As we move into 2026, the real estate market continues to work through the adjustment triggered by higher interest rates. This downturn did not originate from a traditional imbalance of supply and demand. It was triggered by rapidly rising rates that immediately changed financing conditions, slowed investment activity and put downward pressure on valuations.
 
Despite this shock, European real estate fundamentals have been more resilient than expected. Construction cost inflation, tight regulation and growing strain on developers have continued to limit new supply in the region. In several sectors this has helped counter reduced demand. 

The real challenge has been in the investment market where activity remains muted. Even with some recovery, transaction volumes are still close to post-Global Financial Crisis lows after adjusting for inflation. Fundraising has been slow and asset owners remain cautious about bringing properties to market in uncertain pricing conditions.
 
There are reasons to be more positive about what lies ahead. Europe is leading the United States in the cycle of interest rate cuts, which means credit conditions are gradually improving. Banks have continued to support refinancing and have prevented widespread distressed sales. Competition in lending is returning, and debt margins are narrowing.

A second source of optimism comes from fiscal policy. Compared with the austerity response to many previous European crises, governments are now focused on stimulating growth. In Germany, large national programmes for infrastructure and defence are expected to have significant economic impact. This is supported by European Union spending through initiatives such as NextGen EU. This will take time to play out but it is improving market sentiment.
 
Finally, the environment of constant crisis that has weighed on confidence may be finally easing. The period of uncertainty around trade tensions with the United States appears less severe than initially feared. If external shocks continue to subside, investors will gain the confidence to move beyond the current period of wait-and-see.
 
In this environment, value creation will depend on strong operational capabilities, deep specialist knowledge in key sectors and the ability to act decisively in local markets. It will also require clarity about where long-term tenant demand is most durable. At PATRIZIA, we like to shape our strategies in relation to what we call the DUEL mega-trends – long term transitional trends that will undoubtedly shape the next cycle when it comes to demand fundamental. These are: the Digital transition, Urban transition, Energy transition, and the Living transition. 

One of the clearest areas of opportunity across most of Europe is the living sector which continues to face a structural undersupply of housing. The need for good quality places to live is one of the most basic things you can count on to continue regardless of market cycles. Current capital shortages for developers are creating the conditions for new partnerships and the delivery of projects that meet both the needs of communities and the performance expectations of investors.
 
The path to value creation in today’s world is not straightforward. It demands agility, expertise and an operational setup that can act and pivot quickly and decisively. It also calls for strategies anchored in the structural transitions shaping our markets - digital, urban, energy and living - because these forces will define the next cycle.