Europe CRE 360 - May 25

Policy shifts impact economic outlook

• Higher defense spending and looser fiscal policy in Germany will support near term economic growth in Europe.
• However, higher US import tariffs and global uncertainty will prevent much of a rebound.
• Europe is well placed to weather the tariff shock, and we expect the ECB to respond with an additional interest rate cut this year.
• Overall, we forecast eurozone GDP to grow by 1.0% y/y in 2025 and 1.3% y/y in 2026.

Capital market continued to rebound

• Total investment for Q1 2025 amounted to €162bn showing a solid +22% year-on-year increase. The increase is driven by all asset classes. 
• Following a sustained improvement over 2024, the beginning of this year continued to see expansion.
• Even with the geopolitical landscape creating ongoing ambiguity, the European macroeconomic and financial backdrop is favourable. The new direction of central bank’s monetary  policy is likely to persist.

Office letting : an encouraging Q1

• Europe's take-up recorded its first Q1 increase (+8% compared to Q1 2024) since 2022, in line with the 5-yr average (-2%). 
• Despite a generalized increase in vacancy rates, CBD locations hold up much better than secondary sectors, which are experiencing faster growth.
• Prime rents in Europe are increasing thanks to the attractiveness of the most sought-after locations (+5.1% vs Q1 2024).

The logistics market is sluggish

• Over Q1 2025, the occupier market remained stable at a low level in the leading European markets compared to Q1 2024. Apart from Spain, demand has been lagging in most countries.
• Slow start to the year for capital markets. Yield decompression has closed with stabilisation recorded almost everywhere in Europe, creating a more stable environment than in the previous years.

Retail:  promising prospects for occupier market

• Retail recorded a significant rebound of 31% in investment volume over the past 12 months. Investors show most confidence in the core markets, as Germany and the UK captured almost half of transaction volume.
• The occupier market proved resilient, notably thanks to the continuing strong flow of tourists which is returning to pre-pandemics levels. Furthermore, the slowdown of inflation rate will positively impact real wages and consumer confidence, thus boosting domestic consumption across Europe. 

Residential: activity picks up

• Residential investment volume reached €8.9bn (+31% y/y) in Q1 2025, the highest Q1 transaction volume since 2022.
• House prices and rental values increased by 5.3% and 4.2% y/y, respectively, in Q4 2024.
  In Q4 2024, rental affordability in Europe remained stable compared to the 5-year average, at average 23% of household disposable income. However, disparities persist in household purchasing power, creating investment opportunities in cities where rental demand remains strong.