Introduction

2024 was a transitional year for Europe, marked by efforts to stabilise growth and manage inflation amidst geopolitical tensions and post-pandemic realities. While challenges persisted, the final months of the year signalled a turning point for the European real estate market. Investment volumes reached approximately €174 billion, reflecting a 17% year-on-year (YoY) increase, with Q4 delivering the highest quarterly total since 2022. These gains were driven by easing monetary conditions, improved asset pricing, and a growing alignment between buyer and seller expectations.

As we look ahead to 2025, the market is expected to evolve steadily rather than undergo dramatic shifts. The focus will increasingly turn to navigating intensifying geopolitical pressures, addressing the challenges of obsolete buildings, and leveraging new technologies to respond to workforce and energy needs.

In this report, we explore five key themes shaping the future of 2025:

1. Europe in intensifying geopolitical tensions  How escalating global trade and political challenges are influencing investment decisions and capital flows. 
2. Obsolete buildings: Repositioning vs repurposing  Strategies for breathing new life into ageing assets in an era of sustainability mandates. 
3. European real estate amid labour market transformations  The implications of technological advancements on workforce dynamics and their impact on real estate demand. 
4. Real estate's role in reshaping electrical power generation  Exploring opportunities for the sector to contribute to energy independence and resilience. 
5. Impact of extreme weather conditions on real estate  Assessing the growing influence of climate risks on asset performance and investment strategy.

1. Europe in intensifying geopolitical tensions

Geopolitical concerns remain high, although property fundamentals remain in good shape, as investors navigate 2025.

Almost half of the world’s population voted in 2024, many for new governments, in the hope for better economic prospects. The European Parliament elections in June 2024 saw the centrist parties retain power, with gains for populist parties on the political right. The European Green Party lost seats, which will provide a challenge to the European Union (EU) in meeting its target of net zero greenhouse gases by 2050.

However, office occupiers are seeking to lease better quality stock to both reduce Scope 3 emissions and differentiate themselves against competitors, in a bid to attract and retain talent. Hence, we believe that ESG-compliant office stock will continue to achieve a rental premium.

Much of the international voter discontent has arisen from record levels of eurozone inflation, which has squeezed real incomes in recent years, stretching affordability for residential property. Construction costs and developer caution remain historically high, which will constrain residential development pipelines in 2025, supporting rental prospects.

And still, the eurozone’s economy remains in negative growth territory at end 2024. Mario Draghi’s recent EU competitiveness report outlined the reasons for lower productivity, with future challenges including migration and Europe’s approach to China. One of Draghi’s proposals is for the EU to increase research and development (R&D) spending to 3% of GDP to compete with China and the US, which would create new demand for R&D facilities.

A large drag on Europe’s growth is coming from its underperforming manufacturing sector. German car sales across Europe are still 20% below their 2018 peak, given weaker consumer demand. This is coupled with falling German export volumes, given China’s comparative advantage in the production of electric cars.

An additional threat to Europe’s manufacturing sector is the threat of a blanket 10% tariff on US imports of European goods from incoming President Trump. A global trade war is the most significant geopolitical risk over the next two years according to a survey by Oxford Economics, and should the EU respond with tariffs for US goods, this could reduce international trade volumes and provide upwards inflationary pressure. We expect Europe’s manufacturing sector to continue to drag growth in early 2025, although we anticipate this will be compensated by e-commerce occupiers taking more space to stockpile their current inventory over the short-medium term.

The focus of Trump’s proposed tariffs is on the import of goods, rather than services. As such, it is likely that the European service sector, more closely linked to office-using employment, will remain more resilient, and we forecast European office to rise by 4% YoY in 2025.

Following Russia’s invasion of Ukraine in 2022, European NATO members have recently discussed raising defence spending from 2% to 3% of GDP, according to the FT, and, as a result, we are observing increased occupier activity in the engineering, defence and professional services sectors. Clearly, further escalation of the conflict would represent a downside risk to CEE investment activity, although we are also observing pan-European investor demand return to the CEE region, where Savills is forecasting a 55% YoY increase in investment transaction volumes in 2025.

More generally, geopolitical concerns will extend decision-making processes across leasing and investment deals. However, with inflation back under control, businesses are in a better position to plan for the longer term than 12 months ago. Cross-border investors may be more inclined to delay transactions due to geopolitical challenges and will seek politically safe havens for investment, as domestic buyers will remain more active. Investors can always find reasons not to transact, but property market fundamentals remain well-positioned across Europe, supporting total return prospects in 2025 and beyond.

2. Obsolescence of buildings: Repositioning vs Repurposing

Due to physical deterioration of buildings, technological advances, or changes in occupier preferences, landlords are investing more into their buildings to avoid obsolescence.

