Europe tops global CRE investment rankings - what’s driving the surge?

European CRE Outlook - Capital, confidence, and what comes next

Market Dynamics and Investment Outlook

Europe’s commercial real estate sector is moving through a period of recalibration, marked by shifting return expectations, wide valuation gaps, and a growing overlap with infrastructure investment.

Although uncertainty remains, the fundamentals in several segments are strengthening, and liquidity is gradually returning to the market, creating cautious optimism for 2026 and beyond.

Investment Trends

Investors continue to favour resilient themes such as logistics and data centres, supported by structural drivers including urbanisation and digital transformation. However, the thematic story is now widely priced in, prompting many fund managers to revisit their underwriting assumptions. 

Traditional core returns of 7-8% appear increasingly insufficient, with double-digit performance becoming the new benchmark for competitiveness. This shift is pushing investors towards more opportunistic strategies, particularly where assets can be acquired below replacement cost or offer strong cash-on-cash performance.

Furthermore, investors with flexible capital are prioritising asset-specific value creation rather than adhering strictly to predefined sector allocations.

Across the cycle, today’s environment feels typical of late-downturn conditions - prolonged hesitation, mismatched pricing, and narrow bid-ask spreads. Still, repricing is now largely complete in many markets, fundamentals are improving in strong locations, and the cost of debt has eased since its peak.

Transaction volumes are expected to rise moderately in 2026, even if they do not return to the exceptional levels of 2018 to 2019.

Valuation Dispersion

One of the defining challenges is the widening gap between prime and secondary assets. Super-prime properties continue to attract deep bidding pools, while anything slightly lower in quality sees pricing fall sharply. This dispersion leaves many owners with valuations that no longer reflect achievable market prices.

Investors emphasise the need for realistic yields, given the competition from private credit and infrastructure, which often deliver similar returns with different risk profiles. Until there is greater clarity on long-term return expectations, trading volumes will remain structurally lower.

Data Centres

Data centres stand out as the strongest structural growth story. Demand from hyperscale operators, AI infrastructure, and cloud platforms continues to accelerate, and the sector increasingly behaves like infrastructure rather than traditional real estate. Many of the largest European transactions now attract predominantly infrastructure bidders.

Valuations also reflect this shift. Hyperscale facilities with long leases to prime tenants can trade around 6% yields with inflation-linked rental growth. Infrastructure investors can project platform-level returns of 12-13%, making it challenging for conventional real estate capital to compete.

Technological obsolescence is considered a risk only where leases are short. Longer agreements allow upgrades through standard lease renegotiation.

More critical is the availability of power. In markets such as Germany, Ireland, and the UK, grid constraints are so severe that contracted power capacity often becomes the primary source of value. Without significant national grid investment, scarcity will remain a defining feature of the sector.

Financing Conditions

Debt liquidity has returned more quickly than expected. Margins have compressed, and competition has intensified, particularly in core jurisdictions such as Germany. Yet, pricing is not the main differentiator. Lenders offering flexible covenants and stabilisation periods of one to three years are the most attractive partners, especially for assets still recovering from post-pandemic volatility.

Development finance remains difficult. High construction costs, expensive debt, and uncertain rental assumptions often leave too little spread between yield on cost and realistic exit yields. Refurbishment and conversion strategies therefore remain far more appealing, offering shorter timelines, lower execution risk, and more predictable returns.

Retail Revival - Reliable returns or past its prime?

Repricing, Recovery, and Renewed Momentum

Europe’s retail real estate sector is entering a more constructive phase after years of uncertainty. Stronger tenant performance, improving liquidity, and disciplined asset management are lifting confidence across markets. 

While secondary assets still face difficulties, dominant shopping centres and food-anchored retail parks are demonstrating clear resilience and, in many cases, renewed growth.

Investment Trends

Today’s opportunities are primarily driven by repricing and market dislocation rather than geography. Opportunistic funds continue to target assets in the EUR 20 million to EUR 70 million range, where motivated sellers, limited competition, and operational upside can produce mid-teen IRRs. Many of these opportunities arise from large groups divesting non-core retail or resolving legacy issues.

Southern Europe stands out for its strong fundamentals. Markets such as Spain, Portugal, and Italy benefit from high physical retail engagement and healthy consumer spending. This cultural preference for shopping centres and retail parks, combined with repricing already absorbed, has created a favourable environment for value-add strategies.

