European real estate market outlook Q2 2026

Scenario approach during the Middle East conflict

The ongoing conflict in the Middle East will have an impact on the global economy and on real estate markets. At this stage, the impact is hard to quantify accurately as we don’t know the direction or the likely duration of the conflict. This shrouds inflation and interest rate expectations in doubt, whilst distorting typical risk measurement tools. 

In response, we are running a week-by-week scenario approach to assessing the macroeconomic outlook. While our Global Macro Research team have a range of seven potential scenarios, the three most likely are Conflict Risks Dominate, “TACOil” (shorter conflict with trade disruption contained and oil price inflation limited) and Stagflation. Probabilities of each of these are fluctuating almost daily.  

The forecasts for growth, inflation and interest rates are shown in the tables in Figure 1. The basis for the analysis in this paper and our forecasts is our Conflict Risks Dominate scenario. In this scenario, oil reaches $120 per barrel and remains elevated at around $100 until the Autumn. Central banks hike modestly during this period. Recession is avoided, but some growth potential is lost permanently from this cycle. These assumptions result in a weaker real estate outlook for the next 12 months, but the potential for a cyclical improvement in returns remains intact. Please refer to our global macro research for more details on the outlook. 

European economic outlook (Conflict Risks Dominate scenario)

Activity

Eurozone growth has proved more resilient than feared, but the outlook has weakened at the margin as energy prices have risen sharply following renewed geopolitical tensions. The European economy remains highly exposed to imported energy, and the current shock is expected to reduce growth modestly in 2026, despite ongoing fiscal support. Domestic demand is holding up better than exports, helped by lagged effects of earlier monetary easing and targeted fiscal programmes, particularly in Germany and Southern Europe. Overall, growth remains below trend but positive.

Inflation

Headline inflation rose from 1.9% to 2.5% at March’s flash Consumer Prices Index (CPI) reading. But this rise was entirely limited to energy prices. If the conflict re-escalates and the Strait of Hormuz remains shut, inflation will continue to climb at least through the spring. Memories of the overshoot of 2021-2023 are fresh, so inflation expectations are only weakly anchored near 2%. That means an extended period of higher energy costs and supply chain disruption could have greater-than-usual second-round effects unless policymakers intervene. But if a ceasefire can be agreed, then the impact on inflation would be more transient.

Policy

The European Central Bank (ECB) will likely take an activist approach to containing inflation if the strait remains closed for an extended period — as in our Conflict Risk Dominates scenario. Even if a ceasefire can hold and shipping through Hormuz gradually picks up, disruption to fuel supply, higher shipping insurance costs, and broader supply chain disruption would prompt the ECB to expedite its timeline for hikes versus prior expectations. We therefore expect the ECB to hike once this year, before extending its hiking cycle in 2027 in response to fiscal easing.

Figure 1 – Middle East Scenario forecasts

Eurozone economic forecasts - Conflict Risk Dominates

Eurozone economic forecasts - TACOil

Eurozone economic forecasts – Stagflation

Source: Aberdeen 13 April 2026

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

European real estate market overview

European real estate had been moving through a measured recovery phase, characterised by improving liquidity and stabilising values rather than a rapid rebound. Transaction volumes remain below long term averages, but volumes had been rising and price discovery improved. Deals have continued to close, but we have already observed a sharp change in investor attitudes because of the conflict in the Middle East, with many pumping the brakes on new commitments while we are at the point of peak uncertainty. 

The improvement in sentiment observed in 2025, signified by the INREV Investor Confidence Index hitting a record high of 59.4, has clearly waned somewhat. The March 2026 index fell to 54.7, which is unsurprising given over two thirds of respondents submitted their survey responses after the conflict had begun. Investment liquidity and the economy were the two most negatively impacted indicators, clearly highlighting how investors expect the crisis to transition into return potential this year.

Financing conditions remain stable, but costs have risen. The Euribor 5-year swap rate increased from 2.3–2.5% pre-conflict to 2.6–3.0% in early April, reacting quickly to current events. Although this rise is less severe than post-pandemic shocks—since markets already expected rate hikes—we're lowering our return expectations due to tighter credit and higher rates. Residential and low-yield segments in France, Germany and Finland may be most at risk.

