The European commercial real estate (CRE) market faces a complex landscape shaped by persistent global uncertainty, with significant implications for lending, investment, and sector performance as 2025 unfolds. Following an initially optimistic first quarter, activity has been tempered by geopolitical tensions, disrupted trade relations, and uneven economic conditions across the continent.

Early in 2025, lending appeared poised for a recovery after pandemic-related disruptions and a period of elevated interest rates. However, the introduction of new US tariffs against European goods temporarily stalled transactions, as borrowers and lenders undertook more thorough due diligence to assess the broader impact on their strategies. While most deals under way were completed, closing times extended, and some transactions have paused amid ongoing tariff uncertainty. This cautious stance reflects an industry grappling with volatile inflation trends and sustained high construction costs, which continue to inhibit new build projects. According to Trimont, this has prompted a shift among investors towards stabilised, income-generating assets over riskier development loans, with heightened scrutiny on lending assumptions around rental growth and yield compression.

Trade agreements between the US and the UK, and subsequently between the US and the EU, have introduced a degree of clarity by setting tariff levels—10 percent on many UK goods, 25 percent on UK steel and aluminium, and broadly 15 percent for EU exports to the US, though key metals face even higher tariffs for now. Yet, market sentiment remains fragile. The euro area economic sentiment indicator fell sharply in August, particularly in Germany, underscoring concerns in export-oriented sectors like chemicals, pharmaceuticals, and automotive manufacturing. These industries’ downturns could ripple through to CRE segments such as logistics and industrial assets, which are closely tied to economic growth and trade flows.

On capital markets, there has been a cautious but positive shift, notably in debt fundraising following several difficult years. Direct transactions have grown, albeit at a moderated pace, and larger transactions are more common, supported by liquid debt markets. However, demand from US investors for European real estate has fallen by about 30 percent year-on-year in the first half of 2025, as uncertainty drives capital back to familiar domestic markets. Refinancing activity is becoming increasingly important, with base interest rate cuts easing liquidity constraints. Despite this, lending remains selective, especially for assets perceived as niche or problematic. The growing presence of alternative lenders, particularly in the UK where they command a significant market share, presents potential for further evolution in European CRE financing.

Certain geographies and sectors appear particularly vulnerable. Germany’s industrial and automotive sectors face pronounced risks due to their export exposure and the impact of tariffs, while Ireland’s pharmaceutical industry also remains sensitive to trade shifts. Conversely, increased European defence spending may stimulate demand in logistics and high-tech industrial real estate, countering broader deindustrialisation trends. Residential sectors such as affordable and student housing show resilience, buoyed by government initiatives and demographic shifts like a growing influx of international students. Office markets in London’s City and West End, as well as Canary Wharf, show signs of recovery driven by the return-to-office trend, particularly favouring energy-efficient buildings in well-connected locations. Additionally, the surge in investment in data centres, fuelled by global competition in artificial intelligence, represents a key growth area, though investors remain cautious about factors like asset depreciation and electricity supply constraints.

Regulatory bodies and market observers advocate for heightened vigilance amid these conditions. The European Central Bank (ECB) has reiterated warnings about the risk of increasing bad loans, particularly in commercial real estate outside prime locations and in lending to small businesses, urging banks to maintain rigorous credit risk management. The ECB's Financial Stability Review underscores fiscal vulnerabilities in many European nations, attributing risks to high sovereign debt levels sustained by pandemic and conflict-related spending and the potential for rising borrowing costs. This context shapes a fragile outlook for financial stability, especially given CRE market sensitivities.

Globally, regulators such as the Financial Stability Board highlight systemic risks in the $12 trillion commercial property market linked to high leverage, liquidity mismatches, and limited transparency around bank exposures. Indicators like rising default rates in commercial mortgage-backed securities and increased non-performing loans in certain jurisdictions signal growing stress, necessitating close regulatory oversight.

Looking ahead, unsettled conditions are likely to prolong transaction timelines as parties pursue more exhaustive risk assessments. Refinancing will be a critical driver of deal flow, supported by emerging lenders including Asian banks expanding their European presence. Credit standards are expected to tighten, with a strong preference for high-quality assets, stable income streams, and diversified tenant profiles. Emphasis on proactive credit management and early identification of stress signals will intensify, highlighting the value of loan servicers in navigating potential difficulties. Market participants remain alert to local factors such as impending fiscal policy changes in the UK, including tax reforms and rent review abolitions, which could further influence CRE dynamics.

In sum, while there are positive undercurrents and pockets of resilience within the European commercial real estate sector, the broader market must contend with the compounding effects of geopolitical tension, inflationary pressures, fiscal uncertainties, and shifting trade policies. The pace of recovery will likely be measured, selective, and contingent on navigating these evolving risks with prudence and strategic foresight.

📌 Reference Map:

Source: Noah Wire Services