European real estate market commentary - April 2026
The energy price shock could stall or slow the nascent real estate market recovery, but supply fundamentals and the extensive repricing since 2022 continue to underpin selective opportunities across real estate segments.
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Economic backdrop
The escalation of conflict in the Middle East that commenced in February has introduced significant uncertainty to the European macroeconomic and real estate market outlook. The conflict has the potential to significantly worsen the trajectory of inflation, growth and interest rates, both initially and through more pronounced second-order effects, with implications for European real estate markets over the short to medium term.
Energy price shock
The main transition mechanism is the sharp rise in global energy prices. While most of the Eurozone’s energy imports are not from the conflict region, the rise in global prices has already triggered an inflationary impulse. A flash estimate published by Eurostat on 31 March shows Eurozone inflation (HICP) increasing to an annualised 2.5% in March, from 1.9% in February. In response, the ECB has made substantial revisions to its inflation forecast - averaging 2.6% this year and peaking at 3.1% in Q2 2026.
President Lagarde stressed that the ECB is "well positioned" to navigate this shock and will be monitoring closely its "duration, intensity and propagation", with the monetary policy statement reiterating that the Governing Council would continue to "follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance".
Markets are now placing a high probability on two 25-bps hikes that would bring the ECB deposit rate back to 2.50% by year-end. Money market rates have moved in lockstep, with a 60-70 bps increase in EUR swap rates since the commencement of hostilities. These market expectations remain volatile, reacting quickly to news in either direction.
It is also worth noting that the current shock differs from that following Russia’s invasion of Ukraine in 2022, which triggered rapid monetary tightening when an energy price shock coincided with pandemic-related supply bottlenecks that met “tight” labour markets and a demand surge following the end of lockdowns.
Economy remains resilient
Despite a multitude of challenges, the Eurozone economy was resilient in 2025. Final GDP growth released in February for Q4 2025 came in slightly lower than initially reported (0.2% instead of 0.3%). The annual growth rate of 1.5% for calendar year 2025 was the fastest rate of growth in the Eurozone economy since 2022. Trade was volatile, reflecting tariffs and uncertainty, but domestic demand was solid – partly reflecting the impact of fiscal stimulus and the fact that inflation has hovered around the 2% ECB target rate since Spring 2025.
Early activity data for 2026 suggested resilience was continuing. The composite Eurozone PMI signalled ongoing expansion and in February was toward the top of the range based on readings from the past two years. Eurozone inflation (HICP) had fallen to 1.7% year-on-year in January and 1.9% in February, supporting further improvements in real incomes.
Looking ahead, a prolonged period of elevated energy costs would raise the likelihood of negative second-order effects, including entrenched cost-push inflation and challenging stagflationary pressures. By contrast, a relatively swift resolution – potentially as early as May, as some commentators suggest – could allow the ECB to look through what would be a sharp but temporary shock. In such a scenario, the impact on growth would likely prove transitory, reducing the risk of sustained second-round effects and limiting the potential for lasting impairment to European real estate market performance.
European real estate markets
For European real estate markets, this situation has arisen at a time when a nascent recovery in real estate activity and values had begun to take hold following the uncertainty caused by the April 2025 tariff shock. Since then, fundraising had improved, investor sentiment and liquidity had strengthened, and there was growing evidence of stabilisation and recoveries in valuations and transaction pricing.
Pricing and activity trends unclear
The current situation now threatens to stall the recovery again. Real estate data points remain in short supply at this stage. Publicly traded real estate has repriced over recent weeks, providing an early signal of how market conditions are feeding through to property values. European REITs sold off sharply after the outbreak of the conflict; particularly those with higher debt levels and large development pipelines. There has been some recovery in pricing in line with equity markets, but it remains volatile.
Preliminary investment volumes data from MSCI RCA shows a subdued start to the year. The ~€39bn invested in Q1 2026 reflects ~15% reduction on volumes versus Q1 2025. However, the data will not have captured the impact from the conflict given that transactions closed in March would have been negotiated weeks before the outbreak of the conflict. Likewise, Q1 2026 yield data is barely showing any movement across all major sectors.
Sentiment lower – but ‘safe haven’ potential remains
The ongoing conflict is naturally going to cause investors to pause and reflect upon planned investments and allocations for 2026. INREV survey data for European real estate suggests the situation is feeding through to sentiment for real estate, with the consensus indicators showing a notable decline in the outlooks for liquidity, development, and the broader economy.
Whilst many investors are currently modestly under-allocated to real estate, a sustained equity market downturn could quickly trigger portfolio rebalancing away from the asset class. At the same time, limited distributions from private real estate funds are likely to continue, thereby impacting investor appetite to make new capital commitments.
Investors are, however, increasingly accustomed to operating under heightened uncertainty, and any stabilisation in macro conditions could support a relatively swift recovery in activity. Further, real estate could attract selective “safe haven” inflows, particularly into prime, high-quality assets in core markets.
