European real estate market outlook Q3 2026

European economic outlook

Activity

June’s flash Purchasing Managers’ Index suggests the Eurozone economy was pushed close to stagnation by the energy-cost shock. This weakness should unwind during the second half of 2026, as energy markets normalise. That said, Germany’s fiscal easing is likely to take longer to affect the real economy than first hoped. We expect Eurozone growth of 0.8% in 2026, followed by above-trend growth of 1.8% in 2027 and 1.7% in 2028.

Inflation

The sharp fall in liquid fuel prices during June pulled headline inflation down from 3.2% to 2.8% in June. Fading seasonal distortions and reduced transport-service pressure should also help services inflation moderate. Slower wage growth is expected to support further disinflation, with headline inflation forecast to average 2.5% in 2026, before falling to 1.7% in 2027 and 1.9% in 2028.

Policy

The European Central Bank raised rates to 2.25% in June, but this is expected to mark the end of its response to the energy shock. We expect a pause in July and believe that the data should show limited second-round effects by September. Policy is likely to remain on a protracted hold, although fiscal easing could eventually prompt another hike later in the forecast horizon.

Figure 1 – Eurozone economic forecasts

Source: Aberdeen, Haver, June 2026

Forecasts are a guide only and actual outcomes could be significantly different.

European real estate market overview

As of June 2026, we continue to rate global real estate as a ‘+1’ recommendation in our multi-asset investments houseview (maximum +4 and minimum -4), a view that has been steady for the last year. Bond yields are at cyclical highs and the growth outlook remains positive, although weak. This should support returns in the asset class over the next 12 months. 

Annual total returns for continental Europe were 5.5% to March 2026, placing the region among the stronger global performers. That said, we expect the second quarter to have been tougher, as geopolitical stress weighed on confidence and pushed interest rates higher in the region². Market performance remains income-led and uneven, rather than broad-based, with ongoing sector polarisation and Nordic and Southern European markets outperforming the largest markets of Germany and France. 

Operationally, European real estate continues to perform well. Vacancy rates remain low, despite recent modest increases, and rents continue to rise at a pace exceeding inflation. Development continues to be constrained with EU construction new orders falling 15% year on year in May 2026³.

Transaction markets reverted to their subdued state after early optimism in the first quarter. Investment was up 14% year on year in the first quarter, but activity slowed in the second quarter and volumes to May were at a five-year low⁴. Geographically, Spain and Sweden had the strongest increases in capital flows, with Germany and France remaining subdued relative to historic norms. Living and alternatives are seeing stronger capital allocations than traditional commercial sectors, with office volumes reaching just 20% of their annual average volume by the middle of 2026. 

The outlook for capital flows is improving, with more capital available for deployment. The latest global capital-raising surveys by INREV and ANREV show an increase in institutional core capital returning to the market, with $41 billion raised for European strategies in 2025. Around 70% of that capital originates from long-term investor pools, such as insurers, pension funds, sovereign wealth and government institutions – the highest share in these groups since 2020.

Financing conditions remain supportive. Five-year Euribor swaps are moving in a range of 2.6-2.8%, and the recent oil-price reversal has eased the threat of materially higher debt costs. Banks’ lending appetite remains focused on high-quality stock. Margins fell by a further three basis points (bps) in our June survey⁵, taking them to the lowest level in four years. At the current cost, leverage is accretive in many markets, with performance data from the MSCI Pan-European Pooled Fund Index (PEPFI) showing that debt added 52 bps to fund performance across balanced funds over the 12 months to March 2026⁶.

Where pricing is headed from here is the crucial question. The Middle East had threatened to upend the expected performance improvement. Public-listed real estate sold off after the Middle East shock, with the UK and Europe (both -16% month on month) underperforming wider equities and other listed regions. However, the ceasefire agreement points to a normalisation in markets, with European real estate investment trust (REIT) returns recovering 10% of their losses in the week after the announcement⁷. Retail, healthcare and industrials have outperformed, while offices and German residential have lagged over the last 12 months.

