As an investor, you are always looking for new opportunities and ways to diversify your portfolio. Commercial real estate in Europe may be an avenue worth exploring. The European commercial real estate market has experienced steady growth over the past several years and is projected to continue expanding over the next decade. Several factors are driving this growth and pointing to a bright future for those looking to invest in European commercial real estate.
Overview of the European Commercial Real Estate Market
The commercial real estate (CRE) market in Europe is diverse and complex, encompassing office, retail, industrial, and multifamily properties across the region. According to recent analyzes, the European CRE market size was valued at over €4.5 trillion in 2020 and is projected to grow at a compound annual growth rate (CAGR) of 2-3% from 2021 to 2025.
Several factors are driving the growth of the European CRE market:
- Economic expansion. The European economy has been expanding at a modest but steady pace, fueling demand for commercial property. Improving employment rates and rising wages are boosting retail spending and demand for industrial/logistics space.
- Urbanization. The trend toward urban living and mixed-use developments in European cities is increasing the need for more office, retail, and residential space.
- Globalization. Europe’s strategic location and diverse, educated workforce make it an attractive place for multinational companies to do business. This is driving demand for prime office space, especially in major cities.
- E-commerce. The rise of e-commerce has boosted the European logistics property market, as retailers and logistics companies require more warehouse and distribution facilities.
While uncertainties like Brexit pose challenges, the outlook for the European CRE market remains positive overall. Investors worldwide continue to view Europe as a stable, transparent region for long-term property investment. With sound fundamentals and steady growth prospects across sectors, the European CRE market is poised to remain an attractive asset class for years to come.
Key Drivers of Growth in European Commercial Real Estate
The European commercial real estate market is poised for steady growth in the coming years, driven by several key factors.
- Economic expansion. The overall European economy has been expanding at a modest but consistent pace. GDP growth, lower unemployment rates, and higher consumer confidence are fueling demand for commercial space. As the economy continues to strengthen, the commercial real estate market is well-positioned to benefit.
- Increased investment. Europe has become an attractive destination for commercial real estate investment from both domestic and foreign investors. Investment in European commercial real estate reached record levels in 2019 and is forecast to continue rising. More investment means greater demand for properties and higher valuations.
- Urbanization and population growth. Europe’s population continues to grow, and people are increasingly moving into cities and urban centers. This urbanization trend is driving demand for more office space, retail centers, and mixed-use developments in Europe’s major cities.
- Changing space requirements. The nature of work and retail is evolving, and companies have new space needs. Flexible workspaces, co-working spaces, and smaller retail footprints are in demand. This is leading to higher demand for certain types of upgraded, redeveloped, or newly constructed commercial properties.
The confluence of these factors—a steady economic expansion, strong investment inflows, urbanization, and changing space needs—bodes well for the future of the European commercial real estate market. While risks like political uncertainty remain, the overall outlook is positive for continued growth in the sector over the next 3-5 years.
Major European Commercial Real Estate Markets: UK, Germany, France, Etc.
The United Kingdom
The UK commercial real estate market is the largest in Europe. London, in particular, is a global financial hub and center for business. Demand for office space in London has been increasing over the past several years, driving rent prices up. However, with Brexit looming, the market faces uncertainty. Investors are hesitant, and businesses may relocate offices to other European cities like Frankfurt or Dublin.
Germany has the largest economy in Europe, and its commercial real estate market is stable and growing. Berlin, in particular, has become an attractive city for businesses in the technology, media, and telecommunications sectors. Rent prices in Berlin have been rising due to high demand for office space. Munich and Hamburg also have strong office markets, while Frankfurt is a center for banking and finance. Investors are keen on Germany due to its economic strength and stability.
Paris is the dominant commercial real estate market in France, with high demand for retail and office space driving rent prices up in recent years. However, economic growth in France has been slow, and high taxes and strict regulations pose challenges for businesses. Outside of Paris, the market is weaker, with oversupply of space and stagnant or declining rents. Investors have been hesitant in the French market due to political uncertainty and social tensions.
In summary, while the UK and German commercial real estate markets remain attractive to investors, the market in France faces more difficulties. Demand for space is strongest in major cities like London, Berlin, and Paris, but high costs of living and doing business in these cities pose risks. Overall, the European commercial real estate market provides opportunities for investment, but political and economic uncertainties threaten its stability.
Top European Commercial Real Estate Trends to Watch
The European commercial real estate market is poised for growth in the coming years. Several trends are emerging that investors and developers should monitor closely.
Increased Demand for Flexible Office Space
Coworking and flexible office spaces are in high demand as more businesses seek short-term leases and serviced offices. Major cities like London, Paris, and Berlin are seeing substantial growth in flex office space. This trend is likely to continue as more companies adopt remote and hybrid work models.
Environmental, social and governance (ESG) standards are becoming increasingly important in European commercial real estate. New regulations are pushing building owners and managers to improve energy efficiency, reduce waste, and create healthier work environments. ESG-focused buildings that meet high sustainability standards will be attractive to tenants and investors alike.
