European real estate market commentary - July 2026
Despite renewed geopolitical uncertainty, Europe's real estate markets continue to find support from resilient occupier demand, constrained development and increasingly attractive entry points.
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Economic backdrop
The conflict in the Middle East continues to weigh on the European economic and real estate market outlook, primarily through its impact on energy prices, inflation expectations, and confidence.
While the ceasefire reached earlier this year briefly raised hopes that the disruption would prove temporary, renewed hostilities have highlighted the fragility of the situation. Although oil and gas prices have moderated from their recent peaks, they remain volatile, leaving geopolitical developments as a key source of uncertainty for the European economy.
The recent surge pushed Eurozone inflation from 1.9% in February to 3.2% in May, before easing to 2.8% in June. The ECB responded by raising its deposit rate by 25 basis points to 2.25%, balancing the risk of broader inflation against weaker growth.
A resilient economy
Despite heightened geopolitical uncertainty, the Eurozone economy has remained resilient. Headline GDP contracted by 0.2% quarter-on-quarter in Q1 2026, although this reflected exceptionally weak and volatile Irish data. Excluding Ireland, underlying growth remained positive (+0.3% qoq), suggesting the economy entered the recent energy shock from a stronger position than headline figures imply.
Composite PMI improved to 50.0 in June, consistent with broadly flat activity rather than outright contraction. Labour markets have remained supportive, with unemployment falling to a record low of 6.2%, while retail spending has held up. Survey evidence nevertheless points to a clear loss of momentum, with businesses increasingly adopting a "no hire, no fire" approach and consumer confidence remaining firmly in negative territory.
Reflecting these pressures, the June Consensus forecast for Eurozone GDP growth has been revised down from 1.2% in March to 0.6% in June, reflecting the combined impact of higher energy costs, tighter financial conditions, and elevated uncertainty.
Beyond the immediate geopolitical risks, Europe continues to face longer-term structural challenges, including weak manufacturing activity in Germany, fiscal pressures, and political uncertainty in France, and the prospect of renewed trade tensions with the United States.
European real estate markets
Recovery continues, but unevenly
A softer macroeconomic backdrop has inevitably tempered the recovery in European real estate investment markets. While improving financing conditions and evidence of value stabilisation had begun to rebuild investor confidence earlier this year, renewed geopolitical uncertainty has prompted investors to reassess risk and delay allocation decisions.
The recovery is continuing, albeit at a significantly slower and more uneven pace than anticipated at the start of the year. However, the underlying conditions supporting the next phase of the cycle remain intact.
Investment activity has remained subdued but continues to stabilise. Preliminary MSCI RCA data indicates investment volumes of approximately €43 billion during the second quarter, leaving first-half transaction volumes approximately 10% below the same period in 2025. While activity remains below long-term averages, pricing has proved resilient. Prime yields were broadly unchanged during the quarter, though selective outward movement was observed in office and industrial markets in Germany and France, as well as within secondary assets.
Caution returns to markets
That shift in sentiment is reflected in the latest INREV Consensus Indicator, which fell from 54.7 in March to 41.0 in June, representing the largest quarterly decline since the survey began and a return to contraction territory.
The decline was broad-based and driven primarily by a deterioration in macroeconomic expectations rather than underlying property market fundamentals. In total, 74% of respondents reported higher perceived investment risk compared with the previous quarter. Expectations for investment liquidity also weakened materially, with the liquidity sub-index declining sharply and highlighting increased caution around transaction markets.
Fundamentals remain resilient
Encouragingly, however, the leasing and operations component remained marginally above the expansion threshold, while the financing sub-index, despite easing from its recent peak, remained comparatively resilient.
Overall, the survey suggests that investors have become more cautious but continue to view underlying occupier market fundamentals as relatively robust.
Investment outlook
Geopolitical uncertainty may continue to defer transactional activity in the near term, but it has not materially altered the medium-term investment case. For investors with available capital, the current environment is likely to reward patience, selectivity, and the ability to differentiate between assets supported by durable income growth and those more exposed to weaker occupier demand.
As markets move beyond the broad repricing phase of 2022 to 2024, we expect future performance to be driven increasingly by asset-specific characteristics, including location, building quality, sustainability credentials, income durability, and operational execution, rather than by broad sector beta or further yield compression.
Supply constraints define the market
Increasingly constrained supply is likely to be central to investment performance over the next phase of the cycle.
Elevated construction costs, tighter financing conditions, planning delays, and labour shortages have significantly curtailed development activity across most sectors. Recent geopolitical developments and higher energy prices may reinforce these pressures further by increasing construction costs and reducing development viability.
As a result, development pipelines continue to shrink despite occupier demand remaining broadly resilient. PMA's latest European forecasts project office net additions of only 0.4-0.5% of existing stock annually between 2027 and 2030, significantly below the 0.7-0.8% annual average delivered between 2018 and 2024. This sustained reduction in new supply should support rental growth and occupancy for modern, well-located assets, creating a clearer route to income-led returns in supply-constrained markets.
Occupier markets remain resilient
Against this backdrop, occupier markets have so far demonstrated greater resilience than investment sentiment would imply, reinforcing the case for income-focused strategies.
Office leasing activity across twenty-six major European markets increased by 22% during the second quarter, recovering to within around 7% of the ten-year quarterly average following an unusually weak first quarter. At the same time, half of the monitored office markets recorded further prime rental growth, while only four markets have not experienced prime rental growth over the past twelve months.
Although vacancy has continued to edge higher at the overall market level, it is expected to stabilise as new supply declines. The structural divergence between modern, high-quality buildings and older secondary stock therefore remains firmly intact.
Quality continues to win
We continue to favour well-located office assets with strong sustainability credentials and attractive amenity provision, where constrained supply and occupier preference can support rental growth, while also seeing opportunities to refurbish and reposition existing buildings in supply-constrained CBD markets.
Selectivity is paramount
Within retail, valuations have broadly stabilised following several years of repricing, although the sector remains sensitive to weak consumer confidence and continuing structural change. We therefore remain highly selective, focusing only on assets and sub-markets where favourable local supply-demand dynamics, resilient tenant demand, and clear income growth prospects can justify fresh capital deployment.
In the industrial sector, rental growth has moderated from the exceptionally strong pace recorded over recent years, with only a small number of markets now showing prime rental growth over the quarter and the 12-month period.
However, the sector continues to offer attractive long-term investment characteristics, supported by supply chain diversification, continued growth in e-commerce, increasing investment in defence and infrastructure, and ongoing digitalisation.
At the same time, constrained development activity, increasing sustainability requirements, and growing occupier demand for access to renewable power continue to favour high-quality logistics assets. Rapid growth in artificial intelligence is also supporting strong demand for data centres and powered land, while owners are increasingly able to enhance income returns through on-site energy generation, battery storage, and electric vehicle charging infrastructure.
Housing shortages continue to create opportunity
Finally, structural housing shortages across major Western European markets continue to create attractive long-term investment opportunities across living segments.
Undersupplied mid-market rental housing continues to be our focus, where defensive demand characteristics and limited new supply can support resilient income growth. Careful market selection remains essential given evolving regulatory frameworks in several jurisdictions.
We also continue to identify opportunities in senior housing, purpose-built student accommodation, and select hotel investments where repositioning, operational improvements, or completion of stabilisation programmes can unlock additional value alongside resilient, inflation-linked, income streams.
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