Direct market valuations are broadly stable, but the share of markets recording weaker yield movements in CBRE’s yield sheets increased. Across 384 European segments, 80% of yields were stable, 16% were weaker, and 4% were stronger in the second quarter. The outward shifts have been concentrated in lower-yielding office, retail, industrial and living markets. Stronger segments include Irish and Swiss offices; French, Swiss, Swedish and Spanish retail parks; Danish and Swedish industrials; and Swedish senior housing. With inflation and interest-rate expectations moderating in recent days, we expect valuations to remain stable in the third quarter. 

Broadly stable yields support our view that relative real estate pricing remains attractive from an inflation-adjusted perspective. All-property, real-yield margins in Europe increased in the second quarter to 5.8%, up from 5.2% in March, closing the gap on the 10-year average of 6.2%. A small increase in inflation supports asset pricing, where indexation captures this increase, while bond yields have fallen back from peak levels seen in March. Stabilising relative price trends would be a significant positive for a market that has been subjected to a series of false starts in its recovery story.

Overall, the market is improving but remains bumpy. Supply constraints, rental growth and stable cash flows are supportive, while varied rate expectations, fragile investor sentiment, and stop-start liquidity weigh on the prospect of a more aggressive re-risking.

Sector outlook

Offices

Europe’s office markets remain highly bifurcated. Aggregate vacancy rates are still above 14%, but this largely reflects obsolete or poorly located space, rather than a collapse in demand for prime and future-fit offices. Tenants remain focused on efficiency, quality and location, while price discovery in non-core offices continues to hurt index performance, especially in Germany. Offices returned just 3.6% per annum in the European quarterly MSCI sample in March 2026, the lowest of all sectors, and ended a run of seven consecutive quarters of improvement. 

Future supply is the main support mechanism. Office space under construction has fallen by around 35% to the lowest level for a decade, and future supply is likely to tighten sharply. Vacancy rates in central business districts (CBDs) are materially lower than the headline rate, with Paris’s CBD around 6%, central Amsterdam’s below 5%, and Madrid’s the tightest market at 3%. The number of years of supply at the aggregate level remains elevated and is only below long-term averages in Lisbon, Madrid, Rotterdam, Amsterdam and Dublin. 

Modest office allocations remain sensible where efficiency and quality are maximised. Core markets should remain undersupplied, but B+ offices⁸ in good locations may offer better value where reversion capture outweighs retrofit costs. Business parks remain structurally challenged and susceptible to job erosion from artificial intelligence (AI). 

Longer-term demand risks from AI are acknowledged, but technology companies could also generate new demand in selected markets. The office strategy therefore remains deliberately selective: avoid broad office market beta; and focus on central locations, strong sustainability credentials, and assets capable of meeting future occupier efficiency requirements. We prefer Madrid, Munich, Amsterdam and Barcelona over a three-year horizon. 

Industrial & logistics 

Industrial and logistics fundamentals remain soft, but we expect this to improve. The Aberdeen Investments’ global macro research team is forecasting 1.8% GDP growth in the Eurozone next year, which would be a significant step change in demand drivers for the sector⁹. Industrial and logistics returned 6% over the year to March 2026¹⁰. Despite showing a slowdown from 7.7% returns in June 2025, the sector continues to beat the all-property average.

Operationally, the sector remains softer than to which we've become accustomed. While this is a protracted period of tenant caution, long-term structural demand drivers should pair nicely with stronger GDP growth next year. Take-up in the first quarter of 2026 increased by around 10%, led by third-party logistics and retail. Demand is resilient but continues to be efficiency-driven rather than purely expansionary.

Rental growth has moderated in line with the market conditions, with prime rents up 2.9% year on year. Industrial and manufacturing rents are rising fastest at 5.1% and 4.3% respectively, compared with logistics at 2.4%. Vacancy rates have increased in some markets, particularly in the UK and France, but we expect this to drop back as new supply is set to fall back sharply. Construction costs, limited land availability, a developer focus on data centres in industrial zones, and muted development pipelines should keep new supply constrained. Meanwhile, structural drivers, such as reindustrialisation, nearshoring and defence are underpinning occupier demand.

We retain a positive view, with a preference for multi-let and light industrial where pricing power is stronger than in long-let logistics. Industrial forecasts remain attractive, with combined sector returns of around 7.8% in year one and 8.8% annualised over three years.

