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The euro-zone commercial real estate (CRE) market remains in a precarious position, with signs of recovery tempered by persistent economic and financial headwinds. According to the latest investment outlook from Capital Economics, while transaction volumes are expected to rise in 2025, the sector is still facing tight lending conditions, refinancing pressures, and weak economic fundamentals.
Investment in euro-zone CRE reached €98.4bn in 2024, an 11% increase from the previous year but still 50% below the 2018-2022 average. Encouragingly, Q4 2024 saw the strongest quarterly performance in two years, with transaction volumes hitting €32bn—a 23% year-on-year increase. However, Capital Economics warns that this momentum has not carried into early 2025.
A renewed rise in market interest rates in December briefly unsettled investors, although five-year Euribor swap rates have since stabilised at Q4 2024 levels. The reaction in listed markets, where euro-zone REITs experienced a sharp sell-off, highlights ongoing investor sensitivity to interest rate fluctuations. Direct investment figures from Germany provide further evidence of this fragility, with Savills data showing a slowdown in 12-month rolling investment growth in January.
Capital Economics remains cautiously optimistic that transaction volumes will recover in the coming months, but it maintains that 2025 will still be a subdued year for direct CRE investment. The firm identifies three primary obstacles to a stronger recovery.
What are the current obstacles to a stronger recovery?
Firstly, while market interest rates are expected to decline gradually, they are unlikely to drop sharply. Capital Economics forecasts the 10-year German Bund yield to end the year at 2%, a level that will keep financing costs elevated. Meanwhile, euro-zone banks are expected to maintain a cautious stance, tightening credit standards for CRE lending in the first half of the year.
Secondly, refinancing challenges loom large. The high volume of debt maturities requiring additional capital will restrict liquidity and divert funds away from acquisitions, especially given current credit constraints.
Thirdly, the broader economic backdrop remains weak. Euro-zone GDP stalled in Q4 2024, and Capital Economics sees little room for improvement this year. With economic growth expectations subdued, investor sentiment in CRE is likely to remain cautious.
Despite these challenges, Capital Economics forecasts a 25% year-on-year increase in euro-zone CRE investment in 2025, reaching €120-125bn. The firm expects logistics, residential, and student accommodation to lead the way, with the latter gaining popularity as an alternative asset class.
Geographically, southern Europe is set to outperform. As we reported in the January issue of REFIRE, the latest INREV Investor Intentions Survey showed Spain overtaking France as one of the top three preferred investment destinations in Europe. Capital Economics expects Spain and other southern European markets to continue attracting stronger investor interest, reinforcing last year’s trend.
While the euro-zone CRE market may be on a gradual path to recovery, the outlook remains fragile. Investors are looking for signs of improvement in financing conditions, debt markets, and macroeconomic fundamentals before committing more capital at scale. Without these factors aligning, the recovery in 2025 is likely to be uneven and sector-specific.