Other investors prioritise dominant, well-located assets rather than opportunistic distress. These buyers focus on centres that are trading well but have room for operational improvement or capex repositioning. Food retail-linked assets are particularly attractive due to their stable income profiles and consistent footfall.

Liquidity and Financing

In Iberia, liquidity has improved significantly, where high-quality shopping centres and retail parks now trade quickly. Strong demand is outpacing the available supply of investable assets. Meanwhile, Italy and parts of Eastern Europe, after a quieter period, are also showing a noticeable rebound, especially for dominant schemes with loyal catchments.

Financing constraints, which weighed heavily on the sector in 2022-2023, have eased. Banks have returned to lending, particularly on income-producing assets, though availability still varies by country and lot size. Mid-cap deals between EUR 100 million and EUR 200 million attract the widest lender interest, while very small or very large deals remain more specialised.

Tenant Demand and Performance

A decisive shift in tenant performance underpins the sector’s recovery. Retailers across fashion, value, and food and beverage are expanding again, particularly in the top 20 to 30 centres in each country. Data shows rising footfall, stronger sales, and healthier occupancy cost ratios (OCRs) following post-pandemic lease rebasing.

Brands are increasing store sizes by 50% or more in dominant centres, often accepting higher rents due to strong turnover potential. The market has clearly bifurcated, with leading centres attracting major expansions and higher occupancy, while secondary assets in weaker locations continue to lose relevance.

Tenant demand is strongest where centres can offer larger, better-configured units and a compelling environment. Retailers now favour fewer but more efficient stores, reinforcing the position of super-dominant assets while accelerating the decline of smaller, outdated schemes.

Customer Experience and Capex

Experience remains essential but must be applied strategically. Defensive capex is necessary to maintain competitiveness, while destination centres can justify more substantial investment to elevate customer experience. However, for non-dominant assets, excessive experiential spending rarely generates sufficient returns.

Footfall continues to be the core KPI for measuring success, influencing leasing, sales, and overall asset momentum, with selected projects - such as waterfront terraces or upgraded leisure zones - demonstrating strong footfall uplift when tied to the specific strengths of the asset.

High-impact improvements are often simple - high-quality bathrooms, refreshed interiors, efficient circulation, and well-selected tenants that drive natural footfall. Food and beverage also remains a critical driver, with expansions often producing immediate increases in traffic. 

Retail Outlook

Retail’s recovery is uneven but strengthening. Dominant centres in Southern Europe and key parts of Central Europe are outperforming, supported by stable demand, improved bank appetite, and more sophisticated asset management. Opportunistic buyers are benefiting from repricing, while long-income and core-plus investors are returning due to retail’s compelling yields.

The sector is no longer defined by structural decline but rather by clear differentiation: the best assets are thriving, the weakest continue to struggle, and investors who understand this gap are finding real value.

Logistics & Light Industrial - Smart capital allocation or due a shake-up?

A Market in Pause, Poised for Renewed Strength

Europe’s logistics sector has entered a period of recalibration after an exceptional decade of growth. Development has slowed sharply, vacancy has edged up in several countries, and occupier decision-making has lengthened. Yet, despite short-term pressure, the sector’s fundamentals remain solid, and investors expect a healthier balance between supply and demand to emerge by 2026.

Market Conditions

The past 12 months have been challenging, with new development starts down as much as 60% in some markets. High construction costs, stubborn land prices, and tight development margins have made speculative projects difficult to justify. This slowdown, however, is widely viewed as beneficial. With pipelines shrinking and take-up continuing, investors expect vacancy to tighten again over the next 12-18 months.

Logistics is seen to have become intensely local, with political shifts, planning environments, and labour dynamics varying sharply across Europe. Germany’s economic softness is creating both consolidation pressures and attractive entry opportunities. Spain and Ireland continue to show strong momentum, while Poland remains a major hub for cost-driven relocation and Central European consolidation.

Occupier Demand

Post-pandemic expansion has given way to more measured occupier strategies. Many companies now prefer to remain in existing facilities where possible, driven by labour retention and cost considerations. Decision-making is slower, but tenants are generally willing to pay for quality when the timing is right.

