European real estate outlook 2024

Our experts delve into various sectors, including office, industrial, and private rented sectors, examining the impacts of a number of factors such as GDP growth, interest rates, inflation and more.

Pan-European overview

Judith Fischer, associate, commercial research

With the ECB putting rate hikes on pause for the time being, the focus for investors over the coming year is expected to shift towards the timing and intensity of potential interest rate cuts. Some economists are predicting the first ECB rate cut in Q2 2024, while others are foreseeing later in Q3 next year.

Monetary policy within the Eurozone is, however, complicated by the diverse economic landscape. Divergence in inflation remains high but is likely to normalise by 2024, with economists forecasting inflation to hover around the 2% mark in most European regions.

While the uncertain economic outlook and higher interest rates have curtailed investment in some regions, Europe still stands as the prime destination for global cross-border capital. It is crucial to delve deeper than the headlines, as there are resilient pockets even in this landscape. For example, despite the economic headwinds Germany faces and even though volumes are at lower levels than in previous years, it remains the largest destination for cross-border capital in mainland Europe. While German office volumes remain soft, inbound volumes quarter by quarter over the year have been increasing.

Amid rising debt costs there is still a considerable pool of capital waiting to be deployed. Sectors that benefit from strong structural tailwinds such as living and logistics will likely continue to see demand. On the back of solid growth in tourism-related sectors and an easing in core inflation, the hotels and hospitality sectors are attracting investor interest with countries such as Spain showing considerable growth in the sector.

From a geographical perspective, investors from regions with strong currencies and hedging advantages, like North America and Singapore, are likely to remain active in Europe. The Japanese are expected to be significant players over the coming year, benefitting from their favourable cost of debt and shifting yields.

While private capital and safe-haven investors such as sovereign wealth funds are forecast to continue to target best in-class real estate, we expect to see more opportunistic investors selectively targeting secondary and tertiary real estate as it undergoes repricing. This could pave the way for refurbishment to an improved sustainability standard or repurposing assets that have good bones.

Source: Oxford Economics, Capital Economics, MSCI Real Capital Analytics, Knight Frank Research

Belgium

Shane O’Neill, head of research, Knight Frank Belgium

All eyes are on the economy, and more precisely inflation and the ECB’s monetary policy, as invested volumes in Belgium in 2023 have been dire while the market awaits stability.

Looking ahead to 2024, Belgium’s GDP is projected to be 1.3%, above the forecasted Eurozone average of 0.6%. Belgian inflation is expected to slow down to 3.9%, based on data from the Federal Planning Bureau's September figures.

The market has been dealing with uncertainty surrounding high interest rates, underlined by low investment volumes on the Brussels office market. However, Brussels office transaction numbers are expected to see an upturn in Q4 due to the anticipated closing of the €950 million Cityforward portfolio of Brussels office buildings occupied by the EU. Additionally, TPG has submitted an offer to acquire the Belgian REIT, Intervest Offices & Warehouses. If this acquisition materialises, it will significantly impact volumes in 2024.

Furthermore, the potential number of deals next year will increase, as owners, and particularly over-leveraged developers will have to refinance, owing to the ongoing financial context. This leads us to believe that portfolio optimisations will take place. We expect traded volumes to remain low as small (i.e. more liquid) assets are likelier to be subject to disposals. Additionally, cash rich buyers (also targeting smaller tickets) are likely to continue to be most active, irrespective of the asset class.

Turning to the occupier market, both offices and logistics demand appear relatively healthy. The Brussels office market continues to benefit from large moves by the EU, accounting for three out of the top five largest deals this year. Grade A office spaces continue to attract large occupiers with a presence in Brussels who are conscious of their ESG profile. This trend is expected to persist as occupiers also optimise their workplace footprint strategies. The logistics market has also seen a boost from several big box deals, and several speculative large-scale development projects in peripheral districts are likely to continue attracting such deals.

Sources: National Bank of Belgium, European Commission, Federal Planning Bureau, Statbel, Oxford Economics, Knight Frank Research

Czech Republic

Lenka Šindelářová, head of research and consultancy, Czech Republic

The Czech Republic's investment market is notably dominated by domestic capital, and this is expected to persist through 2024. We anticipate that investment volumes will continue to stay below average in 2024, both due to a lack of available investment opportunities and the cautious approach of investors. Yields are likely to experience slight increases, dependent on the development of interest rates.

