European real estate market commentary: July 2025
The Eurozone economy has shown resilience, but the outlook is clouded by geopolitical risks and fragile sentiment. Real estate markets remain supported by tight supply and there are immediate opportunities following the market correction, although negative sentiment currently weighs on activity.
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Economic backdrop
Eurozone economy shows resilience – but outlook clouded
The Eurozone economy continues to show resilience, although uncertainty from geopolitical events, including shifting trade policies, clouds the outlook. Economic growth in Q1’25 surprised on the upside with a 0.6% GDP quarterly expansion. However, this was partly driven by front-loading exports to the US in anticipation of impending trade tariffs, suggesting that the headline figures overstated underlying momentum.
Geopolitical and trade risks remain high
Political and trade risks remain significant. While attention focused temporarily on Middle East tensions, the prospect of US tariffs on EU goods quickly regained prominence. Political analysts had indicated that the EU seemed prepared to accept a temporary “framework” agreement, potentially capping US tariffs at 10% with limited EU retaliation while seeking carve-outs for metals and autos, but the risk of no deal remained.
The trade deal between the EU and the US reached at the end of July avoided this ‘no deal’ risk ahead of the deadline of 1 August, which would have entailed an increase in US tariffs to 30% and likely EU retaliation. Instead, 15% US tariffs will now apply on most goods imported from the EU. While the deal removes some uncertainty and provides, for example, a reduction in tariffs on cars, there remain uncertainties around certain goods and the full details are still to be finalised following further talks.
Sentiment and growth outlook fragile
Economic sentiment remains fragile and survey indicators, such as the Eurozone PMI, softened notably after the initial tariff announcements in early April before stabilising in June. Although most country-level surveys have rebounded from their April troughs, the likely payback from earlier export front-loading suggests that the Eurozone's strong performance had not been sustained in the second quarter. Early data for Q2 already shows a sharp reversal in exports, especially in the more trade-exposed economies, with growth expected to slow markedly or remain flat.
New defence spending, including the agreement of members to raise their defence spending to 5% of GDP in the medium-term as agreed at the recent NATO summit, could provide a boost. The same is true for additional spending on defence and infrastructure from some major European countries, such as Germany. But even with fiscal rules softened, government debt levels have notably increased following the pandemic, limiting countries’ abilities to provide large stimulus packages.
The growth outlook now increasingly depends on domestic demand, especially household consumption. Encouragingly, lower inflation and strong wage growth led to around 2% increase in household incomes last year, but actual spending rose by just 1.1%, indicating a rising savings rate and cautious consumer behaviour. Sustaining domestic demand will be contingent on further resilience in the labour market. Whilst the Eurozone unemployment rate remained at a historic low of 6.2% as of April, forward-looking indicators point to a cooling given falling hiring expectations.
Interest rate normalisation expected to pause
Monetary policy remained supportive over the last quarter, though the prospects of additional rate cuts are now becoming less likely. Eurozone inflation (HICP) in the last three months has hovered around the European Central Bank’s (ECB) 2% target – registering 2.2% in April, 1.9% in May, and 2.0% in June. The ECB delivered further rate reductions of 25 basis points each in April and June, bringing the deposit rate down to 2.00%, a level last seen in December 2022. We are already starting to see the benefits of this to real estate in terms of refinancing events, investment opportunities and sentiment towards the asset class in Europe.
With inflation stabilising close to target and after seven consecutive rate cuts, the ECB has signalled to pause further easing at the July meeting. Looking ahead, risks to inflation remain skewed to the downside, but recent ECB communications following the June strategy review suggest a measured approach, with less inclination to respond to minor deviations from the 2% target.
Fiscal support also warrants attention, particularly with increased government spending likely – in part due to the NATO agreement to raise military expenditure to 5% of GDP by 2035. This suggests that policy rates are likely to remain now at current levels or only slightly lower, in line with current market expectations. Significant risks to both inflation and growth persist, and the ECB’s review also clarified that greater uncertainty will likely mean more inflation volatility in the future.
European real estate market
Tight supply continues to support rental levels
High levels of uncertainty are impacting real estate occupier demand as businesses seem to temporarily defer decision-making. Tight supply conditions, though, continue to support rental levels. Competitive tension for scarce, high-quality stock in accessible locations remains in the office sector, reflecting the ongoing polarisation of demand, which will be a permanent feature of the market for the foreseeable future.
Whilst aggregate market vacancy rates have generally increased across the region since the pandemic (e.g. in Berlin from around 2% in mid-’20 to now c.8%), vacancy rates for Grade A space remain significantly lower. A similar trend can be seen on the submarket level, where vacancy rates in central business district (CBD) locations remain generally lower with e.g. the vacancy rate in the Paris CBD at around 4-5%, where levels are above 20% in the Peri-Défense. Going forward, supply pipelines are forecast to drop significantly from this year onwards, with net additions declining from levels of 1% of stock over the last five years to approximately 0.6-0.7% p.a. for the upcoming five-year period.