Demand is more diverse than at any point in the last decade. Chinese e-commerce groups, Taiwanese and Korean manufacturers, and agriculture-related producers are all seeking space. 3PLs are expected to become more active again from 2026 after working through their own internal vacancy. Amazon, though no longer dominating take-up, is once again active across multiple European markets.

Mid-box units between 5,000 and 10,000 square metres are the most in-demand segment, representing around 65% of requirements. Years of focus on big-box development have left this part of the market undersupplied, creating clear opportunities for investors able to aggregate smaller schemes.

Rents, Incentives, and Land

Rents remain stable or slightly rising, supported by limited new supply. Incentives vary significantly by country, with markets such as Ireland, which has extremely low vacancy, offering minimal concessions, while markets with double-digit vacancy can require incentive packages 30-40% higher than peak-cycle norms.

Land prices remain a major constraint. Despite weaker sentiment, landowners across Europe continue to hold firm, and in some areas land values have risen. This rigidity limits oversupply but constrains development viability. In Spain, for example, land prices in South Madrid make most new projects unworkable, effectively placing a floor under rental growth.

Capital and Finance

Debt markets have improved meaningfully - margins have compressed, liquidity has increased, and lenders show strong appetite for stabilised assets. Development financing remains difficult, especially for speculative projects, though top sponsors can still secure loans. Credit strategies are currently attractive, with senior lenders achieving 12-13% returns at moderate leverage, temporarily drawing capital away from equity.

However, investors expect equity interest to return as redemption queues, portfolio rebalancing, and stalled sales processes release assets to the market in 2026. Those positioning early are likely to find the most attractive opportunities.

Power and Infrastructure

Power availability is now a defining constraint. Reserved power often far exceeds actual use, limiting new development and complicating tenant moves. This has driven innovation such as microgrids and off-grid logistics facilities, particularly in the Netherlands. Select sites with strong grid access are seeing significant value uplift, especially where future data centre use is feasible.

Optimistic Outlook

Despite short-term caution, sentiment remains optimistic, with Germany, Italy, Spain, Ireland, and Poland all presenting compelling opportunities in different segments. Investors highlight the resilience of income, the diversity of demand, and the limited risk of structural oversupply.

Although logistics may be quieter than during its boom years, it is returning to what many consider to be its natural role: a stable, income-driven sector offering long-term durability and steady, compounding returns.

Inflation Hedging & Capital Markets - Durable shield or fading myth?

Pricing Power, Regulation, and the Search for Inflation Resilience

The recent inflation spike has forced investors and lenders to rethink how real estate behaves as an inflation hedge. History suggests real estate outperforms when inflation is in a moderate band, but the current cycle has exposed sharp differences between sectors, business models, and capital structures.

When Inflation Can Be Passed Through

The core question is simple: can you pass inflation through to rents without breaking your occupier base? 

Supply-constrained, operational sectors have been clear winners. In Spanish PBSA, extreme undersupply allows landlords to raise rents by roughly 9-10% in an environment of about 4% inflation, with investors deploying over EUR 1 billion in 18 months. Similar dynamics appear in Nordic senior housing, where operators can pass higher costs to government or private payers and still run healthy margins.

At the other end of the spectrum, tightly regulated residential markets have become almost uninvestable in an inflationary context. Ireland’s 2% rent cap, even on churn, has driven residential transaction volumes down by roughly 90%. Investors simply will not accept assets where real rental growth is structurally capped while costs rise faster.

The Sweet Spot: 2-4% Inflation

Research suggests that real estate performs best when inflation sits around 2-4%. In this range, indexation and market rent growth can keep pace with costs, and reputational risk in residential remains manageable. Above 4%, regulation, politics, and affordability constraints make full pass-through difficult, so real real estate returns start to erode.

This is also the range where central banks are expected to cut rates, lowering the cost of debt and improving transaction viability. Expectations are for the Consumer Price Index (CPI) to gravitate around 2%, with UK base rates drifting toward roughly 3.25%, supporting more accretive financing.

Equity Rotations and Lease Duration

In the last three years, many investors shifted from classic long-income to shorter-duration sectors where rents can rebase quickly: PBSA, multi-let industrial, hotels on variable performance structures, and certain healthcare assets. The ability to reset rents annually or even daily has been valued more than nominally low yields on long, capped index-linked leases.

However, shorter duration only works where there is genuine pricing power. Core offices in London or supply-constrained logistics can still attract capital because tight markets allow meaningful reversion at lease expiry. Where markets are weak or over-supplied, shorter leases simply accelerate downside.

