European real estate is breaking out of the current cycle, leading to more differentiated performance from other markets globally than typical – according to the Europe Chapter of the Insights, Strategy and Analysis (ISA) Outlook 2026 report published today by global real estate investment manager LaSalle Investment Management. That’s chiefly due to strong occupier demand, especially in Europe’s luxury high streets and city centre prime office markets, as well the insulating effect of the Euro.
The strength of European commercial occupier demand in 2025 was evident in how, across LaSalle’s European portfolio, rent trade-out for spaces up for lease renewal rose to 3.8% higher than expiring rent levels. This 3.8% is on top of mostly indexed rental rates, and so suggests that rental growth has outpaced inflation. Looking across the market as a whole, top-quartile, centrally located offices and luxury high-street retail were the two standout performers. Prime office rent changes in Paris CBD and London City now average close to 10% annually since 2023, while retail property rents on London’s Bond Street, Paris’ Champs-Elysees and ‘Golden Triangle’ and Milan’s Via Montenapoleone continue to consistently outpace inflation. Alongside healthy occupier markets, initial data suggests European real estate offers investors more diversification benefit at this moment in the cycle than is typical, as global regions diverge. Taking European and US public real estate securities, correlation between the two regions moved sharply towards zero this year. While US tariffs have dragged on Europe’s economic growth, its real estate markets have been minimally exposed to trade wars.
The single currency has played an important role in insulating continental European real estate markets from the effects of geopolitical risk. The blended risk-free rate for the Euro area’s 20 constituent countries has helped mitigate the effect of localised uncertainty – such as the appointment of a fifth French Prime Minister in the last two years – on the pricing of real estate debt. The deceleration of Euro-area inflation to modest levels has enabled a return in real-terms to aggregate rent growth, allowing the European Central Bank to make faster and deeper interest rate cuts over the past 18 months than other major central banks. That monetary loosening has supported real estate valuations by making floating-rate Euro-denominated debt solidly accretive for real estate investors to the largest degree since 2022.
In the UK, after a sharp adjustment in property yields from 2022 to 2024, LaSalle assesses that UK real estate today offers its highest nominal expected returns in 11 years, and this applies to assets in London and other UK cities with high ‘Human Capital’ scores and long-term secure income.
Demographic changes drive city market bifurcation
Half of Europe’s city regions – where 251 million people live today – are projected to experience population decline over the next decade. Against this demographic headwind, LaSalle expects growth to be more concentrated than ever in a small number of winning city regions.
Property sectors that escape this demographic drag by capturing demand from other, faster-growing parts of the continent will yield opportunities, such as purpose-built student accommodation (PBSA) serving international student populations in the UK and Spain, as well as European hotels
‘Sheds and… shops?’
Industrial and retail have been on opposite sides of market forces for the last decade, as logistics surged – and was therefore commonly grouped with residential under the ‘beds and sheds’ moniker – while retail saw downward adjustment in demand and rents. As 2026 approaches, that contrast no longer applies. Cyclicality in logistics was a major driver in those European property markets where vacancy trended higher in 2025, with UK logistics vacancy rising 110 basis points to 7.8%, its highest level in 10 years. Retail vacancy has moved in the opposite direction and is lower than logistics in some markets – though LaSalle’s analysis still points toward industrial, especially multi-tenant industrial, as offering a better risk-return proposition than the all-property average.
That shift epitomises how property type alone has become steadily less relevant in determining capital allocation strategies. Europe’s residential markets also exemplify that trend, with LaSalle recommending high-demand niches such as student accommodation, flexible living in Spain and UK single-family rented housing schemes – while noting the complexity of a market in which more restrictive regulations around rent are driving outsized rental growth for the limited supply of new units let at free market rent in the most regulated markets.
Dan Mahoney, Head of European Research and Strategy at LaSalle, said: “Europe’s real estate markets have seen it all in 2025 – the good, the bad, and the ugly, with slow capital market recovery creating a sense of déjà vu. However, we are now seeing signs that Europe is breaking out of this cycle. The region stands out for its ability to balance global portfolios and offer attractive risk returns across every property type, meaning that single sector strategies may no longer be as attractive relative to balanced strategies. There are submarkets, subtypes, and assets already benefiting from a combination of inelastic supply and demand, plus reversion potential – among them super-prime offices and luxury high-street retail – and these continue to have strong momentum.”
Brian Klinksiek, Global Head of Research and Strategy at LaSalle, added: “Despite a turbulent 2025 filled with trade policy uncertainty and fallout from global conflicts, European real estate markets remain resilient. The repricing of assets mean that valuations are lining up with transacted prices, occupational fundamentals are set to strengthen due to collapsing new supply, and debt capital is readily available for a large swathe of the real estate opportunity set. These characteristics underpin the flexibility of global real estate markets, demonstrating that the asset class remains a significant contender for investors seeking resilience against macroeconomic volatility.”