Logistics and E-Commerce Boom
The logistics and e-commerce sectors continue to drive demand for warehouse and distribution space across Europe. As more consumers shop online, the need for fulfillment and delivery centers is growing exponentially. E-commerce giants and logistics companies are scooping up warehouse space, especially near major cities and transportation hubs.
Some commercial building owners are converting unused office and retail space into residential units. Residential conversions, especially in city centers, can help revitalize properties and neighborhoods. They are also a way for owners to generate income from underutilized commercial space. Local governments are supporting more mixed-use development, making residential conversions an appealing option.
Keeping a close eye on these trends will help real estate investors and developers spot new opportunities and make strategic decisions about acquisitions, developments, and redevelopments across Europe. While there is uncertainty in the market, focusing on high-demand and ESG-aligned sectors can help future-proof portfolios and drive value. Overall, the European commercial real estate market shows a lot of promise in the years to come.
Impact of Brexit on European Commercial Real Estate
The decision of the United Kingdom to leave the European Union will undoubtedly impact the commercial real estate market across Europe. Brexit introduces economic uncertainty that could slow investment and leasing activity over the next several years.
Reduced Demand from UK Investors and Occupiers
Many UK investors and occupiers have substantial European portfolios and operations. Brexit may:
- Reduce demand for commercial space from UK companies in Europe.
- Lead UK investors to divest European assets to focus on domestic opportunities.
- Complicate UK companies’ ability to move staff between the UK and Europe, potentially impacting office leasing.
Economic Uncertainty Impacting Investment and Leasing
Brexit has already caused currency volatility and slowed economic growth in the UK and Europe. This uncertainty may:
- Discourage commercial real estate investment as investors take a “wait-and-see” approach.
- Cause businesses to delay major leasing decisions until the post-Brexit regulatory environment is clearer.
- Negatively impact property valuations if investors require higher yields to compensate for risk.
Opportunities from Regulatory Arbitrage
Depending on the final terms of Brexit, the UK may diverge from some EU regulations. This could create opportunities for regulatory arbitrage, where companies locate certain operations in either the UK or EU to benefit from more favorable regulations. For example:
- If UK financial regulation diverges significantly, some financial firms may shift operations to European cities like Frankfurt, Dublin or Paris. This could increase demand for office space in these cities.
- The UK may lower corporate tax rates to attract business. If so, this may draw some companies and investors to the UK commercial real estate market.
The impact of Brexit on European commercial real estate will depend on the details of the final withdrawal agreement and future UK-EU relationship. Close monitoring of Brexit developments is critical to understand, anticipate and capitalize on the challenges and opportunities it may present. With prudent risk management and a long-term investment outlook, Brexit does not necessarily mean the end of promising returns from European commercial real estate.
COVID-19 and the European Commercial Real Estate Market
The COVID-19 pandemic has significantly impacted the European commercial real estate market. ###Decreased Demand
With many businesses temporarily closed or operating at reduced capacity, the demand for commercial real estate has declined across Europe. Occupancy rates have dropped as companies downsize or close offices. Rent prices have also fallen in many areas.
Shift to E-Commerce
The growth of e-commerce during the pandemic has reduced foot traffic in retail spaces and shopping centers. While some retailers have adapted by improving online shopping experiences, others have struggled. The shift to online shopping may permanently impact demand for physical retail space.
Opportunities in Logistics
In contrast, the logistics and warehouse sector has seen increased demand. The rise in e-commerce and home delivery has fueled the need for more warehouse and distribution space. Investors view logistics as a relatively stable long-term opportunity.
The overall European commercial real estate market is expected to recover as COVID-19 restrictions lift and business activity resumes. However, the recovery may be gradual and uneven across countries and sectors. Investors are likely to remain cautious in the short term.
The pandemic has accelerated several existing trends in the market, including the move to flexible workspaces, growth of e-commerce, and adoption of new technologies. While traditional office and retail spaces face challenges, sectors like logistics, multifamily housing and life sciences may benefit from shifts in work, shopping and lifestyle patterns.
The European commercial real estate landscape has been permanently changed by COVID-19. However, with prudent risk management and a long-term outlook, the market can rebuild and thrive. By adapting to new opportunities and the needs of businesses and communities, the commercial real estate sector can play an important role in Europe’s post-pandemic recovery.
Record Low Interest Rates Boost European Commercial Real Estate Activity
Record low interest rates in Europe are fueling increased activity in the commercial real estate market. ###Low Borrowing Costs
With interest rates at historic lows, the cost of borrowing money is very affordable for investors and developers. This makes commercial real estate projects more financially viable and attractive. Developers can get construction loans, mortgages, and lines of credit at lower interest rates, reducing their costs. For investors, the lower cost of capital means higher returns on investment.
Low interest rates also lead to greater liquidity in the economy as money is cheap to borrow. This extra liquidity finds its way into the commercial real estate market as investors look for productive places to allocate their capital. With more cash available to deploy, investment in European commercial real estate has increased.
