Trends and outlook for the European Real Estate Market in 2024
The outlook for the European real estate market is gradually improving, thanks to the slowdown in inflation and the recent interest rate cut by the European Central Bank (ECB). However, the main factor contributing to this improvement is the strong operational performance of the real estate sector, which continues to show positive results. Aside from secondary office spaces, real estate availability remains limited and rents are rising. According to MSCI data, rental values across Europe have increased by 4.3% across all sectors in the 12 months preceding the first quarter of 2024. Industrial rents rose by 6.8%, residential by 6.3%, office rents by 2.8%, and retail by 1.6%.
Overall, real estate rents have increased by 8.6% since the slowdown began in June 2022. After the global financial crisis, real estate rents had dropped by 8.5% before stabilizing two and a half years after the beginning of the slowdown. This indicates a sustained recovery despite the uncertainties.
Economic growth is a critical factor driving tenant demand and influencing rental trends. While current economic growth remains somewhat inconsistent across different regions, the overall outlook has become more optimistic. The Composite PMI continues to show positive growth on average, and the labor markets are demonstrating resilience. Unemployment in the European Union (EU) dropped to 6.4% as of April 2024, reflecting a decrease in joblessness. Real wage growth in the Eurozone reached 5.3% in May, marking the highest rate since June 2022. These factors are playing a more significant role in supporting the cyclical recovery of real estate than the cuts in interest rates alone.
When examining the various segments within the real estate market, the outlook for the office sector in Europe is mixed. The demand for office space increased to 1.7 million square meters in the first quarter of 2024, reflecting a 2% rise compared to the same period in 2023. However, overall demand is still 11% lower than the pre-pandemic average, with the demand for office spaces structurally reduced due to the growing trend of flexible working arrangements. In addition, rents for high-quality office spaces continue to rise rapidly in several cities across Europe. For example, in Paris, rents for top-tier office spaces surged by 7.4%, hitting a new record of €1,070 per square meter.
The logistics market has shown contrasting signals. Despite an increase in occupancy rates to 6.2 million square meters in the first quarter of 2024, the supply of high-quality warehouses remains scarce. The industry is anticipating a reduction in supply over the coming months, which could potentially drive further rent increases. Rental rates in the logistics sector rose by 6.8% compared to the previous year, signaling a strong demand for logistics properties, especially in strategic locations.
The retail sector has also shown signs of recovery, primarily driven by an increase in savings during the pandemic and the growth in real wages. The vacancy rate for retail warehouses across Europe has decreased to 3.8%, with the UK experiencing even lower rates. However, shopping centers continue to face structural challenges, as their vacancy rates increased to 13% in the first quarter of 2024. The outlook for shopping centers remains cautious, although there has been renewed interest in luxury retail and retail parks, which may present growth opportunities in these sub-sectors.
The residential real estate market has demonstrated resilience, especially during the pandemic and the current economic slowdown. Vacancy rates in the top 30 European cities have stabilized at 3%, down from the peak of 4% in 2021. In certain cities, rental rates have increased by double digits, with an average growth rate of 6.3% recorded in the first quarter of 2024. The limited supply of new housing across Europe supports the continued resilience of cash flows within the residential market. This trend indicates that residential properties remain in demand, but investors need to be cautious about new regulations on rent controls and sustainability initiatives that could impact future returns. The European residential market continues to be seen as a stable and reliable investment, with long-term growth potential in many urban areas.
Despite the challenges, the overall health of the European real estate market suggests that 2024 will be a year of gradual improvement. However, the dynamics in different sectors will vary, with office and retail markets facing certain challenges while residential and logistics markets remain strong. Investors will need to stay vigilant to emerging trends and regulatory changes that could shape the real estate landscape in the coming years. In conclusion, while uncertainty remains, the outlook for the European real estate market has shown positive momentum heading into 2024, driven by solid performance in key sectors, improving economic conditions, and strong demand for well-located assets.
Sources: https://www.abrdn.com/en-gb/institutional/insights-and-research/european-real-estate-market-outlook-q3-2024