The Czech economy is expected to rebound in 2024, with forecasted GDP growth of 2.4%, primarily driven by the recovery in household consumption. Inflation is gradually decreasing, and the labour market remains tight.

Despite the slowdown in the inflation rate, it is unlikely that financing costs will change in the short term. The Czech National Bank has maintained the base interest rate at 7% since June 2022. Consequently, both Czech Crown-denominated and Euro-financing costs are expected to remain elevated throughout 2024, impacting both the market's development and investment activity, as well as exerting pressure for further yield decompression.

In the Prague office market, the vacancy rate stands at 7.4% at the end of Q3 2023 and there is an expectation of significantly fewer new completions in 2024 than in previous years, with around 79,000 sqm in the pipeline compared to the 10-year average of 124,000 sqm. This situation may lead to an undersupply in 2024-2025, resulting in renewed rental growth in prime city centre and inner city locations.

However, the occupier market may experience an influx of second-hand office space that has become obsolete as current leases expire, and companies adjust their space requirements to accommodate hybrid workstyles.

Within the logistics market, we have observed a slight decrease in demand following a significant surge in 2021 and 2022 due to the impact of Covid. Vacancy rates started to rise slightly in 2023, but they still amount to less than 2%. Rents are expected to continue to stabilise in 2024, following a growth rate of 19% recorded in 2022.

Sources: Czech Ministry of Finance forecasts, Knight Frank Research

Denmark

Martin Spangdahl-Fafara, managing director, Croisette Denmark

Foreign investors are expected to return to the Danish market in 2024, supported by the positive economic outlook, with residential and logistics sectors remaining in demand.

Among the Nordic countries Denmark’s economy has the strongest outlook for 2024, with an expected GDP growth of 1.8% which is also well above the Eurozone average. This should support real estate investors’ confidence in the market. The growth forecast is mainly driven by an improvement in pharmaceutical production, as well as a recovery in household consumption and investment.

The Danish unemployment rate is the lowest in the Nordics, with just under 3%. While unemployment is likely to tick up slightly, a sharp labour market correction is not expected in 2024.

Amid a weaker global environment and increased hybrid workstyles, we are likely to see large international occupiers adjust their space requirements in 2024. The sharp rise in indexed rents throughout 2023 may result in some occupiers relocating to more affordable submarkets in the Greater Copenhagen Area. Local companies, however, are not expected to follow this trend on the same scale. Nevertheless, the vacancy rates in almost all sectors are at their lowest level ever and are expected to remain stable.

The retail sector is likely to benefit from strong tourism and the recovery in consumer spending amid lower inflation, with footfall and tourist numbers exceeding pre-Covid levels.

Investment activity is likely to pick up again in 2024 as interest rates are expected to be cut in line with ECB monetary policy. The Danish market is dominated by local investors but foreign players are expected to return as soon as some larger transactions have closed. Particularly, the residential and logistics sectors are expected to remain in demand, with a focus on ESG-rated assets. Yields have not moved out as much as in other European markets which is evidence of the strong Danish economy and its safe haven status. Therefore, we are likely to see more value-add investments where yields are higher. Developers are focused on senior living and student housing, two sectors which are undersupplied in Denmark. In particular, the senior living segment is seeing developments in the larger regional cities in Denmark.

Sources: Oxford Economics, Croisette Denmark, Knight Frank Research

Finland

Jalmari Janhunen, managing director, Croisette Finland

Despite limited transactional market activity at the end of 2023, both buyers and sellers began to align their views on the current pricing of real estate indicating that investment activity could pick up in 2024. However, the timing of the recovery remains uncertain.

Finland’s economy is forecast to grow by 0.8% in 2024, in line with the Eurozone average, supported by easing inflation and improving consumer confidence. The labour market is still robust but is softening. However, no significant increases in unemployment are expected, which will continue to support the occupier markets.

Occupier demand from logistics operators remains stable, with both large operators and smaller-sized businesses taking up space. In Helsinki and Tampere, the office occupier market will likely be supported by solid office employment growth which is expected to outperform the national average.

After subdued investment activity in 2023, there are few signs for a quick recovery of investment volumes in 2024. There remain opportunities for value-add investments in the logistics sector, particularly in secondary locations due to a lack of prime assets coming to the market. The logistics sector is supported by strong underlying fundamentals, steady occupier demand and a scarcity of land which will keep prices stable considering the more challenging market conditions.

Office investment volumes will start to increase if pricing expectations of buyers and sellers come closer together. The prime office yield stands at 4.5% but might move out further depending on the agreed price that transactions will have achieved by the end of 2023.