Upon lease termination, a landlord will evaluate whether the building will relet, and at what rent. Are there significant capex costs required in the short term, and what is the remaining lifespan of the building over the long term?

Reposition?

MSCI data shows that across European offices, improvement expenditure as a percentage of capital values is at its highest level for seven years, as landlords seek to meet the changing demands of its end user to improve lettability and avoid obsolescence. This may include incorporating increased bike parking and amenity provision, and we have observed several landlords choosing to sacrifice floorspace to create atriums, to enhance social value appeal and achieve a higher overall rent roll. With a more unpredictable economic outlook, landlords are also increasing flex office provision in their schemes to increase the appeal to their existing tenant base.

Blending retail with non-retail uses is an increasingly common asset management strategy for shopping centres. Across the board, there is a notable rise in leisure in prime shopping centres, non-retail services in neighbourhood locations, and offices in city-centre schemes. Many centres, particularly those once anchored by department stores, are undergoing significant transformations. While e-commerce is projected to reach 25% of total retail sales on average across Europe by 2030, prime regional shopping centres have seen a reduction in vacancy rates, supported by refreshed retail and leisure offerings.

Asset managers are under more pressure from local authorities to reposition their existing schemes, rather than redevelop, to reduce whole-life carbon emissions. This clearly saves embodied carbon, but will the operational carbon usage increase under a change of use as a result of adapting an older building? Landlords are therefore investing more intensively in smart-building technology to reduce operational energy usage in a change-of-use scheme.  Of course, not all buildings can be converted to alternative uses, due to design constraints – large floorplates limit natural light, and fire and safety regulations may not meet planning criteria for a change of use.

Or repurpose?

In some non-CBD office districts, vacancy rates have risen, due to an occupier preference for better quality, CBD-located office stock. So, landlords are reviewing the viability of converting older stock to alternative uses. In some instances, capital values have fallen to levels in line with, or even below, residential, although in most markets, secondary yields have not yet adjusted sufficiently to support redevelopment plays. Construction costs are forecast to rise by 15% over the next five years, according to the BCIS, which will squeeze developer margins and limit value-add investor activity.

Some locations are better positioned to cater for alternative sectors – we have seen instances of business parks converted to data centres where there is suitable power supply. In edge-of-CBD locations, some smaller office schemes have been converted to PBSA, which benefit from commercial zoning permits, although municipalities generally seek to maintain tax income generated by office stock. Since 2021, 64% of office space which has been converted in Madrid has been into residential, although data centres (9%), hospitals (9%), hotels (9%), storage (5%) and student (4%) conversions have also been popular given rising tenant demand.

Competition for suitable development sites is heating up too, with land previously allocated for industrial & logistics use being taken by data centre operators. Should this trend continue, the speculative pipeline for warehouse space will decrease, constraining vacancy and supporting further rental growth in the industrial and logistics sector.

Landlords must adapt their buildings to ensure they continue to meet tenant requirements. Although we are initially seeing more landlords opt to reposition space, we anticipate that further price adjustment for older, non-CBD offices and shopping centres throughout 2025 will support more repurposing to avoid building obsolescence.

3. European real estate amid labour market transformations

Where jobs were, people used to follow – now, evolving workforce trends are redrawing the map of European real estate.

Europe is facing widespread labour market challenges, marked by worker shortages, skill gaps, and recruitment difficulties across most industries. These workforce dynamics significantly influence real estate demand, as jobs and employment patterns are pivotal drivers of property markets.

According to Eurostat, the EU’s unemployment rate hit a historic low of 5.9% in September last year, while nearly 75% of manufacturing and service businesses struggled to find skilled workers. Despite these challenges, employment grew robustly, with over 219 million people employed in the third quarter. This dichotomy underscores the labour market's complexity as it undergoes significant transformations.

For decades, population growth drove an expanding labour force, but this trend reverses as ageing workers retire, shrinking the active workforce. Remote work has broadened access to talent across suburban, rural, and international areas. However, while it attracts employees for its greater convenience and flexibility, it also presents challenges, such as maintaining productivity and team cohesion.

Technology is another force reshaping the labour landscape. Rapid innovation has outpaced the capacity of education and training systems to equip workers with the skills required for emerging roles. Additionally, the rise of automation and artificial intelligence is disrupting traditional employment models, particularly in roles involving repetitive or routine tasks.

Cultural and generational shifts are also redefining work priorities. Unlike older generations who prioritised jobs when choosing where to live, younger workers now prioritise lifestyle and neighbourhood. Generations X, Y, and Z increasingly favour remote and contract work over full-time roles. Many are entrepreneurial, often managing multiple jobs simultaneously, pushing employers to rethink how they attract and retain talent.

