Key Takeaways
- • AEW's 2026 Mid-Year European Outlook projects European real estate recovery will remain resilient despite Middle East conflict, with the geopolitical disruption estimated to reduce GDP growth by only 10 basis points annually through 2030.
- • Base-case GDP growth forecast stands at 1.5% annually for 2026-2030, while a downside scenario reflecting prolonged conflict yields 0.7% growth with higher inflation and bond yields—still non-recessionary.
- • Prime European real estate rental growth is projected at 2.4% annually (base case) and 2.1% (downside scenario) across 2026-2030, supported by declining new supply and lower forecast vacancy rates in office and logistics sectors.
- • Base-case total returns for European real estate are projected at 8.7% annually over 2026-2030; the downside scenario yields 7.6% annually—a reduction of only 1.1 percentage points despite prolonged conflict assumptions.
- • Office yields are forecast to tighten by 40 basis points over five years in the base case, with shopping centres, logistics, and residential following at 25, 24, and 17 basis points respectively; pent-up investor demand is expected to drive transaction volumes higher once market confidence returns.
Summary
AEW has released its 2026 Mid-Year European Outlook, concluding that the long-term recovery trajectory in prime European real estate is positioned to withstand the ongoing impact of Middle East conflict. According to the research, the geopolitical disruption presents a manageable headwind rather than a fundamental threat to the sector's recovery, with solid current income yields and projected rental growth providing resilience across a five-year investment horizon through 2030.
The report's macroeconomic analysis quantifies the conflict's impact with precision. Latest GDP growth forecasts incorporate a 10 basis point annual reduction relative to AEW's base case, with limited long-term effects on inflation and bond yields by year-end 2030. The base-case scenario assumes European GDP growth of 1.5% annually during 2026-2030. A downside scenario—reflecting assumptions of prolonged Middle East conflict—projects significantly lower GDP growth of 0.7% annually, accompanied by higher inflation and bond yields, though this trajectory remains non-recessionary.
Occupier market fundamentals provide underlying support for the resilience thesis. Declining new supply across office and logistics sectors is expected to compress vacancy rates, underpinning prime rental growth projections of 2.4% annually in the base case and 2.1% in the downside scenario. These rental growth rates hold relatively steady across both scenarios, suggesting structural supply-demand dynamics are insulating real estate from cyclical shocks. On the yield side, the base case forecasts 40 basis points of office yield tightening over five years, followed by shopping centres (25 basis points), logistics (24 basis points), and residential (17 basis points). In the downside scenario, logistics and high street retail are forecast to experience some yield widening pressure.
Total return projections demonstrate the sector's resilience numerically. Base-case total returns for European real estate are projected at 8.7% annually over 2026-2030, while the downside scenario yields 7.6% annually—a reduction of just 1.1 percentage points despite the prolonged conflict assumptions embedded in the downside case. The research notes that recent pre-conflict investor sentiment supported solid transaction volume momentum in 2025, and despite the negative near-term effects on deals in progress, pent-up investor demand is expected to drive long-term transaction volumes materially higher once market confidence stabilizes.
The report's macroeconomic analysis quantifies the conflict's impact with precision. Latest GDP growth forecasts incorporate a 10 basis point annual reduction relative to AEW's base case, with limited long-term effects on inflation and bond yields by year-end 2030. The base-case scenario assumes European GDP growth of 1.5% annually during 2026-2030. A downside scenario—reflecting assumptions of prolonged Middle East conflict—projects significantly lower GDP growth of 0.7% annually, accompanied by higher inflation and bond yields, though this trajectory remains non-recessionary.
Occupier market fundamentals provide underlying support for the resilience thesis. Declining new supply across office and logistics sectors is expected to compress vacancy rates, underpinning prime rental growth projections of 2.4% annually in the base case and 2.1% in the downside scenario. These rental growth rates hold relatively steady across both scenarios, suggesting structural supply-demand dynamics are insulating real estate from cyclical shocks. On the yield side, the base case forecasts 40 basis points of office yield tightening over five years, followed by shopping centres (25 basis points), logistics (24 basis points), and residential (17 basis points). In the downside scenario, logistics and high street retail are forecast to experience some yield widening pressure.
Total return projections demonstrate the sector's resilience numerically. Base-case total returns for European real estate are projected at 8.7% annually over 2026-2030, while the downside scenario yields 7.6% annually—a reduction of just 1.1 percentage points despite the prolonged conflict assumptions embedded in the downside case. The research notes that recent pre-conflict investor sentiment supported solid transaction volume momentum in 2025, and despite the negative near-term effects on deals in progress, pent-up investor demand is expected to drive long-term transaction volumes materially higher once market confidence stabilizes.
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