Listed real estate trends often indicate future market sentiment. Recently, REITs (real estate investment trusts) have seen significant volatility with mostly negative impacts, especially in rate- and inflation-sensitive sectors like residential. In Europe, 1-year returns had averaged 25% before the conflict but dropped sharply after it began. Although a brief rally followed ceasefire news, its effects may be temporary (1).

So far, we have little evidence of how valuations have been impacted. In CBRE’s March yield sheets, 83% of segments had stable yields in the three months to March, with 16% seeing yield compression. We expect April to be broadly stable as valuers wait and see how oil prices and inflation expectations evolve (2). 

Regional outlooks are diverging. The Nordics, Spain, and Portugal are less exposed to rising gas and oil prices, while Germany, Italy, the Netherlands and Ireland face greater risks due to energy import dependence. However, intra-EU trade links mean all areas will likely experience supply chain disruptions, with Spain and Italy particularly vulnerable to fertilizer shortages affecting agriculture and jet fuel shortages impacting tourism.

Overall, we believe the European real estate cycle is no longer in correction, but neither is it in a broad based expansion. The environment favours low risk strategies, with returns increasingly driven by income growth rather than yield compression. However, a sustained period of above-target inflation and higher rates is likely to push required returns higher, with investors needing higher returns to support new allocations. 

Sector outlook

Offices

Europe’s office markets remain in a period of transition. This sector will be vulnerable to recent macro headwinds, through tougher financing conditions, liquidity shortfalls and weaker leasing activity in the event the disruption persists. Non-core offices remain under intense pressure and are suffering significant value falls, particularly at the point of sale as buyers have strong negotiating positions. 

Total vacancy rates fell sharply in the fourth quarter of 2025 to 14.0%. This represented a return to a trend of peaking rates. We think this trend will continue, as total office space under construction has fallen consistently for the last five years and is now at its lowest level since 2016. New office supply, as a share of total stock, is forecast to fall to 0.6% in 2026 and 2027, just half of the long-term average (3). 

Supply is improving, but demand remains subdued. Net absorption rose slightly from -38,000 square metres in June 2025 to -34,000 in December, as tenants continue to consolidate into smaller offices in key areas. In central business districts with tight supply and strong prime rental growth, grade-B+ offices are showing better performance prospects than prime stock, particularly in Paris. 

Prime annual rental growth eased to 4.7% (4) in 2025, yet still a level more than double the long-term average. Shortages of high-quality space in good areas remain a key driver of this trend. With years supply dipping to 3.5 years from a peak of 5 years in 2023, we expect rental trends to broaden out from A-grade to B+ offices.  However, we are also cautious of the medium- to long-term given the impact of artificial intelligence (AI) on white-collar jobs. Risks in this context mean we are increasingly focused on resilience in core locations.

Industrial & logistics 

Industrial and logistics fundamentals remain comparatively robust, despite a clear ongoing moderation in occupier demand. The conflict is likely to weigh on leasing activity as occupiers wait to see how supply chain disruption plays out. Rising fuel costs will have an almost immediate impact on profitability and operational feasibility under scenarios with substantial shortages.

Rental growth has slowed from the exceptional rates seen earlier in the cycle. Prime rents increased by 3% in 2025, although the quarterly rate had slowed to a standstill by year-end. Industrial rents are growing faster with net operating income per square metre surpassing €100 for the first time in December 2025 (5).

Importantly, supply overall remains constrained: development pipelines are modest, land availability is limited, and construction costs have begun to edge higher again. There are pockets of stubborn over-supply in parts of France, the UK and Poland, but the outlook is more constrained across all markets.  Green Street analysis highlights that replacement costs remain elevated, providing a floor under values and supporting income resilience.

Structural factors like supply-chain resilience, near-shoring, and automation are now driving take-up more than cyclical growth. New European policies and taxes are expected to boost domestic demand and benefit industrial assets by supporting reindustrialisation, increasing income, and rejuvenating Europe’s ageing industrial base.