Investors increasingly demand high ESG credentials across all sectors. We will likely see more asset conversions from brown to green.

Sources: Oxford Economics, Croisette Finland, Knight Frank Research

France

David Bourla, chief economist and head of research, France

The recovery of the French investment market will depend on whether sellers accept a more significant stronger repricing and will be very gradual depending on the type and the quality of assets. However, there are a number of players with significant liquidity that are clearly keeping an eye out for opportunities. We therefore expect the market to bounce back, even if it is still difficult to know when the recovery will occur and to what extent.

Despite a gradual fall in inflation and a possible upturn in household consumption, the business climate is expected to deteriorate over the coming months and economic growth in 2024 is likely to remain sluggish. After ten quarters of decline, unemployment is anticipated to tick upwards, with 60,000 jobs expected to be lost in 2024 after some 320,000 net new jobs in 2023.

Office occupiers will be even more willing to cut costs in 2024, which will encourage them to continue downsizing and amplify the release of second-hand space. Since the number of square meters available for delivery in the Greater Paris Region will be very high in 2024 (over 900,000 sqm), vacancy rates will be pushed to new all-time highs.

However, the situation will vary greatly by submarket: supply will remain scarce in Paris, which could fuel further rent rises. Meanwhile, supply will generally be abundant on the outskirts, where the submarkets that offer the best value for money may nonetheless benefit from relocations from occupiers forced to optimise their real estate.

The logistics leasing market is more solid, with sustained demand and supply still limited by regulatory constraints (“ZAN” – Zero Net Artificialisation). This will continue to push up prime rental values, which, after crossing the €60/sqm/year threshold in 2021 and then the €70/sqm/year threshold in 2023, will gradually approach the €80/sqm/year threshold in the Paris Region.

The outlook for the retail market is more mixed. Much will depend on households’ purchasing power and their propensity to dip into their savings which remain at a high level. In Paris, prime high streets will likely benefit from the dynamism of international tourism and the 2024 Olympic Games.

Given investors’ caution and longer negotiation times, investment volumes will likely remain relatively low until the second half of 2024 or even until the start of 2025. This period could, in fact, coincide with a peak or cut in ECB interest rates.

Despite subdued activity, the desire to invest in property is still there. This has been even stronger in certain ‘niche’ segments such as managed residential or higher education where volumes have increased year-on-year. The diversity of buyers ready to seize the opportunities from repricing is also a positive sign.

Sources: INSEE, Banque de France, Knight Frank Research

Germany

Jutta Rehfeld, director, Berlin, Germany

Dennis Beißer, senior research consultant, Munich, Germany

Backed by the expectation of stabilised interest rates and potential rate cuts in 2024 and thus a more reliable framework for price-fixing, we might see more activity in Germany’s real estate markets. The rental markets which have proven to be resilient, continue to be attractive for investors. However, the location and property standards and thus financial feasibility of potential opportunities must be examined carefully.

The German economy is expected to expand in 2024. The forecasts, however, vary widely between sources, from a GDP growth of 0.1% to 1.6%. After seeing negative growth in 2023, a positive economic stimulus combined with more stable financial conditions might support some market players to break out from the wait-and-see approach seen in the market over the last year and seek their opportunities in 2024. Nevertheless, Germany continues to be a top global player in terms of cross-border investment, even though volumes have moderated.

In the office sector, we continue to see rising prime rents driven by demand for high quality and ESG-compliant space. At the same time however, vacancies are increasing and take up is at levels last seen in 2013/2014 as a delayed response to the recession. Many companies will continue to postpone signing new leases and prefer opting to extend contracts. The strong project pipelines are somewhat hampered by construction and planning delays. Additional space has come to the market as occupiers reduce their space requirements partly as a result of increased working from home. But office vacancy rates remain low in an international context.

The big question of future space needs and the challenge of upgrading existing properties to higher sustainability ratings means the office sector is currently seeing somewhat greater uncertainties.

Logistics is backed by a solid occupier market. With demand still outpacing supply and positive rental growth expectations we might see more demand from institutional investors in the logistics sector, in particular for ESG-compliant high quality assets.

Overall, institutional investors remain cautious and will increasingly appear as sellers as part of portfolio adjustments in 2024. Where it is difficult to obtain financing, we are likely to see more private and equity rich investors. Strict ESG criteria are becoming more important to secure leverage as well as convincing concepts for conversions.

