the capital had stayed low for years after Germany's reunification in 1990 because most jobs there were relatively low-paying ones in the public sector. The global resurgence of inflation but also the influx of private capital and foreign professionals, like Marti and Egorchenko, changed that.

While Berlin rents remain below those in some other major German cities, they have risen about 32% since 2021, data from housing portal ImmoScout24 showed, well above the national 20% average.

Despite its transformation, the capital is still catching up with Germany's traditional business centres in the west and south.

Last year, local unemployment of 9.7% still well exceeded the national 6.0% average. Berlin's gross average monthly earnings of 4,634 euros also remain below wages in Munich, Hamburg, Stuttgart or Germany's finance hub Frankfurt.

Yet Berlin has already made big strides over the past decades, Gornig said.

"If you look back 20 years, Berlin has already developed from a pure seat of government into an economically strong centre, which is quite a remarkable development."

And while long-time Berliners say they miss its edgier, subversive side, recent transplants say there is still much to admire about the city. Egorchenko, for example, says street events, such as Love Parade or Rave the Planet continue to reflect the openness Berlin stands for.

"Some places are losing sexiness, but in general, I would say Berlin is still sexy, it's still cool, it's still like ... wow."