Logistics continues to offer attractive risk adjusted returns, particularly in undersupplied urban markets and key distribution hubs. 

Retail

Retail has been the best-performing sector in the last year, given its high-income return and supportive fundamentals. We believe it will continue to be resilient to the impacts of the conflict, unless a more severe scenario evolves which hits consumers harder than currently anticipated in our main scenarios. 

Investor sentiment is improving, with investor intentions remaining in positive territory (6). With €37 billion invested in 2025, retail volumes are improving. The sector accounted for 16% of the total amount invested in 2025. Retail warehouses are no longer the sole focus of capital, with some shopping centre transactions and high street retail markets back in favour (7). 

Household finances remain in good shape, with unemployment still close to cyclical lows at 6.2% in February 2026 and Eurozone real wage growth at 2.6% in December 2025. Consumer sentiment has taken a big knock from geopolitical tensions, falling to the lowest level in nearly three years in March 2026.  While sector fundamentals are in good shape, a prolonged period of stagflation and higher operational costs would take their toll.

Retail warehouses continue to perform well, but returns have slowed from their peak of 10% in March 2025 to 8% in 2025, according to data from MSCI. Shopping centres have overtaken retail warehouses to become the strongest performer with 8.4% in 2025, underpinned by income returns of 6.3%.  

Living

The residential market's long-term fundamentals are the strongest among all the sectors. Structural demand thematics remain in place and are driving resilient performance. Supply also remains largely in check. These factors are creating strong cash flow dynamics and a range of investment opportunities across the risk spectrum. Investors still favour the sector. 

Last quarter, key supply-side data improved slightly. Vacancy rates, by far the lowest among the sectors, increased 20 basis points (bps) from 2.4% in September to 2.6% in December. New developments are being absorbed, and most major cities remain undersupplied. Helsinki is starting to see a better balance, too. With low construction activity, Helsinki's vacancy rate is expected to halve in two years. Across 30 major European residential markets, vacancy rates are forecast to drop by about 10 bps per year over the next four years.

Due to ongoing low supply, residential rents are rising, although growth slowed from 6.7% in March 2025 to 5.6% in December. Residential rental growth is outpacing all other market sectors. Rents are expected to keep increasing roughly in line with real wage growth. 

Yields have remained stable under a weight of capital, with 24% of total investment directed to this sector. It is possible that pricing comes under negative pressure from higher interest rates and inflation, given the importance of long-term stable income returns in underpinning value in the sector. However, inflation linkages in the cash flows and strong open market rental growth help to offset some of the headwinds.  

Outlook for performance and risk

Geopolitical risks remain elevated, and uncertainty persists. We are moving week-by-week through our scenario-approach to assessing market conditions and we are adjusting our views as more information flows in. 

We think 2026 will be a tougher year than we had expected prior to the conflict, with rising inflation and interest rate expectations weighing on performance. We think yields at best will be flat this year, before the cyclical recovery continues in 2027, supported by a catch up in both leasing and investor allocations. In essence, the conflict in the Middle East serves to delay the cycle rather than halt it entirely. A prolonged stagflation scenario would be more damaging. A stagflation scenario currently carries a 20% probability in the view of our Global Macro Research team. 

European property returns were 5.7% as of December 2025 (8) but are projected to drop to 4.1% over the next year, 3% below earlier expectations. Three- and five-year annualised returns are estimated at 6.7% and 7.3%, with a 1% annual reduction in the five-year forecast due to conflict. Geographic differences will be significant; while markets will face challenges, the Nordics, Spain, and Portugal should remain more stable thanks to lower reliance on imported oil and gas.

Figure 2 provides a high-level view of modelled returns across key scenarios provided by our Global Macro Research team. Figure 3 shows our sector level return forecasts under our current base case. 

In conclusion

Given heightened uncertainty, we believe stronger returns can be achieved by cutting risk while ensuring strategies are linked to resilience and real-world demand drivers. This means reducing leverage, limiting exposure to development risk, keeping voids to a minimum through active management, and de-risking upcoming lease events. Once clarity on the outlook is restored, we will review risk exposures.