Europe’s occupier markets, accustomed to slow growth, benefit from limited new construction, keeping supply and demand balanced, writes Dan Mahoney
2025 has spawned macroeconomic storms – triggered by the Trump administration’s new tariffs and their influence on financial market conditions – in both the Atlantic and Pacific.
These storms are just beginning to make landfall when it comes to Europe’s real estate markets, yet their path remains erratic. Thunderheads loom and offer more changes in direction and intensity as tariff ‘pauses’ expire over coming months.
The long-term real estate impacts ride on short-term policy shifts that are nearly an order of magnitude different from recent experience: US average effective tariffs are now the highest since the Second World War and the Global Economic Policy Uncertainty Index is currently six times higher than its long-term average from 1997-2015.
Policies that would have been seen as radical or outside the window of possibility are becoming law: Germany’s stimulus combining debt brake reform, infrastructure and defence spending, and tax cuts is a notable example.
What does this macro environment mean for European property? Time is a key factor here: financial markets and policy shifts don’t instantaneously change direct real estate capital markets or occupier demand. Instead, they filter through to real estate with variable time lags.
So, any real estate impact depends on whether the proposed US tariff rates remain, if immigration policies withstand appeals, and the degree to which Europe’s higher defense spending sticks. And the longer that clouds of uncertainty hang over markets, the higher the likely damage to real estate investment and demand.
As the policy shifts stand today, demand for European student accommodation may be most directly impacted. Europe already has a global edge attracting international students, with 50% more of them than the US, and this comparative advantage is being reinforced following heightened US scrutiny of international students.
Post-“Liberation Day” UK application data is not yet available, but Studyportals year-to-date data shows a shift in prospective international student intentions toward attending universities in the UK and Spain. This implies the potential for renewed momentum in the already high pace of European purpose-built student accommodation (PBSA) rent growth.
Predicting the absolute paths of these new policies over a longer horizon is guesswork, whereas relative real estate impacts – by asset class, geography, and property type – can be anticipated with more confidence. On these fronts, European real estate is positioned to offer investors some resilience. As an asset class, real estate is early in its price and real rent recovery.
Unfortunately for Europe, GDP growth has not been providing much support to occupier space demand in recent years. While Spain, Denmark, and Poland have been notable exceptions, the German economy has contracted since 2022.
The silver lining consequence of this lacklustre growth is that Europe’s occupier markets have gotten used to these headwinds – and as a result are building very little new supply. This has caused market supply and demand to remain fairly balanced.
Competitive tension exists for space that can meet strong tenant preferences for central locations, new-quality spaces, and low carbon and energy use intensity. This tension has supported improvement in the pace of real rent growth, net of inflation, over the last year.
Extra tariffs, on the moderate 21% of EU exports that go to the US, are certainly a negative for the European economy, but they seem likely less able to tip European real estate markets out of balance.
REIT index reactions post-“Liberation Day” seem to reflect Europe’s relatively better position, with European listed real estate securities outperforming since 2 April.
Low economic growth, moreover, when combined with the ECB’s institutional stability, high inflation-fighting credibility and the fiscal room manoeuvre in Germany, has produced a very different price of money in the Eurozone. With interest rates about 200bps lower than in either the US or UK, Eurozone real estate is once again benefiting from more accretive debt.
Across property types in Europe, historic patterns of investment sensitivity to fluctuating uncertainty suggest that residential properties are likely to be least sensitive to trade war escalation, whereas some hotel markets bear close monitoring as they can be especially sensitive. Industrial assets – which house these affected supply chains – could see tariff impacts cushioned by very low vacancy (just 3.1% in Germany), and also by very wide alternate use potential of industrial assets, including even for the defense sector.
An unpredictable storm, like the current trade war, brings systemic risk for all asset classes, including real estate in Europe, even as there are also some possible ‘rainbows’ for certain property types like European PBSA.
The current macro unpredictability drives our belief that building a real estate portfolio that spans regions, and includes quadrants like debt, should enhance portfolio resilience in coming years.
Return correlations between listed real estate securities in the US versus those outside the US, worth tracking as a possible leading indicator for private real estate, have fallen below their long-term average, implying greater potential diversification benefits. This may presage more-than-typical private real estate risk-return gains from adding European exposure to a global portfolio.
Preparation and positioning can make all the difference between taking costly damage in a storm versus none, and a big part of why we believe real estate, and especially European real estate, is ready to weather this storm.
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