Following the significant correction in capital values of approximately 25% between mid-2022 through mid-2024, real estate continues to offer attractive entry pricing. In the near term, assets with inflation-linked leases or strong pass-through mechanisms in operational sectors should offer better cashflow resilience and relative value support. More positively, INREV’s consensus indicators for leasing and operational performance prospects remain upbeat.
Competing pressures in occupier markets
On the occupier side, the renewed uncertainties and clouding economic outlook will weigh on confidence and see decision-making put on hold, resulting in subdued occupier activity in the near-term. Occupiers continue to face declining supply of high-quality space amid curtailed development pipelines. This situation could intensify further, with escalating energy prices likely to have a notable impact on the price (and in some cases availability) of important construction material, thereby driving already elevated construction costs higher.
This could further constrain new supply and intensify cost-push pressures on rents. PMA’s latest European forecasts for office net-additions published in early April were revised downwards again and are now showing average net-additions for 2027-2030 of only 0.4-0.5% of existing stock, versus net additions for the period 2018-2024 of 0.7-0.8%.
Investment outlook
At this stage, our preferred portfolio positioning remains broadly unchanged. We continue to expect asset- and location-specific characteristics – such as building quality and sustainability credentials – to play an increasingly important role in driving relative performance, following a period in which sector-level dispersion dominated.
Energy-efficient assets offer resilience
The current environment is likely to reinforce both investor and occupier focus on energy-efficient assets that offer greater resilience and can command rental and pricing premia. The impact of rising energy costs upon profitability will be dependent upon both profit margins and the energy component of total costs.
Energy-intensive assets such as data centres, industrial assets used for manufacturing as well as hotels and care homes are likely to be most impacted. Retail food stores with high electricity consumption for refrigeration, and offices with older HVAC systems would also be affected. On the other end of the spectrum are assets like self-storage that are usually low energy consumers. It should however be noted that those operators most exposed to energy price volatility will often have hedging arrangements in place.
Office: Location, location, location
Demand in the office sector remained subdued in Q1’26. However, tight supply, characterised by an ongoing scarcity of modern, Grade A space in central business district (CBD) locations, alongside persistently high construction costs and capacity constraints, continue to underpin prime rental values. According to JLL, 14 of the 33 major European office markets recorded increases in prime rental levels over the first quarter.
The polarisation in demand and performance in the office sector between “best in class” and “the rest” is expected to persist. Modern assets with good amenity provision in major metropolitan CBDs should continue to perform, and prime assets are potentially offering value. Given the limited of supply of modern space, we also see an opportunity to upgrade and refurbish well-located workspaces in supply constrained major capitals and regional CBDs.
Retail: Selectivity remains key
The retail sector has stabilised, with recent valuation data pointing to a recovery across several segments following a prolonged period of adjustment. Renewed pressure on consumers and retailers in addition to ongoing pressure from online retail warrants caution - particularly given the sector’s vulnerability to second-round effects if the current situation persists. Our approach remains highly selective in terms of preferred segments.
Industrials and logistics: Structural tailwinds persist
For the industrial sector, while tenants may face short-term margin pressures, increasing geopolitical fragmentation is likely to accelerate supply chain reconfiguration, with a focus on improving resilience. More regionally, occupier demand remains well supported by structural drivers such as growing e-commerce penetration and expectations that government-led investment on defence and infrastructure will further stimulate logistics space requirements.
Access to sufficient power, preferably from renewable sources, is also high on occupiers’ agendas, creating scope for owners to garner incremental income from the provision of onsite charging facilities and power generation. At the same time, concerns around obsolescence and carbon reduction targets are driving demand for new or refurbished space against a backdrop of constrained supply. In parallel, rapid growth in AI is underpinning strong demand for data centres and powered land, sustaining elevated investor interest.
Living sectors: Supply shortage creating opportunities
The lack of supply of residential space across major Western European markets and continuing urbanisation trends are creating a range of opportunities across “living” segments. We have a focus on undersupplied mid-market rental housing segments. Careful consideration needs to be given to local regulations that are shifting to further protect residential tenants from rent increases.
We also see opportunities in senior housing, student housing in major university locations across the region, as well as parts of the hotel market with a preference for leased assets providing inflation-linked cashflows or operating hotels where the repositioning, restructuring of operations and/or completion of stabilisation activities can drive value creation.
Secondaries and recapitalisations
Lastly, compelling recapitalisation and secondaries opportunities continue to exist across real estate platforms, funds, and other holding entities. These involve providing flexible capital solutions to established management teams facing time or capital constraints in optimising value. Opportunities are being fuelled by cyclical and structural dynamics – particularly the need to address operational complexity and sustainability requirements, and capital value declines of 20-30%+ that have exacerbated balance sheet and asset funding challenges.
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