As office investment will likely remain relatively low, other asset classes are expected to compete for larger shares in 2024. With prime net yields above 4% and still under upward pressure, retail – especially food-anchored retail, is gaining in importance. Additionally, we expect more investor interest in niche sectors such as data centres, health care and education.

Solid fundamentals supporting the residential sector – including its subsegments senior/student living – means investor demand will likely be driven by rising rents in Germany’s major markets. The focus, however, will mainly be on small to medium deal sizes with total volumes on low levels for both investment and leasing markets.

Sources: Oxford Economics, BMWK, Knight Frank Research

Ireland

Joan Henry, chief economist & head of research, Knight Frank Ireland

Investors, both global and domestic, are expected to continue to take a wait-and-see approach for the rest of 2023 to assess what the impact on pricing will be into 2024, reflecting the numerous global financial market and geo-political concerns, which have increased investor and occupier caution.

Economic growth forecasts, while remaining positive, have edged lower, impacted by the same global concerns and monetary policy tightening. On the positive side, the labour market remains tight, with the economy operating at full employment. However, the government continues to face the challenge of an economy operating at full capacity across most sectors and infrastructure (housing and transport services in particular) which is inadequate to meet the population growth and pace of activity across the economy.

Total office take up in the Dublin market is expected to reach between 1.3m – 1.5m sq ft for the year as a whole, which is below the ten-year average level of take up (2.6m sq ft) but will only reduce the new ten-year average to 2.5m sq ft.

Smaller deal sizes have been a key feature of market activity in 2023 and this is expected to continue into 2024. Professional services companies continue to drive current requirements for larger spaces, and while the technology, media and telecom sector is still active, the requirements are for smaller spaces.

Upward pressure on the office vacancy rate is expected to continue into the first half of 2024. This reflects a particular complexity in the market at present whereby an increase in grey market space and a peak in the delivery of new space are creating a one-off spike in the amount of space available, particularly in the city centre market. However, it should be noted that for space that meets higher building energy ratings and has sustainable credentials, the overall vacancy rate is considerably reduced.

In contrast to the large volume of recent new deliveries, a slow development pipeline for 2025 and 2026 is expected, with 90% of space set for completion in 2026 already pre-let. As such, the aforementioned upward pressure on the vacancy rate is expected to ease by the end of 2024 with vacancy rates falling thereafter.

Prime headline rents are achieving in the region €62.50 - €65.00 psf. Rents are expected to end the year closer to €62.50 psf with evidence continuing to suggest that enhanced incentives and rent-free terms will maintain a floor under prime rents close to or at this range. Rental growth is expected in 2024, driven in particular by higher costs and the increased occupier preference for new space with the best sustainable credentials.

Office investment activity and transaction levels in Ireland continue to reflect the wider trend seen across all European markets in 2023. The cost of finance and weak sentiment continue to be key constraints on activity, with liquidity particularly tight for larger lot sizes. Investors, both global and domestic, are expected to continue to take a wait-and-see approach for the rest of 2023 to assess what the impact on pricing will be going into 2024.

Prime office yields continue to come under pressure, as is the case across all investment asset classes. Prime yields are estimated to be between 5%-5.25%, with limited transactional activity making it difficult to be exact. This is expected to remain the case into 2024.

Ireland: Knight Frank Ireland

Poland

Dorota Lachowska, head of research, Knight Frank Poland

Increased investment activity may return in the second half of 2024, with a focus on the PRS sector. Occupier demand for logistics and warehousing assets will likely remain high, particularly in Poland’s established logistics hubs.

The Polish economy seems to be picking up, with positive forecasts for the coming quarters, mainly due to a revival in domestic consumption. While exports have yet to recover, domestic demand is the primary driver of growth.

Despite a challenging external environment, Poland is witnessing the beginnings of an economic upturn. In 2024, there is potential for GDP growth of around 3%, although global uncertainties pose a risk. The election results in Poland offer hope for a shift towards a more market-oriented economy that encourages entrepreneurship.

Since the beginning of 2023, there has been a noticeable decline in interest in leasing offices. High inflation, which has led to an increase in construction costs, service charges, and office fit-outs, has had a negative impact on the ease of decision-making for tenants, as well as on planning new investments. More and more tenants are opting to renew their contracts and stay in their current locations. Meanwhile, due to limited new supply in the capital city, the availability of office space is decreasing.

Despite challenges facing the manufacturing and production sectors, demand for warehouse and logistics assets is predicted to remain high. After a period of intensive development of emerging logistics markets, developers have shifted their attention back to the established warehouse markets.