Industrial and logistics benefit from long-term demand drivers
Prime industrial and logistics rents remained largely unchanged again over the quarter with only select markets showing growth, often attributable to a new generation of assets entering the market and setting new benchmark rents. Muted conditions in the manufacturing sector is leading to those occupiers being more cost-conscious and cautious about decision-making.
However, medium to long-term demand remains supported by structural drivers such as the ongoing growth in ecommerce and occupiers focusing on scarce modern stock with features such as renewable power provision and amenities for employees, with a minor yet growing issue concerning aging stock. The current situation is also likely to accelerate nearshoring dynamics – even if tariffs are short-lived. On the supply side, speculative development has increased, but higher development costs and restrictive planning environments continue to constrain pipelines.
Retail sector outlook mixed
With consumers prioritising saving versus spending and sentiment remaining low, conditions in the retail sector remain challenging. This, together with the competition from online retail will mean ongoing pressure on store sales and maintain elevated vacancy rates. Furthermore, retailers face pressure on margins through higher staff costs.
Despite these considerations rental levels for many retail formats have likely troughed, consequently we are becoming less cautious over prospects albeit remaining highly selective with regards to segments. We expect retail parks with a low exposure to fashion as well as convenience formats including supermarkets able to provide resilient inflation-linked cashflows. It should also be noted that demand for luxury goods is likely to remain inelastic, though investment pricing here is in our opinion in general not offering fair value.
Negative sentiment weighing on investment market activity
Turning to capital markets, sentiment surveys – such as the June INREV Consensus indicators – present an encouraging picture. Despite a slight decline over the past three months, sentiment has generally remained resilient in the face of ongoing uncertainties.
Notably, investor expectations regarding the economic outlook improved marginally, sentiment around leasing and operational fundamentals remained positive indicating continued confidence in occupier markets, and, on the financing side, investors maintained a very optimistic view. However, there was a marked deterioration in sentiment concerning investment liquidity – a development that may have negative implications for transaction volumes in the months ahead.
Investment activity in Q2 2025 was already subdued, with preliminary figures indicating approximately €38.5 billion invested in European real estate, making this the slowest quarter since Q3 2023. More anecdotally, through our conversations with investors, there is a recurring theme of current and pending demand for European real estate versus the US, considering the lower interest rate environment and geopolitical circumstances.
Pricing remaining stable
Pricing across European real estate remained broadly stable over the past three months. According to CBRE’s Monthly Yield Monitor, the unweighted average yields for the 13 largest European countries (including the UK but excluding CEE) showed minimal movement during the period across all major sectors. Yield compression was highly selective, with most changes limited to 5-10 basis points, and only very few markets recording shifts as large as 25 basis points. This represents a clear shift from the start of the year, when a greater number of markets experienced more pronounced yield compression1.
Investment outlook
Opportunities following market correction
Owing to the extent of the repricing observed since the spring of 2022, our proprietary market valuation framework is signalling that immediate opportunities can be found across multiple markets and sectors. Several property types, notably the industrial and logistics segments, have rebased to attractive price points, and are supported by strong structural fundamentals despite the current elevated risk for short-term performance. Investors should also be cognisant that history points to the periods preceding economic downturns delivering above average performance.
Regarding our current asset views and our preferred sectors and portfolio positioning, our view has continued to shift to a more neutral stance across market segments. This is attributable to our expectations for further income growth in light of low future supply and despite ongoing uncertainties, and as market repricing continues to progress even if at somewhat slower speed that expected at the start of the year.
Sector views
We continue to favour industrial estates (including outdoor storage facilities), cross-dock warehouses, and urban logistics assets that are benefitting from ecommerce and urbanisation trends. We believe that the shifts in trade policy are likely to accelerate nearshoring dynamics and lead to occupiers holding higher inventories where financially viable – even if tariffs might be short-lived. There is also a growing threat of obsolescence in the sector with more than half of logistics stock in many European countries being more than 10 years old, according to JLL, and many major occupiers having introduced carbon reduction targets. Occupier requirements also continue to evolve with access to sufficient power becoming a key concern given the increasing trend of electrifying fleets.
The prevailing, and in many cases exacerbating, lack of supply of residential space across major Western European markets, along with continuing urbanisation trends, are creating opportunities across “living” segments that provide long term resilient cashflows. We have a particular focus on undersupplied affordable and mid-market rental housing segments, although 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 selective senior and student housing markets in major university locations across the region, as well as in selective parts of the hotel market. For this latter, we have a preference for leased hotels in the main destination locations providing inflation-linked base rents, as well as variable components capturing operating profit or operating hotels where the repositioning, restructuring of operations and/or completion of stabilisation activities can drive value creation.
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 emerging lack of modern space, we also see an opportunity to upgrade and refurbish well-located workspaces in supply-constrained major capital and regional CBD, capitalising on a growing supply shortfall.
1Source: Schroders Capital, CBRE, July 2025.
Important Information
Schroders has expressed its own views and opinions in this document, and these may change. Information herein is believed to be reliable, but Schroders does not warrant its completeness or accuracy. The views and opinions contained herein are those of the author, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other communications, strategies or funds.
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