The dynamics of the labour force significantly impact the European real estate market, influencing property sectors in distinct ways. In construction, labour shortages are delaying new projects. While limited new development has bolstered occupational markets and rental growth in recent years, this could become critical when demand picks up, potentially driving rents higher and exacerbating affordability issues, especially in residential sectors.

Remote work is reshaping residential markets, increasing demand for larger homes with office spaces. Simultaneously, rising housing costs in major cities are pushing residents further out from city centres. This trend affects retail properties, as declining footfall in traditionally residential areas forces retailers to invest in visitor attractions or relocate to vibrant, growing neighbourhoods. Due to growing voids, some secondary shopping centres have been repurposed into mixed-use developments, such as a former Leeds shopping mall transformed into a digital skills training hub.

Office real estate is undergoing significant transformations, with occupancy levels now averaging 60% across much of Europe. Employees are increasingly drawn to hybrid work models, especially as they live far from CBDs, while employers strive to bring them back to the office to ensure collaboration, cohesion, and talent retention. This has created challenges, with offices overcrowded some days and underutilised on others. Furthermore, a decline in the workforce in certain European countries will likely affect the long-term demand for office space.

Industrial properties remain less affected, as logistics warehouses rely on increasing automation. However, they still need skilled workers to operate advanced machinery and IT systems, and a shortage of qualified personnel is becoming challenging.

Ultimately, location remains a cornerstone of the real estate industry, and its importance is only set to grow. This trend will likely drive greater polarisation between prime and secondary locations, with the latter at risk of obsolescence in the near term. Mixed-use developments, which combine retail, office, and residential spaces, are gaining momentum as they better align with modern urban and workforce demands. These flexible spaces will increasingly be seen as a solution to the challenges posed by evolving labour market and lifestyle trends. Looking ahead, emerging labour force patterns are anticipated to transform large, mono-centric European cities into multi-hub metropolitan areas. This decentralisation will profoundly reshape real estate dynamics, reshaping the geographical demand for space.

4. Real estate's role in reshaping electrical power generation

With electricity set to account for 60% of energy demand by 2050, and real estate a major consumer, the sector holds a unique responsibility to lead in sustainable practices and incorporate renewable energy systems into its developments.

Rising energy costs, geopolitical tensions, and the accelerating impacts of climate change have created an urgent need for innovative energy solutions. Traditional power generation methods, reliant on fossil fuels, are increasingly untenable due to stringent decarbonisation targets and environmental concerns. The EU’s Green Deal aims for net-zero carbon emissions by 2050, necessitating a radical overhaul of energy systems. Simultaneously, the geopolitical crisis stemming from the war in Ukraine has exposed the vulnerabilities of energy dependency on external sources, driving home the need for decentralised, resilient, and clean energy solutions.

Since the energy crisis began, the EU has seen the sale of three million heat pumps, three million electric cars, and approximately 500 MW of electrolysers, contributing to a 1.3% increase in electricity demand from 2021 to 2023. The surge in electricity demand is just beginning, in fact, it is projected to account for 60% of all energy demand by 2050. Hence, the distribution grid is increasingly becoming the backbone of the economy. Yet, 30% of today’s European grid is over 40 years old, with some even older components. According to EY, an annual investment of €67 billion is needed to build or upgrade the European grid to face the energy transition.

Real estate, being one of the largest consumers of energy, most notably data centres and logistics, bears a unique responsibility to pioneer sustainable practices and integrate renewable energy systems into its projects. Real estate developments are increasingly becoming hubs for renewable and decentralised energy generation. Buildings are now designed to function as energy producers rather than mere consumers. Solar panels are integrated into rooftops and façades, enabling properties to generate clean electricity. In Germany, the Heliotrope building sets a benchmark with its rotating design that maximises solar energy capture throughout the day. Energy storage systems, such as lithium-ion batteries, allow buildings to store excess power generated during peak sunlight hours. These systems are often integrated into microgrids, which enable local energy sharing. In the Netherlands, the Hof van Cartesius project exemplifies a community-driven approach to sustainable living, with energy generated and distributed among its occupants.

Real estate is also exploring innovative technologies such as geothermal systems and wind turbines for localised energy generation. Additionally, micro nuclear power generators, or small modular reactors (SMRs), are gaining traction. These compact reactors can power industrial parks or large residential complexes, offering a stable and carbon-free energy source. Developments like the Circular City initiative in Copenhagen showcase how real estate can utilise waste heat from nearby industries or data centres to warm residential buildings, reducing overall energy demand.