Lenders, Margins, and Diversification

For lenders, inflation is mainly a question of tenant resilience. Thin-margin operators such as 3PLs or service-apartment platforms can be pushed underwater if rents rise 3% while their EBITDA margins sit at 5-10%. This risk has pushed lenders towards diversified portfolios: a residential block with 200 tenants, or a logistics portfolio with dozens of occupiers, is far easier to underwrite than a single leased asset.

Despite higher base rates, margins on good assets have compressed due to intense competition among credit funds and returning banks. Credit has looked attractive, with senior strategies targeting low double-digit returns, often outcompeting equity on a risk-adjusted basis. As rates fall and credit returns normalise, that balance is expected to shift back in favour of equity.

Repricing, Obsolescence, and ESG

Inflation and rate rises have widened yields across almost all sectors, but the depth of repricing depends heavily on rental growth and future capex. Nordic care homes, for example, moved from about 4% to 5% yields, yet indexation and secure income have kept total returns compelling.

By contrast, secondary offices and non-ESG-compliant stock have seen values hit by both yield expansion and looming obsolescence. The cost of upgrading assets to meet future ESG and regulatory standards has risen with inflation, and in some cases capex cannot be justified at all, effectively stranding assets.

Sentiment, Uncertainty, and the Road Ahead

A key reason transactions remain slow is not just inflation, but layered uncertainty: geopolitics, AI, construction-cost scars from recent years, and diverging macro views within investment committees. Deals that once closed in six weeks now routinely take six months, and many owners prefer refinancing or continuation vehicles to outright sales.

Even so, more activity is expected as inflation settles back into the 2-4% range, rates edge down, and the relative appeal of equity improves. In that environment, real estate can again operate as a credible inflation hedge - but only for assets with true pricing power, sensible regulation, and a clear plan to remain relevant over the next decade.

Operational CRE & Asset Management - Driving efficiency, tenant satisfaction, and profitable returns

From Passive Landlord to Active Operator

Across offices, logistics, residential, and hospitality, asset management has shifted from a back-office function to the centre of value creation. There is now a consensus that the era of “buy-lease-forget” is over, with today’s market rewarding owners who understand their tenants’ operations, anticipate needs early, and manage buildings with the mindset of a service provider, not a rent collector.

Tenant Relationships as a Strategic Asset

The transformation of landlord-tenant interactions stretches across sectors. In logistics, staying close to occupiers is now essential. Asset managers monitor operational patterns, contract renewals, staffing, and even LED-lighting requests that could secure multi-year extensions. Instead of waiting for lease events, teams maintain monthly dialogue to avoid surprises and support tenants’ business continuity.

In offices, the shift has been even more pronounced. Tenants now behave as true clients, and landlords increasingly recognise that their cashflow is directly tied to occupier satisfaction. Improving HVAC performance, redesigning floorplates, adding amenities, or providing flexible re-stacking options can secure retention years before expiry. For many buildings, especially in prime CBDs with rising competition, this proactive approach is the only path to achieving top rents.

There is also a strong bifurcation, with the best-located assets able to justify amenity investment, while secondary buildings struggle to support the required capex. In weaker locations, losing a tenant may render the entire building unlettable, forcing it into alternative uses.

The End of Macro-Driven Strategy

Industry consensus suggests that the next cycle will not reward large macro bets. Instead, performance will hinge on granular understanding: tenant behaviour, operational cost structures, contractual edge cases, and local supply-demand dynamics. Family offices and institutional managers echo the same view - portfolios must be worked asset by asset, because returns will be earned through micro-level interventions, not thematic allocations.

This shift is visible in office leasing patterns. Large corporates still prefer longer leases due to relocation complexity, but mid-sized occupiers increasingly demand shorter commitments, prioritising flexibility and cost control. In central London, Paris, and Madrid, many tenants now choose “tier-one minus” buildings: central location, good quality, and modest amenities at 10-20% lower rents. Rising occupancy costs are pushing even premium tenants down a tier.

Retail, Domino Effects, and Sector Nuance

Retail’s dynamics differ sharply. As tenant mix is interdependent, a single weak anchor can drag down an entire asset. Landlords must maintain constant engagement, track sales performance, and manage relationships across multiple centres. Retailers now share far more turnover data than in previous cycles, creating healthier alignment around profitability and rent sustainability.

