MSCI: recovery in European CRE market stalled in Q1 2025

The recovery in Europe’s commercial real estate market stalled in the first three months of 2025 as investor sentiment was shaken by rising borrowing costs amid mounting economic and geopolitical uncertainty, according to MSCI’s latest Europe Capital Trends report.

Transactions completed in the first quarter totalled €41 billion, the report showed, which represents an 11% decline from the same period a year earlier, led by weaker UK and French markets.

The negative Q1 2025 contrasted with the investment market’s positive momentum since Q1 2024. During the 12 months to March 31 transaction volumes rose by 17% to €213.9 billion. 

“Uncertainty over trade tariffs, the economy and geopolitics, amplified by the unpredictable nature of the Trump administration, has deflated the cautious optimism of investors at the end of last year”, said Tom Leahy, Head of EMEA Real Asset Research, MSCI. “We’ll have to monitor closely how expectations for weaker growth affect occupier demand and how central banks’ interest rate policy evolves. Such a fast-evolving environment makes short term forecasting a huge challenge.”

Global bond markets, which serve as a benchmark for real estate pricing, had a volatile quarter as the new US administration began reshaping global economic frameworks.

The bond market’s volatility adversely affected investor sentiment, since real estate pricing is sensitive to changing bond yields and credit costs. Against this backdrop the gap in pricing expectations of prospective buyers and property owners selling assets widened. MSCI data show there was a pick-up in the number of agreed transactions that failed to complete during the first quarter.

Investment flows into the apartment sector continued to grow, because most European markets remain structurally under-supplied and the sector is also relatively insulated from international trade tensions. Apartments overtook the weaker industrial and office sectors during the first quarter to become the top sector choice for investors.

Investment in the housing market also contributed to a rebound in overall volumes in Germany, Europe’s second-largest market for real estate investment, to end a three-year market slump. Investment in real estate rose by 59% from a year earlier to €9.6 billion and transaction activity rose in the 12 months to March 31 by 26% to €40 billion.

In the UK, investment activity for the 12 months to the end of March was 20% stronger from the same period a year earlier in spite of a 26% decline in sales volumes from a year earlier to €10.6 billion. London was the top investment destination in Europe, even if investments fell by 32% compared with the first quarter of 2024. Transactions in France declined 29% in the first three months from a year earlier, making it the slowest quarter since 2013.

“We appear to be entering a new era where the direct real estate market’s relative stability and illiquidity has become a virtue, in contrast to the volatility of public markets”, said Leahy. “While the sector is not immune to the changing global environment, the weeks or months it takes to complete a property transaction give investors the time to make more considered decisions. Those with a clear strategy and the patience to wait for the turbulence to subside will be best placed to drive performance and to seize opportunities that arise during periods of market dislocation.”