Office Real Estate Transactions in Europe Drop Sharply

In 2024, the European office sector accounted for only 22% of approximately €189 billion in commercial real estate investments—almost half the volume recorded in 2019, before the Covid-19 pandemic, according to Bloomberg, citing MSCI Inc. data. Experts attribute the decline primarily to the popularity of remote work and challenges related to ESG (Environmental, Social, and Governance) standards.

The head of real estate research at MSCI for the EMEA region, Tom Leahy, noted that the sector is experiencing polarization—well-located, modern, and environmentally friendly buildings that meet tenant demands are performing significantly better. A considerable portion of office buildings has been acquired for repurposing through renovation or reconstruction.

Offices, which once formed the core assets of institutional real estate investors, have fallen out of favor due to the rise of remote work, which has raised doubts about future demand for traditional office spaces. This transformation is similar to the shift in the retail sector, where the growth of e-commerce prompted investors to prioritize warehouses for storage and distribution over traditional retail stores and shopping malls.

Aging Office Infrastructure and Demand for Modernization

Earlier, JLL experts reported that the European office market is outdated, with 80% of office buildings being more than 10 years old. Demand is increasingly shifting towards energy-efficient buildings, while less efficient buildings risk becoming illiquid assets. The estimated cost of upgrading office spaces in London and Paris alone could exceed $77 billion. According to AEW calculations, annual capital expenditures required to meet these upgrade targets will rise by nearly 30%.

This additional financial burden is further exacerbated by a 9% drop in office real estate prices over the past year, affecting the return on capital.

Phil Ryan, JLL’s director of global urban development research, noted that there is high demand for modern office spaces, but the market currently lacks the right conditions to stimulate new construction or large-scale modernization.

Sustainability Challenges and ESG Regulations

Europe is falling behind its Paris Agreement energy efficiency targets. Additionally, new studies highlight the carbon costs associated with installing energy-saving technologies, such as heat pumps, meaning that even more substantial improvements in office operations will be required.

Investment Slowdown and Rising Prime Office Rents

Many developers have halted or abandoned new projects due to higher interest rates and economic uncertainty. This has led to a supply shortage, particularly for well-equipped and sustainable buildings, causing rents for prime office spaces to increase.

In London's financial district, office rents for top-tier buildings rose by 10% from January to June 2024, according to JLL data.
European prime office rents are rising, as landlords seek to compensate for higher costs.
Tenants prefer energy-efficient office spaces, leaving older buildings struggling to attract occupants.
The volume of investment deals in European office real estate fell by 21% year-on-year in the first half of 2024, reaching €14.1 billion.

UK Dominates Office Investments in Europe

The UK remained the dominant player, accounting for 29% of total investment in European office real estate, surpassing its five-year average of 24%. Experts attribute this to faster price adjustments and attractive yields for cash buyers.

The most stable segment is high-end office properties, with only Vienna and La Défense seeing declines in prime office yields.

Long-Term Outlook and Investor Strategies

According to analysts, the office sector is facing challenges as institutional investors seek to reduce risk exposure in their portfolios. As a result, transaction volumes in European office real estate are unlikely to return to pre-pandemic levels in the near future.

However, AEW forecasts an annual return of 8.8% across top-tier European commercial real estate until 2028, as market recovery, lower interest rates, and rising rents create conditions for potential growth.

Hans Vrensen, head of research and strategy at AEW Europe, stated that while investors may need to compensate for lost time and set more ambitious capital investment goals for decarbonization, these goals remain achievable.