The Role of AI: Quiet but Transformational

AI’s most meaningful impact is happening behind the scenes rather than in glamorous front-end applications. Data standardisation, error checking, real-time occupancy tracking, and automated recommendations are already reshaping asset management workflows. Several examples show how AI identifies mistakes or opportunities faster and more accurately than large human teams.

Tools can analyse millions of data points across portfolios to suggest re-stacking, highlight under-used floors, or optimise energy consumption. There is widespread agreement that AI replaces “monkey work” rather than strategic judgment. Machines may excel at processing scale, but humans are still required for decisions, context, and nuance.

However, reliable outputs require clean, standardised data. Many landlords still lack the internal systems needed for effective AI deployment, and open Large Language Models (LLMs) remain unsuitable due to confidentiality concerns. Most adoption is happening within closed, controlled data environments.

The Human Question

Concerns remain about how junior talent will build skills if AI handles foundational analytical work, although the counter-argument is that every generation adapts - new tools create new efficiencies, but critical thinking and decision-making remain human responsibilities. Over time, AI may become a silent team member in investment committees, preparing risk assessments, stress tests, and scenario analysis before human discussion even begins.

Operational Outlook

The message is clear: active management is no longer optional. Whether through stronger tenant relationships, disciplined capex allocation, or intelligent use of operational data, value creation now occurs in the details. Owners who master the operational layer will thrive, while those relying on long leases and passive appreciation will fall behind.

Value-add Capital Strategies - Asset repositioning for maximum ROI?

Returns, Repricing, and the New Shape of the Risk Curve

The value-add landscape has shifted dramatically. With core buyers largely absent, the traditional hierarchy between core, core plus, and value-add has blurred. Capital that once pursued 18% IRRs is now examining core plus stock, while value-add managers increasingly focus on income-producing assets simply because they can still deliver the required returns. 

The result is a market defined less by strategy labels and more by what is achievable in a higher-for-longer rate environment.

Moving Up the Risk Curve by Moving Down the Quality Curve

The absence of core capital has pulled value-add investors into segments they historically would not touch. If a manager can buy stabilised assets, apply moderate leverage, and still reach 15% returns, then the need to add heavy capex or development risk diminishes.

Much of this shift is being driven by debt markets. With lenders now more willing to finance income-led assets at 60-65% LTV, the levered return profile often exceeds that of more operational projects.

This has created a temporary inversion: investors must work harder to deliver value-add returns, yet investor expectations have increased from roughly 12% five years ago to around 15-18% today. This can be attributed to investors benchmarking against peers rather than absolute risk, pushing return targets up even as real estate risk premium has compressed.

Location Back at the Centre

Earlier in the cycle, strong logistics demand allowed investors to stray into secondary locations, but today - with capital more cautious and debt more expensive - value-add strategies are gravitating back to prime markets, where leasing depth and liquidity are stronger. 

Managers report looking at addresses they would never have considered 10 or 15 years ago, because high-quality locations now offer repriced yields that can support 15% business plans with minimal capital uplift.

Offices and retail illustrate this divergence. Well-located retail, especially dominant centres in the UK and Germany, now offers high single-digit yields with clear rental resilience. Offices, meanwhile, continue to face uncertain pricing, with Germany still lacking meaningful price discovery and very few transactions to anchor underwriting.

The Bid-Ask Problem and the Search for Deal Flow

A central challenge is sourcing. Many owners prefer to refinance, extend maturities, or run continuation vehicles rather than sell. The result is long gestation periods: investors engage on assets for 12-18 months before sellers finally accept market pricing. Many market players expect this to persist, especially as many loans extended in 2022-2023 approach maturity and as vendors who delayed capex or leasing decisions run out of time.

Developer JVs are emerging as one of the few reliable sources of stock as stress in the development market, especially across continental Europe, is forcing developers to reprice land and seek equity partners to avoid insolvency. Some investors have built national pipelines purely from these relationships, particularly in Spain, the Nordics, and increasingly Germany, where development deals were impossible only a few years ago but are now viable again.

Sector Repricing and the Shape of Exits

One key debate centred on whether investors should underwrite cap rate compression. The consensus was cautious: value add managers should assume flat exit yields and let rental growth drive returns. The next buyer is unlikely to be a traditional core investor, but rather a core plus or income-focused buyer with similar cost of capital.

