Key takeaways for 2025

• Prime offices will continue to attract tenants back
• Real estate fundamentals in central locations look strong
• European city centres remain an important focus for LaSalle

How would you describe the 2024 real estate year?

While 2024 was undoubtedly a challenging year for real estate capital markets, operating fundamentals and leasing were solid. And there are more signals pointing to an improving outlook on the horizon. The INREV ODCE Index returned to positive territory in Q2 2024 for core real estate funds, after seven quarters of negative figures.

Rental performance also remained robust. Our own portfolio data shows that, in 2024, rents for new and renewed commercial leases across our European portfolio grew 2.7% relative to expiring passing rent.

In 2024, we also saw some longstanding patterns and relative property type performance start to shift. For example, while GDP was positively correlated with rents in Europe for most of the period 2001-2019, they have become decoupled since the pandemic.

It is a trend that has endured and even intensified last year as many European markets saw healthy rental growth despite weak economic performance. We believe this change in pattern is the result of both limited construction and polarisation of asset quality.

In 2024, European city centres bounced back further, increasingly attracting office occupiers and capital to more central locations. Those offices in prime locations with modern features won out, and we expect to see this trend continue in 2025. 

What are the main challenges facing the sector in general and your company in particular in 2025?

Geopolitical and macroeconomic volatility will remain a key challenge. Europe still faces heightened recession risk and, as a region, our economic trajectory is vulnerable to how trade barriers evolve in 2025, and to fiscal constraints on government budgets in many countries. All eyes remain on interest rates, given how they influence real estate capital markets.

There’s been an encouraging trend of slowing inflation and falling policy rates in 2024. But UK inflation has proven comparatively stubborn and led to particularly wide spreads in interest rates between the UK and Europe. 

Recent European GDP growth has been sluggish and its global competitiveness has eroded – a worry for long term tenant demand in more peripheral locations Germany was a notable laggard in 2024, whereas in Spain, Poland and Denmark growth was better.

‘In 2024, European city centres bounced back further, increasingly attracting office occupiers and capital to more central locations.’

Philip La Pierre, LaSalle Investment Management

Despite this, real estate fundamentals in central locations look strong. I expect to see average rent growth remain positive, especially in prime offices and rental housing. A challenge for real estate is that, with higher base interest rates, the asset class needs to earn its place in investor portfolios by providing higher income and total returns going forward. We believe we’re now at that point in Europe – based on the widening spread between our expected real estate returns and European bond yields over the past year.

What are the main elements of your strategy for the year ahead?

The cycle is turning, and I believe 2025 is going be both a very interesting and exciting year for real estate investment. Despite macroeconomic headwinds, European city centres will remain a key focus for LaSalle, owing to their strong vibrancy and significant occupier demand.

From a sector perspective, long-term tailwinds for the logistics and residential/living sectors remain intact, though selecting the right locations will be crucial because we think the relative performance differences between major property types will be narrower.

Retail is back on the investment menu in a big way in many markets. Solid fundamentals and lower occupancy costs are evident across many of retail’s many incarnations across the region following a nearly decade-long period of rebalancing. This is complemented by the investability of offices due to stabilising occupational fortunes and rebased pricing.

Debt strategies will continue to remain attractive for us. As all-in debt costs and unlevered yields come back closer to their historical relationships, near-term pricing will give way to a focus on the attractive long-term risk-adjusted return and diversification proposition of debt investing.

Taken together, Europe’s distinct investment opportunities, coupled with the bounceback in market fundamentals, make it an important allocation in global real estate portfolios.

Philip La Pierre is CEO, Europe, at LaSalle Investment Management