The low interest rate environment, stable political and economic conditions, and transparency of major European commercial real estate markets are drawing substantial foreign investment. Investors from North America, Asia, and the Middle East see the opportunity for solid returns from high-quality assets in Europe’s core markets. Several major deals in recent years have been funded by foreign investors.
Development Activity Rising
New development starts have been rising in Europe’s strongest commercial real estate markets like Germany, the Netherlands, and Poland. Developers are accelerating projects to take advantage of the favorable financing conditions and meet demand from investors and tenants. The increased development is helping to modernize Europe’s commercial building stock.
While low interest rates are beneficial to commercial real estate in Europe, the market faces risks if rates start to rise significantly from their current levels. Higher borrowing costs could hamper investment and development activity. However, Europe’s major markets remain attractive to global investors seeking portfolio diversification and long-term value. Overall, record low interest rates have given a substantial boost to European commercial real estate activity.
Green Buildings Movement Transforms European Commercial Real Estate
The green buildings movement is transforming the European commercial real estate market. As sustainability and environmental consciousness become higher priorities for companies and consumers, green certified and eco-friendly buildings are in high demand.
Increasing Popularity of Green Buildings
The green building market in Europe is growing rapidly, fueled by companies seeking to reduce their carbon footprint and operating costs, as well as meet sustainability goals. According to a report by CBRE, a leading commercial real estate services and investment firm, the green building sector is expanding at a rate of over 10% annually. This increasing popularity means that green certified office space and other commercial properties often have higher occupancy rates and can command premium rental rates compared to conventional buildings.
Benefits of Green Buildings
Green buildings that have obtained sustainability certifications like BREEAM (Building Research Establishment Environmental Assessment Method) and LEED (Leadership in Energy and Environmental Design) offer many benefits to owners, investors, and occupants:
- Energy efficiency improvements can lower utility bills by up to 50-70% compared to typical buildings.
- Water conservation features reduce water usage and costs.
- Improved indoor air quality and natural lighting enhance occupant wellbeing and productivity.
- Lower environmental impact due to reduced waste, pollution, and natural resource usage.
- Increased asset value and return on investment. Green certified buildings tend to have higher selling and leasing prices.
The Future is Green
With the increasing awareness of sustainability issues like climate change, the green building movement is only gaining momentum in Europe. New environmental regulations and incentives are also driving the transition to more sustainable construction and renovation of commercial properties. Investing in green buildings and eco-friendly workplaces will be key to the future success and competitiveness of European commercial real estate.
Europe Commercial Real Estate Market FAQs
The European commercial real estate market is a complex industry with many factors at play. Several frequently asked questions can help provide an overview of this market.
What types of commercial real estate are available in Europe?
There are four primary types of commercial real estate properties in Europe:
- Office space: This includes single-tenant and multi-tenant office buildings. Office space is in high demand in major European cities like London, Paris, and Berlin.
- Retail space: This includes shopping centers, strip malls, and individual retail units. While e-commerce has impacted retail, retail space in prime locations remains in demand.
- Industrial space: This includes warehouses, distribution centers, manufacturing facilities, and flex space. Major logistics hubs in Europe have a strong industrial market.
- Hospitality: This includes hotels, motels, resorts, and other lodging facilities. Europe’s tourism industry supports its hospitality real estate market, especially in destinations like Spain, Italy, and Greece.
What factors drive the European commercial real estate market?
Several factors influence the European commercial real estate market:
- Economic growth and business activity. When economies are expanding, demand for commercial space rises. Recessions can lead to higher vacancy rates and lower rents.
- Interest rates. Lower interest rates make commercial real estate more attractive to investors and buyers. Higher rates can deter investment.
- Foreign investment. Commercial real estate markets in Europe attract significant foreign capital from North America, the Middle East, and Asia. Changes in foreign investment levels impact the market.
- Demographic shifts. Population growth in cities and changes in population age, income, and other attributes affect the demand for commercial real estate. Migration within Europe also shapes the market.
- New construction. The supply of new commercial space coming onto the market influences vacancy rates, rents, and investment returns. Oversupply can reduce rents while undersupply supports rent growth.
- E-commerce adoption. Although e-commerce has disrupted parts of the retail market, it has boosted demand for logistics space. The growth of online shopping influences both the retail and industrial sectors.
- Sustainability. There is increasing focus on sustainability, energy efficiency, and environmental impact in the European commercial real estate market. Greener buildings tend to have higher occupancy and rents.
The interplay between these factors determines the overall health and trajectory of the European commercial real estate market. Close monitoring of these drivers provides insight into opportunities and risks for investors and businesses in this market.
As you have seen, the European commercial real estate market is poised for growth in the coming years despite some economic and political headwinds. With strong fundamentals, increasing demand, and a variety of investment opportunities across property types and geographies, commercial real estate can continue to provide attractive returns for investors. While risks certainly remain, the outlook is optimistic if you are willing to take a long-term view. By focusing on high-quality assets, diversifying across countries and sectors, and partnering with experienced managers, you can position yourself to benefit from the bright future of European commercial real estate. The only question that remains is: are you ready to invest in this promising market? The opportunities are there for the taking.