In retail, where yields have already reset, investors can achieve attractive cash-on-cash returns with limited capex. Offices face a steeper challenge, with debt availability remaining constrained, and sellers struggling to accept current pricing.

The UK has shown more price discovery than the continent, and its shorter, more flexible leases may allow quicker rental recovery, making it an increasingly attractive target for 2025-2026 deployment.

Capital Raising, Vintage Cycles, and the Road to 2026

Despite the challenging environment, value-add capital is expected to return. Several core institutions have already begun launching value-add strategies for the first time, encouraged by improving fundamentals, signs of falling rates, and the inability of core strategies to deliver the higher returns their investors now demand. Fundraising is still difficult, but momentum has improved over the last 6-9 months.

The 2026 outlook is cautiously optimistic, with refinancing pressures, improving debt margins, and a gradual return of global capital from Asia, Canada, and Australia are expected to increase liquidity. Meanwhile, competitive pressure from retail-driven, discretionary capital in prime cities such as Paris and London shows that money is still willing to chase scarce assets aggressively.

For now, success in the value-add space comes down to patience, sourcing discipline, and realistic underwriting. The best opportunities will come from motivated sellers, repriced prime locations, and partnerships with developers who need capital more than ever.

CRE Debt & Lending - Restructuring, repricing, or re-entering?

Competition, Liquidity, and a Re-Shaped Risk Landscape

Europe’s CRE debt market is in one of its most liquid and competitive phases in years. Banks and debt funds are deploying aggressively, margins have tightened, and almost every asset class except secondary offices attracts strong lender appetite. 

But, this situation sits alongside a notably dry equity market, creating a capital stack where debt is doing nearly all the work and underwriting discipline is critical.

Liquidity and the Cycle

Lenders describe the market as crowded. Regulatory headroom, repayments, and cautious syndication strategies allow banks to keep lending, while private credit remains in high demand. Equity, by contrast, is selective, slowing transaction volume but making high-quality deals fiercely competitive.

Competition peaked in early summer and eased slightly toward year end, though most believe this was seasonal. The expectation is for a sharp re-acceleration of activity and lender rivalry in early 2026.

Pricing Compression and Back-Leverage Pressure

Prime senior deals have converged around 1.75-2% margins, with only a few banks lending below 1.50%. This compression has hit debt funds that rely on cheap back-leverage. Several major leverage providers have reached exposure limits, reducing capacity and likely widening spreads for whole-loan strategies and high-LTV structures.

Pricing divergences across countries are narrowing. Poland, helped by surprisingly assertive domestic banks, now prices close to Germany, despite different risk profiles. Germany itself remains uneven, with hidden bank exposures, construction-sector distress, and inconsistent local appetite for new loans.

New Entrants and Geographic Dynamics

Spanish lenders are expanding across Europe, GCC-backed banks are selectively active, and some non-bank lenders have lowered return hurdles to compete around the 1.75-2% zone. In the Nordics, alternative lenders gain share mainly at higher leverage or when structural complexity is required. Relationship banking still dominates low-risk senior positions.

Structure, Flexibility, and Sponsor Segmentation

Flexibility, not pricing, is now the main differentiator. Top-tier sponsors can negotiate covenant-lite terms, softer governance, and generous cure rights. Mid-market sponsors request similar treatment but usually receive it only when leverage is low and assets are prime.

Many lenders have shifted competitiveness from margin to structure: taking more lease-up, development, or transitional risk to meet internal return benchmarks. For straightforward, low-risk assets, lenders admit that pricing cannot realistically compress any further.

CMBS Returns as a Distribution Tool

The European CMBS (Commercial Mortgage-Backed Securities) market is quietly re-emerging, with Blackstone’s EUR 510 million logistics deal acting as a catalyst, followed by a handful of office and mixed-use deals distributed to both European and US buyers. CMBS will not replace traditional syndication, but it helps banks recycle capital more efficiently and diversify distribution away from a small number of relationship lenders.

Execution risk remains, however, as CMBS requires more preparation, depends on market windows, and is not suitable for all asset pools. Still, its revival expands the toolkit for clearing large balance-sheet exposures.

