Knight Frank: Navigating the two-tier European real estate market

While real estate investors prioritise yield and capital growth, occupiers face a fundamentally different set of operational challenges.

Philipp Ueberschaer

Speaking at EXPO REAL to CRE Media Europe, Philipp Ueberschaer, partner and head of Occupier Strategy & Solutions (EMEA) at Knight Frank, highlighted that European markets are currently defined by severe bifurcation.

Occupiers with expiring long-term leases in central locations often face steep rent escalations, forcing difficult choices: pay a premium or relocate outward. Conversely, suburban tenants enjoy broader options, higher vacancy levels, and stronger leverage to negotiate concessions.

The core cause of structural scarcity in prime segments is a lingering construction backlog, driven by a series of headwinds since 2020, including post-COVID disruption, geopolitical and energy shocks, and high interest rates.

Because speculative development remains subdued, prime assets face a persistent shortage, maintaining upward pressure on core rents.

Madrid vs. Paris

Madrid stands out as one of Continental Europe's best-performing commercial markets, buoyed by strong macroeconomic fundamentals. High residential demand has spurred conversions of commercial space into residential units and hotels, further restricting office availability. For occupiers seeking expansion or cost reductions, Madrid remains a tightly constrained market.

Conversely, Paris is experiencing softer occupier demand and rising vacancy rates—even within core districts. This provides occupiers with rare leverage to renegotiate lease terms, re-trade rent conditions, or pursue attractive acquisition targets.

Sector drivers

Data centres have seen unprecedented occupier demand. Site selection has shifted from strict proximity requirements (e.g., Frankfurt) to broader geography, where power access is the main constraint.    

Substantial demand growth across Western and Eastern Europe is driven by increased defence spending.

Shifting EU import threshold rules have made bulk shipments into CEE more cost-effective, boosting demand for large distribution centres.

Additionally, CEE countries, particularly Hungary, are seeing significant absorption from overseas EV battery manufacturers setting up manufacturing hubs.

Portfolio realignment in Germany

Ueberschaer noted that macroeconomic pressures are prompting German manufacturers to adjust their domestic footprint.

Industrial occupiers are moving production assets further east in Europe to streamline operational costs, while surplus manufacturing plants are being sold or repurposed into data centres or residential.

Ultimately, technological advancement is shifting real estate asset specifications and creating new sector demand across Europe, rather than simply reducing space usage, Ueberschaer concluded.

Branislav Pekic