Collaboration between governments, energy providers, and real estate developers is critical. Incentives such as tax credits and grants encourage the integration of renewable energy systems into both new and existing properties. Real estate companies are adopting models like Energy as a Service (EaaS), where they not only consume but also produce and sell energy. The Powerhouse Brattørkaia in Norway is an example of generating more energy than it consumes and selling the surplus back to the grid. Internet of Things (IoT) devices and Building Management Systems (BMS) optimise energy use by predicting demand patterns and adjusting generation accordingly. In Spain, the La Pinada eco-neighbourhood demonstrates how data-driven energy management reduces waste and increases efficiency.

The growing demand for electricity has highlighted a critical gap in energy generation, prompting real estate market players, particularly large-scale operators, to invest in energy solutions to power their assets. This trend is underscored by Brookfield Asset Management’s £1 billion investment in solar energy in the UK and Sandbrook Capital’s funding of renewable power infrastructure for U.S. data centres. These initiatives reflect a strategic shift as real estate players address energy challenges to ensure operational resilience.

Europe’s journey toward reshaped power generation is intricately tied to the evolution of real estate. By adopting renewable energy, integrating innovative technologies, and fostering energy independence, the sector is addressing today's urgent challenges while setting the foundation for a sustainable future. The ongoing transformation highlights real estate’s potential not just as a consumer of energy but as a cornerstone of Europe’s clean energy revolution.

5. Impact of extreme weather conditions on real estate

Weathering the storm of climate change requires bold innovation and strategic resilience to ensure European real estate thrives in an unpredictable future.

Last year, Europe recorded the hottest summer on record, with flooding, droughts, wildfires and heatwaves characterising much of the year across the region. In Spain, flash flooding in October 2024 severely impacted densely populated areas, taking a heavy toll on human life, the environment, and infrastructure. Extreme weather events are no longer outliers in Europe – they are increasingly a core concern for the real estate sector. These events are prompting investors to reassess their approaches across all property types, as climate resilience becomes crucial to safeguarding portfolio value and ensuring long-term profitability.

Extreme weather creates direct financial challenges for investors, including physical damage to assets and infrastructure. Floods, storms, wildfires, and heatwaves disrupt operations and necessitate extensive repairs. According to the European Environment Agency (EEA), economic losses from climate-related extremes reached €44 billion in 2023, 58% higher than the previous ten-year average. Many commercial properties were not designed to withstand these threats, and without adaptation efforts, future losses are inevitable.

Indirect costs are also mounting. Rising insurance premiums and stricter underwriting practices add to operational expenses for property owners. Heatwave-prone retail spaces require advanced cooling systems, significantly increasing costs. Industrial and logistics facilities face supply chain disruptions from floods or storms, leading to lost rental income and strained tenant relationships.

These pressures are driving a repricing of assets, with properties in high-risk areas seeing declining values due to perceived risks. Indeed climate risks are reshaping property valuations. In cities like Venice, Amsterdam, and Hamburg, rising sea levels and storm surges weigh heavily on real estate prices, although infrastructure projects like flood barriers tend to mitigate these risks.

These factors are prompting investors to prioritise climate-safe locations, leaving less resilient regions at a disadvantage. Cooler northern European regions are becoming increasingly popular for residential investments as southern areas suffer from intensifying heatwaves. Conversely, regions vulnerable to extreme weather face declining demand and higher vacancy rates, widening the gap between prime and non-prime assets.

Innovative building technologies are addressing these challenges by enhancing resilience and sustainability. Properties with adaptive strategies – such as elevated foundations or renewable energy systems – are emerging as valuable assets. Milan’s Bosco Verticale integrates greenery into high-rise structures, reducing urban heat, cutting energy use, and improving air quality. Similarly, Amsterdam’s Waterbuurt floating homes are designed to adapt to flooding, appealing to environmentally conscious tenants and investors. These proactive solutions demonstrate how innovative designs ensure long-term viability in an era of increasing environmental volatility. The Netherlands, particularly vulnerable to flooding, stands out as a leader in building climate-safe real estate, followed by Nordic countries at the forefront of sustainable developments.

Finally, environmental, social, and governance (ESG) constraints are intensifying pressures on the industry. The EU’s goal of achieving carbon neutrality by 2050 and initiatives like the Energy Performance of Buildings Directive (EPBD) are driving significant changes. Tools such as building renovation passports provide greater transparency on the costs of achieving net-zero upgrades, enabling more accurate capital expenditure planning. However, these requirements also demand greater resilience, creating a dual challenge for property owners. A lack of action risks asset obsolescence and reduced valuations, as investors increasingly prioritise properties aligned with ESG criteria. Despite recent economic headwinds, initiatives like London’s Skyline Skills Hub are fostering collaboration to decarbonise and green the built environment.

Looking ahead, real estate’s viability as an investment will depend on the effectiveness of its climate mitigation strategies. Rising insurance costs and stricter financing requirements tied to environmental regulation present ongoing challenges, but those prioritising innovation and resilience will be best positioned to navigate this evolving market.

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