Increased investment activity may return in the second half of 2024 as inflation eases and interest rates in the Eurozone are expected to be cut, following subdued investment volumes in 2023 compared to the previous year.

As seen across Europe, this has been as a result of high financing costs, global economic uncertainty, and disparities in price expectations between sellers and buyers. The sector that will likely keep the attention of investors is the Private Rented Sector (PRS), following a year-on-year increase in transactions of over 80%.

Sources: S&P Global Ratings, Knight Frank Poland

Spain

Daniel Caprarin, research director, Spain

The hotel and living sectors will continue to show resilience amid favourable economics and solid supply-demand dynamics.

Spanish GDP is forecast to expand by above average 1.3% in 2024 supported by consumer spending and a robust labour market, after an expected 2.4% growth in 2023. However, weak external demand and tighter monetary policy are weighing on the growth outlook. Within the Eurozone, Spanish inflation has been more moderate and is expected to average 2.9% in 2024, spurring interest in the growing residential sector and beyond.

As seen across Europe, higher interest rates led to a slowdown in Spanish investment activity due to both the uncertainty in determining the value of assets and the limited access to financing for new projects. However, on the back of double-digit growth in tourism the hotel sector continues to attract investor interest. Cross-border inbound investment into the hotel sector surpassed the full year totals of the last four years in 2023, with positive sentiment likely to continue into 2024.

The Build-to-Rent (PRS-BTR) sector also shows great resilience with significant transactions, as the market still faces a shortage of supply and strong demand. We are also likely to see growing investor interest in the purpose-built student accommodation (PBSA) sector. Madrid is the second most popular choice for PBSA and PRS investment in Europe, according to our European Living Sectors Investor Survey.

We continue to observe how tenants in the office market prioritise asset quality and location, and due to the scarcity of this type of space, a slight increase in prime rents is expected. Meanwhile, the logistics market is still adapting to new consumer buying patterns, and although prime rents in Madrid have remained stable, some established submarkets may achieve slight increases in their respective prime rents.

We expect that in 2024, interest rates will remain stable or be cut which, combined with the positive economic outlook for Spain, will rekindle investor appetite, especially in the second half of the year.

Sources: Oxford Economics, Knight Frank Research

Sweden

Elvis Miglans, research analyst, Croisette Sweden

Despite a soft GDP growth outlook for Sweden in 2024, there remain opportunities for the commercial real estate market that point to a possible recovery of transaction volumes in upcoming quarters.

On the back of an anticipated GDP contraction of -0.51% in 2023, soft growth of 0.12% is expected for the Swedish economy in 2024. However, while Sweden might be experiencing among the lowest growth in Europe, it should be noted that this is on the back of GDP which is already significantly higher than pre-pandemic levels.

With the key policy rate unchanged at 4% in the Riksbank’s latest November meeting, Oxford Economics now predict the rate has reached its peak and will start to see cuts in mid-2024. Sweden is especially exposed to rising interest rates, since most mortgages and corporate loans in the country are variable or short-duration, causing a swift passthrough of higher rates.

However, with even higher key interest rates in the Eurozone, US and UK, Sweden may be less impacted in the long term by global higher-for-longer interest rates than other markets, which are burdened with refinancing at these higher rates.

The monetary policy tightening cycle has been largely effective at combatting inflation, standing at 6.5% as of October 2023 compared to a recent peak of 12.3% in December 2022. The descent is forecast to continue, driven by energy price base effects and lower food inflation. Inflation expectations for 2024 are close to target in 2024 at 2.9%, and well within the target range in 2025 at 1.7%.

However, a weak Swedish krona is raising the cost of imported goods and services for households and businesses, thereby contributing to some stickiness in inflation. On the other hand, this devaluation may attract interest from international investors with increased buying power to the Swedish commercial real estate market.

As with other markets, investment activity in Sweden declined sharply in 2023 YTD, with transaction volumes falling 42.2% from last year, reaching a low not seen since 2013. The misalignment of buyers and sellers’ views on market values are expected to start to resolve in 2024.

Sweden’s office and industrial real estate sectors demonstrate robustness in prime locations despite the economic volatility. Across all sectors except the regulated residential sector, rent has seen an inflation-driven increase of approximately 10%, which are likely to continue to rise. In Stockholm's CBD office vacancy rates remain low, under 8%, indicating healthy fundamentals.

Sources: Oxford Economics, Croisette Sweden, Knight Frank Research

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