A European cycle for selectivity

In our 2026 Global CRE Outlook: A Cycle for Selectivity, we argued that the commercial real estate (CRE) cycle has moved into recovery by nearly all traditional measures. REIT valuations, often a bellwether for cyclical turning points, have risen broadly since their 2023 trough. Valuations across most major price indices are rising, and credit markets are functioning again, helping bolster transaction activity. At the same time, distress, a classic lagging indicator, continues to edge higher, reflecting the long tail of the downturn.

However, there are two key caveats that differentiate this cycle from prior recoveries.

• A rising tide will no longer lift all boats. Returns are diverging sharply across sectors, regions, and fund strategies. This unevenness isn’t a flaw in the cycle—it is the cycle. Investors are no longer confronting a broad-based downturn; they are navigating widening dispersion. The cycle ahead will likely be alpha-driven, and real estate investors will increasingly need to take a page from equity markets, where asset and market selection drive performance.
• Income will be the dominant driver of returns over the next 12 to 18 months. Unlike the post-global financial crisis (GFC) period—when returns were amplified by accommodative policy and financial engineering—the next phase of performance will hinge on property fundamentals and effective asset management. Net operating income will likely drive both income returns and capital returns in a higher-for-longer rate backdrop where cap rate compression is limited. Structural themes will remain important, but clearing return hurdles requires sharper focus and execution.

In Europe, this is playing out in single-sector funds, which continue to notably outperform their multi-sector counterparts. Additionally, return dispersion across European ODCE funds has widened over the past year: the median net return was +4.2%, with the top-quartile managers at +5.3% and the bottom-quartile managers at +2.5%. This trend is reinforced by rent growth forecasts across markets and property types provided by Property Market Analysis LLP (PMA). (See below: Each dot on the chart represents 5-year annual rent growth forecasts for cities across property types.) Offices and multifamily exhibit the widest dispersion in growth expectations.

• Office (prime) rent growth across 39 markets is forecast to average 2.0% per annum over the next 5 years, ranging from +3.6% to -0.3%. This reflects occupier demand gravitating toward higher-quality assets in prime, well-connected locations. Standout markets include Dublin, Barcelona, Warsaw, London (City), Luxembourg, and Copenhagen.
• Multifamily 5-year annual rent growth forecasts average 3.0% across 38 markets, ranging from +4.6% for Bristol to +0.9%. In multifamily, divergence is primarily driven by differences in demographic momentum and rental regulation. Standout markets include Bristol, Leeds, Berlin, Birmingham, London, and Düsseldorf.

In today’s unusually complex macro environment, investors should focus on funds that can outperform by delivering superior net operating income growth. Achieving this will require disciplined property, market, and fund selection, as return dispersion across real estate continues to widen—the central theme for 2026 and beyond.