Economic Outlook
The global economy continues to be characterised by instability and unpredictability. Growth is weakening across different regions driven by weak consumer spending, which is underpinned by an energy shock. We see the world economy growing less than had been anticipated at the beginning of the year.
The Eurozone economy is now expected to grow by 1.0% in 2026, compared to 1.2% at the start of the year. In the U.K. it is now expected to grow by 0.7% compared to 1.1%.
Headline inflation is on the rise, but core inflation remains subdued on the back of weakening economy. We see limited policy rate increase in 2026.
Capital Market on an Elongated Recovery
The key variable remains the duration of the Iran conflict. In this context, slower activity in 2026 seems likely rather than derailing of recovery.
Total investment for Q1 2026 amounted to €181bn showing a consistent 10% year-on-year increase.
The different asset classes are showing contrasting resilience, at different stages of their recovery phase. Logistics and offices continue to record year-on-year growth, while retail and hotels show a stabilisation in their volumes after the rebound observed in recent quarters.
Office Letting Volumes off to a Slow Start in 2026
Office letting across the 18 main European markets totaled 1.67 million sqm in Q1 2026, representing a 16% year-on-year decline and remaining below the five-year average, primarily due to a slowdown in large-scale transactions.
Prime office rents continue to rise across most European cities, driven by a persistent lack of new supply.
The vacancy gap between CBD and non-CBD locations continues to widen, reflecting the ongoing shift away from non-CBD areas.
A New Wave of Uncertainty in The Logistics Market
The occupier market recorded contrasting trends across Europe. Take-up increased by 10% in the leading European markets. Demand strengthened in the UK, Spain, Italy, Poland and Germany whilst take-up dropped in France and the Netherlands. Rents rose by 2.7% in Q1 2026.
The Middle East crisis and its share of uncertainties has cooled investors’ confidence. Stable overall in Europe, prime logistics yield movement ahead will depend on the ECB’s decisions on its policy rates and subsequent impact on 10-year government bonds.
Retail: Renewed Caution may lie Ahead
The sector’s recovery as an investment asset over 2025 may now be compromised if the stability in volumes seen in Q1 continues. Nevertheless, retail remains a core segment for investors with Germany and the UK still capturing almost half of transaction volumes. The strong growth in shopping centre investment over the year continues.
The pickup in retailer business optimism observed in 2025 is also compromised due to the ongoing war in the Middle East and its repercussions on price levels. However, consumer confidence has not yet followed and even shows slight improvement compared to Q4 2025.
Residential: Strongest Q1 Activity since 2022
Residential investment volume in Europe reached €12.0bn (+21.2% y/y) in Q1 2026, thanks to a greater number of large transactions driving upward residential activity.
The European residential investment market remained essentially driven by domestic investors accounting for 61% of the total investment volume. Nevertheless, Q1 is marked by a growing participation of cross-border investors (+11 p.p y/y).
House prices and rental values increased by 5.1% and 3.9% y/y, respectively in Q4 2025. Despite the ongoing regulations in Europe, rental values are still booming in most cities to reach new record levels.