Intelligent Investment
European Real Estate Market Outlook 2026
January 13, 2026 40 Minute Read
As we enter the year, the real estate market is now firmly into the next cycle. However, we expect differences in this cycle when compared to previous ones. Long-term interest rates are forecast to remain elevated, limiting the potential for yield compression. Instead, returns will be primarily income-driven, with stock selectivity and proactive asset management being key.
The investment market will continue to see a gradual improvement, with improving financing conditions being accretive to returns. The living sector has now cemented its position as Europe’s largest investment sector, and we expect this to remain the case this year.
Occupational markets in most sectors are expected to see moderate improvement throughout the year, amid a somewhat weak macroeconomic backdrop. There are some standout segments, however, such as living, where an acute shortage of supply will promote rental growth. Rapidly growing demand in the data centres sector, fuelled chiefly by the AI boom, will also lead to upwards pressure in pricing in this sector.
- Europe’s Economy faces slower growth this year amid global weakness, trade policy challenges, a strong Euro, and competitive pressures. We expect one further rate cut by the Bank of England (BOE) this year, though no further cuts by the European Central Bank (ECB). Long rates will remain elevated.
- Positive sentiment in real estate Capital Markets will continue, with a gradual recovery driven by income-focused strategies and strong lending appetite.
- A structural supply-demand imbalance will persist in the Living sector, sustaining rent growth despite increased development activity in select markets. Europe’s ongoing appeal for international students will continue to act as a driver of demand for Purpose-Built Student Accommodation (PBSA).
- Logistics take-up will see moderate improvement, though net absorption is not expected to recover until next year as occupiers upgrade their facilities, rather than expand. Prime rent growth is forecast to slow further, due to increased cost sensitivity.
- Office demand will benefit from employment growth and rising office utilisation, with spillover into less central areas due to low availability and strong rental growth in city centres. New supply continues to be higher outside Central Business Districts (CBDs).
- Retail sales growth will remain stable, with strong competition for prime high street units pushing rents above quoted levels. Prime shopping centre rents will trend stronger, while retail parks will outperform due to a persistent demand-supply imbalance.
- More measured growth is expected in Hotel operating performance, with increasing inbound travel acting as the main driver amid a disciplined development pipeline.
- AI growth will further strain capacity in Data Centres, with vacancy rates forecast to compress to a historic low by the end of the year, even amid a period of record-breaking new supply entering the market.
- Sustainability will continue to drive value creation in today’s evolving regulatory landscape, with initiatives acting to strengthen resilience, reduce risk and protect asset value.
Contacts
Related Insights
Our 2026 Outlook highlights the key opportunities, considerations, and areas where value is expected to emerge. Explore sector‑by‑sector insights to help shape ...
Despite uncertainty, growth will continue for the U.S. commercial real estate market in 2026.
The Asia Pacific commercial real estate market is poised for another solid year in 2026.