Retail

Retail has been the standout sector over the past year and remains favoured in our houseview. Our TACOil scenario helps protect the sector from a more painful inflation and labour-market shock. Meanwhile, vacancy rates are tight, rents are rising, and new supply is minimal. Annual returns have been strong, with the overall sector delivering 7.3% to March 2026. First-quarter returns accelerated to 1.9%. 

A broader range of retail formats is now performing. Retail parks remain attractive, with a vacancy rate of just 3.7% and rental growth climbing to 2.9% per annum¹¹. Spain, Sweden, France and Germany are our preferred markets for this format, but malls, high streets and convenience formats are also seeing better fundamentals across many markets. Capital is shifting back in favour of retail, with new retail park funds launching recently. A shortage of suitable assets on the market is limiting deal flow, with only €14 billion closing in the first half of 2026. We are starting to see an increase in opportunities as funds facing redemptions start to approach deadlines to return capital to investors. 

Spreads aren’t tight in this sector due to higher yields, so the main risk is the consumer. Confidence weakened to its lowest level since the war in Ukraine started and softer labour-market conditions could challenge spending. But recent falls in oil prices should help real incomes and sentiment to improve. E-commerce is growing, but retail parks are increasingly repositioned towards convenience, services and leisure.

We prefer stabilised, modern schemes with limited capital expenditure risks and clear catchment strength. Retail remains a supportive allocation to diversified portfolios, but asset selection matters more as the sector’s recovery broadens. Total return forecasts remain strong, with retail parks around 9.4% annualised over three years and all retail around 8%.

Living

Residential drivers remain structurally supportive, with deep supply-demand imbalances and resilient income acting as the key foundations. It continues to be a top sector for new capital allocations, attracting €29 billion of transactions in the first half of 2026 – €9 billion more than offices, the second-largest sector¹². Residential assets accounted for 29% of portfolios in the INREV asset level index in March 2026, up from 13% in 2015, and reached new highs¹³. Investor sentiment indicators point to investor allocations to the sector growing further this year.  

Housing completions aren’t expected to meet housing requirements across Europe’s private-rented sector markets, and purpose-built student accommodation remains far below UK levels across much of continental Europe. German construction output has been in contraction since 2020, falling a further 2.4% in May 2026 to its lowest level for a decade¹⁴. This supports rental growth and resilient occupancy, while the latest inflation and interest-rate expectations should limit pressure on affordability, operating costs and relative pricing.

Improving net-operating income is a crucial performance driver. Data from MSCI shows that operational efficiency has improved, with residential operating costs falling from around 30% to 25% of gross income over the last 10 years¹⁵.

Residential performance has been improving in recent quarters. The sector returned 6.7% over the year to March 2026, the second-strongest sector after retail and one of only three segments to see an improvement in performance in the first quarter. We retain a favourable stance, but with increasing conviction in strategies that create value.

Outlook for performance and risk

Peak uncertainty may have passed, and recent market moves in oil, swaps, and bond yields are positive signals for real estate. But sentiment is still fragile and further shocks are possible, so the appropriate stance is gradual re-risking rather than a wholesale move up the risk curve.

Our three-year annualised European all-property total return forecast is 7.6%, with a five-year forecast of 7.9%. The path is expected to improve from 6.3% in year one, to 7.8% in year two, and 8.8% in year three – supported by stable income, modest capital growth and limited yield compression. Overall, industrial and retail are expected to outperform over three years, while residential is set to deliver attractive risk-adjusted returns. Offices remain bifurcated but with increasing scope for different risk strategies. Geographically, we favour Southern Europe, the Nordics and pockets of the market in Germany, France and the Netherlands.

Leverage remains accretive where income is secure and debt costs are manageable. A diversified portfolio across Germany, Spain, the Netherlands, Sweden and France – with around 40% loan-to-value – is expected to deliver stronger returns than our standard forecast. This highlights the importance of portfolio construction and segment selection.

Our view is constructive but still selective. Macro headwinds are fading and we’re hopeful of above-trend growth in 2027. Inflation should support indexed income without creating a valuation problem and we expect rental growth to remain intact. But fragile sentiment, stop-start liquidity and relatively elevated debt costs mean asset management, asset selection and risk discipline will drive performance. 

Figure 2: European total return forecasts, June 2026