LaSalle: Europe breaks from global real estate cycle as occupier demand strengthens

European real estate is expected to diverge from other global markets in 2026 as occupier momentum strengthens, rental growth outpaces inflation, and the single currency shields continental markets from geopolitical shocks, according to LaSalle Investment Management.

The findings form part of the Europe Chapter of the Insights, Strategy and Analysis Outlook 2026 report. The firm highlights how rent trade-outs on lease renewals across its European portfolio rose to 3.8% above expiring rent levels this year, on top of mostly indexed rental rates.

LaSalle reports that prime city offices and luxury high-street retail delivered the strongest performance, with prime office rent changes in the Paris CBD and London City averaging close to 10% annually since 2023.

Rents on Bond Street in London, the Champs-Élysées and ‘Golden Triangle’ in Paris, and Via Montenapoleone in Milan continue to outpace inflation.

At the same time, initial data shows that European and US public real estate securities are moving in different directions, with the correlation between the two falling sharply towards zero this year. This suggests European real estate offers greater diversification benefits for global investors than usual.

LaSalle links this divergence partly to the euro, which has helped stabilise borrowing costs across the continent despite political volatility in some member states. Euro-area inflation has decelerated to modest levels, enabling the European Central Bank to cut rates more quickly and more deeply than other major central banks over the past 18 months.

The firm says this has supported valuations by making it more profitable for real estate investors to borrow in euros than at any time since 2022.

In the UK, following sharp property yield adjustments from 2022 to 2024, LaSalle sees a repriced market offering its highest nominal expected returns in 11 years. The firm notes opportunities across London and other UK cities with strong human capital fundamentals and long, secure income.

Demographic pressures are also reshaping strategy. LaSalle expects half of Europe’s city regions, home to 251 million people today, to face population decline over the next decade. It sees opportunities in property types that capture demand from the faster-growing areas, including purpose-built student accommodation serving international student inflows in the UK and Spain, as well as hotels.

Industrial and retail markets have also shifted. UK logistics vacancy rose 110 basis points to 7.8% in 2025, its highest level in ten years, while retail vacancy in several European markets moved in the opposite direction and now sits below logistics in some markets. LaSalle maintains that multi-tenant industrial across Europe still offers a stronger risk-return profile than the all-property average.

The firm argues that property type alone is becoming less critical as investors increasingly target niches within residential and operational sectors. These include student accommodation, flexible short-term living in Spain and single-family rented housing in the UK.

More restrictive rent regulation in some countries has also driven outsized rental growth for the limited supply of new units let at free-market levels.

“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,” said Dan Mahoney, head of European research and strategy at LaSalle. “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 means 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.”

He said this underlines real estate’s appeal as a resilient asset class for investors navigating economic uncertainty.

LaSalle manages $88.5 billion of assets globally as of the second quarter of 2025.