The economic boom that began in Germany after 1871 with the unification of the empire following Wilhelm I's coronation as German Emperor in the Hall of Mirrors at Versailles on January 18, 1871, also had a significant impact on Potsdam, which overnight became an imperial residence city. During the subsequent Gründerzeit years, the German Empire experienced enormous growth, which was reflected in Potsdam. The city’s infrastructure underwent a rapid modernization.
In 1874, the city’s magistrate commissioned the English "City of Potsdam Waterworks Company" to establish a central water supply and operate a waterworks, which began functioning just two years later. The pipeline network was continually expanded over the following decades, connecting additional city districts and several surrounding villages.
The rising water consumption led to increased wastewater, prompting the magistrate to order the construction of a central underground drainage system in the late 1870s. However, it was not until 1889 that the first municipal sewage treatment plant began operations in the Berliner Vorstadt. With the construction of an additional treatment plant five years later, the entire urban area was equipped with a functioning sewerage system.
Alongside modern water and sewage systems, the city also advanced its gas and electricity supply. From 1906, street lighting was gradually converted from gas and oil lamps to electric lighting. The city’s first power plant, which opened in 1902, also paved the way for the electrification of the tram system, which began in 1907. Since 1879, the city had already operated a "horse-drawn railway," which was extended across the Lange Brücke to the main train station in 1888. In 1908, a partial line to Nowawes opened, and by 1913, the tram network was extended to the airship harbor. The area on the northwestern shore of Lake Templiner, where the first Zeppelin had landed in 1911, was envisioned by the city, together with Luftschiffbau Zeppelin AG Friedrichshafen, as a future European aviation center.
Transportation infrastructure was also expanded. The Sacrow-Paretz Canal (1874–1878) and the Teltow Canal (1899–1906) were built in the surrounding area. The stone Glienicke Bridge was replaced with a modern steel construction in 1906/07. In the city center, main streets were paved with asphalt between 1905 and 1910.
Public health care evolved from basic orphan and poor relief into modern healthcare. In addition to the existing municipal hospital on Türkstrasse, the "St. Joseph’s Hospital" opened in 1872, followed by the "Auguste Victoria Hospital" and the Oberlinkrankenhaus in 1890. Since 1879, the Oberlin Association had established a large area in Nowawes with facilities for individuals with physical and mental disabilities. Similar goals were pursued by the Hoffbauer Foundation, founded in 1901, which built various diaconal institutions such as orphanages, schools, hospitals, educational buildings, and the Island Church on the Tornow Peninsula (today Hermannswerder). In 1913, the Werner-Alfred-Bad became the first public swimming pool.
The demolition of the city wall in the 1890s spurred a construction boom in Potsdam’s suburbs. The population increased from 43,901 at the time of the empire’s founding to over 62,000 in the years preceding World War I. Entire streets of Gründerzeit-style buildings emerged in the Berliner Vorstadt, Brandenburger Vorstadt, and southern Babelsberg. Wealthy industrialists, senior officers, and government officials built stately villas in Neubabelsberg and the Nauener Vorstadt, designed by prominent architects.
In the city center, old buildings gave way to new, prominent administrative structures such as the Imperial Post Office (now the main post office) and the provincial administration building (now the town hall). On the outskirts, new barracks were built for Potsdam’s guard regiments, further emphasizing the city’s status as an imperial administrative and garrison center. Craft, trade, and service businesses, such as the M. Hirsch department store established in 1879 on Brandenburger Straße, became major economic drivers, catering to the needs of the court, garrison, administration, and citizens.
Industrial operations were primarily concentrated in nearby Nowawes, which merged with Neuendorf in 1907 to form the rural community of Nowawes. Along the Berlin-Potsdam railway, new factories sprang up, including the Orenstein & Koppel locomotive factory in 1899. On the Telegrafenberg, modern facilities for research and observation were built, including the Astrophysical Observatory (1876–1879), the Meteorological-Magnetic Observatory (1888–1890), and the Geodetic Institute (1892). These neo-classical brick buildings by Klinger created a unique science park that established the Telegrafenberg as a globally recognized research center.
In November 1911, the Berlin Bioscop Film Company began converting an unused factory building and its grounds in Nowawes, laying the foundation for Potsdam’s ongoing success as a center of filmmaking with its first movie shot in 1912.
During the July Crisis of 1914, Wilhelm II signed the imperial army’s mobilization orders at the New Palace. World War I profoundly affected life in Potsdam. The uniformed soldiers vanished from the city’s streets as the industry shifted to war production. Between 1914 and 1917, the Cecilienhof Palace in the New Garden was constructed in English country house style for Crown Prince Wilhelm’s family. Despite Wilhelm II’s abdication in 1918, the crown prince lived there until the end of World War II. By the war’s end in 1918, 1,664 Potsdam residents were reported dead on the battlefields.
