European Real Estate Market Outlook Midyear Review 2026

Welcome to CBRE's European Real Estate Market Outlook Midyear Review 2026.

The defining geopolitical development of the first half of 2026 was the US-Iran conflict, which reshaped Europe's macroeconomic backdrop. The energy price shock caused by the conflict raised Eurozone headline inflation and prompted the European Central Bank (ECB) to raise its policy rate, a directional change from our January outlook, when we expected short-term interest rates to remain on hold or fall. We now anticipate no further ECB hikes this year, but long-term interest rates will stay elevated, keeping the potential for property yield compression limited.

Despite this tougher backdrop, most European economies continued to grow and most real estate sectors evolved broadly in line with our early-year expectations. Income remains the main driver of returns, and rental growth has generated capital value gains for prime assets, even as some sectors saw outward yield movement in certain locations. The cost of debt rose in the first half of 2026, but lender appetite remains strong. As debt costs ease, we expect a rebound in investment activity in the second half that leaves full-year volumes broadly flat to modestly higher than in 2025.

On the occupational side, data centres and living remain the standout sectors, with demand-supply imbalances driving rental growth. Occupational markets in most other sectors are set for a firmer second half, as demand deferred during a volatile first half is released, and sentiment improves.

• The US-Iran conflict has reshaped the outlook for the Economy, lifting inflation and prompting the ECB to raise rates rather than cut them as expected in January, though no further hikes are anticipated this year. Growth will stay modest and long-term interest rates elevated.
• Positive momentum in Capital Markets will resume in the second half, as easing debt costs and strong lender appetite support a rebound in investment, with alternatives attracting a growing share of capital.
• A structural housing shortage will continue to sustain rental growth in the Living sector, which remains Europe's largest destination for investment. Europe's enduring appeal to international students will keep driving demand for Purpose-Built Student Accommodation (PBSA), where persistent undersupply supports occupancy and rents.
• Take-up in Logistics will continue to grow amid improved occupier sentiment, but net absorption will not recover until next year as upgrading to better facilities, rather than expansions, remains the focus. New sources of demand are emerging from Chinese occupiers across a variety of sectors, and higher European defence spending.
• Demand for Office space will strengthen in the second half as deferred demand is released, while a tightening supply of new space will drive rental growth in fringe and core CBDs. The implementation of AI tools across the corporate organisations is raising the quality of space occupiers want, even if it shrinks their footprint.
• A weaker consumer environment will weigh on Retail sales growth. However, certain upside risks, including higher real disposable incomes relative to recent crises, and elevated savings rates, may provide resilience. Despite the downward revision to the outlook for retail sales, occupier demand remains robust and focused on scarce prime locations.
• More moderate growth is expected in Hotel operating performance, as demand normalises after a strong first half, with regional divergence widening and rising costs set to squeeze operating margins.
• Rapidly growing demand driven by AI will keep straining capacity in Data Centres, driving vacancy rates to record lows. Power procurement and grid constraints remain key bottlenecks.
• Regulatory change continues to shape decisions in Sustainability, even as reporting requirements narrow, while record summer heat has moved physical climate resilience up the agenda. Value increasingly rests on the smart timing of capital expenditure.