ESG: Lower Priority, More Pragmatism

ESG-linked lending has lost momentum. Margin reductions for hitting KPIs are typically only 5bps, and structuring costs often outweigh the benefit. Greenwashing concerns also make lenders cautious, especially for sustainability-linked frameworks with ambiguous KPIs.

True green assets are simple to classify, but transitional ESG financing is harder to execute. Nordic lenders remain the most ESG-driven, although even they now prioritise commercial logic over labels.

Underwriting: Occupancy, Obsolescence, and Valuation Gaps

Lenders are increasingly focused on tenant stickiness, obsolescence risk, and viable alternative uses. Data centres raise the most questions around functional obsolescence, retail requires close turnover scrutiny, and offices demand rigorous assessment of whether tenants will stay beyond break options. 

A persistent issue is the gap between valuation and clearing price, with many lenders now running independent liquidation timelines and stress scenarios rather than relying on appraisals.

CRE Institutional Trends - Fund flows, allocations, and performance-driven capital

Scale, Selectivity, and the Redefinition of Core

Institutional capital is active but far more selective than in past cycles. Allocation decisions are now driven less by traditional real estate buckets and more by relative value versus global equities, bonds, and private credit. The result is a market where institutions still deploy billions, but only into sectors and structures that offer scale, income, and long-term relevance.

Scale as the Primary Constraint

Large sovereign funds and pensions stressed that scale governs nearly every decision. Teams overseeing tens of billions cannot deploy into small or fragmented opportunities. Platforms must support repeat deployment and meaningful exposure, which pushes institutions toward logistics, PBSA, living, and data centres. These sectors offer both granularity and the ability to build multi-country platforms.

Offices remain problematic. Limited liquidity, slow price discovery, and capex uncertainty make it hard to scale quickly, even when selective opportunities exist. Some institutions aim to rebuild exposure eventually, but almost all prefer to wait for clearer pricing.

Fundraising: Slow, Patient, and Opportunistic

Fundraising timelines have doubled. LPs take longer to underwrite, stretch diligence, and wait for evidence that a manager has either seeded assets or secured co-investment opportunities. Several LPs rarely commit without a compelling angle that creates urgency - a time-sensitive discount, a strategic partnership, or an opportunity that cannot be replicated later.

Despite this caution, LPs with captive capital are still deploying. But they are increasingly absorbing assets stuck in GP continuation vehicles or delayed exits, where governance and pricing discipline are more favourable.

Relative Value Over Fixed Allocations

Capital moves wherever returns exceed those of global listed markets and private credit. Europe currently screens well, as financing is more attractive than in the US, valuations are more transparent than in Australia, and liquidity is improving in several continental markets.

The UK remains less favoured due to policy volatility and inconsistent pricing, though some LPs see opportunity in best-in-class London buildings once values stabilise.

The New Definition of Core

Traditional core real estate yielding 3-5% with long leases is no longer considered fit for purpose. Institutions increasingly define “core” as income-resilient, operational, and supported by structural demand drivers. PBSA, senior living, extended stay, and data centres all fall into this category, even if they require more operational oversight.

Income is now more important than mark-to-market appreciation. After several volatile years, LPs favour assets with predictable cashflow, modest indexation, and strong occupancy fundamentals.

Governance, Control, and Exit Alignment

Institutions still insist on strong exit rights, especially in JVs or co-investments as misaligned partners blocking sales remains a painful memory across the industry. However, day-to-day governance requirements are becoming lighter for managers with proven execution capability. LPs prefer to focus their oversight where it genuinely changes outcomes, rather than micromanaging.

Sector Priorities Going into 2026

Many LPs describe being underweight in data centres and PBSA relative to long-term targets, making both core expansion themes. Logistics remains an anchor allocation across nearly all global portfolios due to its scalability and cross-border consistency.

Residential views vary by region. Northern Europe is seen as attractive for regulated and institutional rental housing, while Southern Europe draws interest for logistics and selected living formats. Offices will see selective rotation rather than aggressive expansion.

Despite the cautious macro backdrop, institutions emphasise that they have deployed substantial capital this year across Europe, North America, and Asia. The difference is not the amount of capital, but the precision with which it is placed.

The theme for 2026 is clear: institutional capital is not waiting for a return to the old cycle. Instead, it is redefining core, re-weighting toward income, and concentrating firepower where structural tailwinds and scale align.
 

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Thank you to everyone who participated in the GRI Commercial Real Estate Europe 2025 conference.