
By Petra Blazkova, Europe Head of Core and Core-plus Research and Strategy, LaSalle Investment Management
European real estate has begun 2025 at a crossroads. The market is coming out of a difficult couple of years, driven by a period of intense capital market correction in response to the new reality of elevated interest rates, higher government bond yields and challenging macroeconomic conditions.
This new phase of the European real estate cycle is characterised, among other things, by the shifting composition of what now constitutes a balanced portfolio.
Take, for example, an investor weighing up the relative merits of allocations to the logistics or office sectors. Over the past decade, European logistics real estate has been arguably the standout property type, earning a substantially larger role in investor portfolios with the highest returns of any European property type in eight of the last 10 years.
But over the past 12 months we have seen a steady erosion of industrial’s advantage on a sector-wide basis. The 170 basis-point rise in the vacancy rate of European logistics in 2024 was greater than seen in any property type, acting as a drag on rental growth to a near-inflation pace.
At the same time, some segments of the office sector are benefiting from tailwinds. Prime offices in central locations with low vacancies have been experiencing strong growth. Vacancy within the City of London office market, for example, has now declined for five consecutive quarters. However, older assets in out-of-the way locations and commodity stock continues to attract limited demand.
The combined effect has been one of two ships at the very least approaching one another in the night: in this top-performing, centrally located market segment, office rent growth has often been stronger than logistics over the last year. Prime office rent growth in London, Paris and Amsterdam exceeded prime logistics rent growth in Warsaw.
That being said, the logistics market continues to offer a range of highly investable opportunities. But the trend supports two conclusions about how the European real estate market of 2025 is forecasted to differ from that of recent years.
Firstly, the moniker of “beds and sheds”, a term coined to describe an approach to portfolio construction that focuses on the residential and logistics sectors as a safe haven for allocators to real estate, amid the challenges facing offices and retail, is now too simplistic to accurately describe the European opportunity set.
That’s because in retail, like offices, rents have also converged with European logistics. The retailers left standing have been thoroughly tested by 20 years of rapid growth in e-commerce penetration, Covid-19 and a cost-of-living crisis. That is not say that pressure points have been eroded completely. Headwinds from e-commerce will persist and investors should be choosy on assets, but the pace of change has slowed significantly.
In other words, logistics is forecasted to outperform its sector peers by a narrower margin going forward.
This leads us to a second conclusion about the state of European real estate, and specifically logistics, market in 2025: to do better than the average in the industrials sector, location selection is forecasted to become paramount.
This was the premise underpinning LaSalle’s new, proprietary Paths of Distribution score, released last year. This innovative, granular research comparing logistics locations at a micro, market, country and pan-European level was conducted in the context of growing uncertainty around variables such as energy prices and supply chain disruption. As location remains a key variable that distributors can still control, it has increasingly become a more important factor in attracting occupiers, and therefore in constructing portfolios, than ever before.
These shifting dynamics across logistics, office and retail demonstrate a clear convergence in outlook between Europe’s recently favoured sectors, on the one hand, and those formerly out-of-favour, on the other.
Blanket allocation approaches and approximate rules of thumb were more viable ways of thinking about real estate portfolio construction in the last few years. Moving forward, investors will be under greater pressure to select the right formats and markets, whatever their chosen sector.