Rising bond yields impact European commercial real estate

Geopolitical instability and trade tensions hampered global real estate recovery in Q1 2025, making property investors wary and resulting in fewer deals, according to a new MSCI report.

MSCI table

Key factors contributing to the ongoing instability include the new US administration's tariffs on Canada, Mexico, and various materials, a shift in European security arrangements, and potential changes in Ukraine support.
Global real estate deal activity declined in Q1 2025, particularly in Europe and Asia-Pacific, reversing the positive trend seen from Q2 2023 to Q4 2024. While the easing of US-China tariffs offers some relief, even a baseline 10% tariff could impact the real estate market.
Rising bond yields impacted European commercial real estate, with tariff concerns particularly affecting warehouse investments. Office and retail sectors are susceptible to broader economic impacts like GDP slowdown. Conversely, sectors with strong underlying trends, such as apartments and data centres, are expected to be more resilient to this uncertainty.
Despite demonstrating resilience during the downturn with rental growth often exceeding inflation, European occupier markets now face new risks to business investment and leasing activity due to geopolitical instability.
While not entirely insulated, real estate's longer investment horizons allow for a more measured response to global volatility. This, combined with its recent underperformance compared to other asset classes (resulting in decreased fundraising), could make real estate a more appealing investment option in a turbulent market.
If central banks cut interest rates to counter the potential economic drag of tariffs, real estate's attractiveness could be further enhanced, according to MSCI. Lower rates would bolster property valuations and improve its relative investment case, even in a slowing economy. 
While tariffs have disrupted the anticipated continuation of the real estate recovery that began in late 2024, the sector's fundamental strengths—stability, income generation, and inflation hedging—may help it withstand this challenging period.