CB RE RESEARCH

2018 EUROPE
R E A L E S TAT E
MARKET
OUTLOOK
 2018 EXPECTED TRENDS 2018 EXPECTED TRENDS

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Economic and Political Outlook
1. Positive economic environment for most of Europe
through 2018 to 2019.
2. UK growth subdued as Brexit-related uncertainties
take their toll, but scope for a bounce back from 2021.
3. The prospect of higher long-term interest rates will
start to pose a challenge to property pricing.
Investment Outlook
1. Continued strong growth in assets under
management will put pressure on investors to deploy
capital.
2. Most European markets approaching full capacity in
terms of investment volumes. France and UK are the
main markets offering potential for investment
growth.
3. Prime yields remaining largely flat through 2018;
room for yield compression in the secondary
segment.
Industrial and Logistics Outlook
1. Very strong demand growth has cut the availability of
large-scale modern warehouse space, producing capacity
constraints in some of the main European logistics hubs.
Coupled with strong e-commerce related growth this will
support further rental increase.
2. Expect ever-closer integration of logistics and retailing.
Growth in e-commerce is a demand accelerator for
logistics due to its greater space demands.
3. Cross-dock depots and pop-up warehousing among the
formats likely to see growth in 2018.
Residential Outlook
1. The sector’s evolution will be supported by the sheer
quantity of capital available for real estate investment
in 2018, increasingly through development in order to
build scale.
2. Positive growth in residential prices, both for sale and
rent, across most of continental Europe. Multi-family
housing will increasingly incorporate hospitality
elements and higher levels of service.
3. Watch out for new regulation having dampening
effect on construction levels.

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Office Outlook
1. Another strong year for office-based employment
growth in 2018.
2. Technological innovation, labour market changes and
shifts in workforce preference increasingly
influencing occupiers’ decisions.
3. Growth in appetite for flexible offices will permeate
across European markets.
Retail Outlook
1. Strong consumer spending and retail sales growth
provide positive counterbalance against interest rate
concerns and intense competition for consumer spend.
2. Profound changes in the role of the store, and its
interaction with consumers: stores need to be fully
integrated into a retailer’s omnichannel strategy.
3. Retailers increasingly focused on getting their city
strategy correct. This will support rental growth at the
prime end of the market.
Hotels Outlook
1. Strong investment momentum to continue into 2018,
underpinned by major portfolio and platform sales.
2. Stock shortages and premium pricing in gateway
cities will encourage investors to look further afield at
secondary and niche opportunities.
3. Look for growing brand differentiation, as well as
format and service innovation, in 2018.
Alternatives Outlook
1. Some sectors traditionally viewed as ‘specialist’ are
now firmly embedded within investors’ core strategy.
Most now have a formal allocation to specialist assets.
2. With previously specialist sectors becoming
mainstream, expect further and deeper forays into
‘niche’ sectors to drive returns.
3. A key feature of 2018 will be operator consolidation
across Europe. This will present real estate investors
with new partnership opportunities as well as
enhancing covenant strength.

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 EXECUTIVE SUMMARY
Despite an undercurrent of political uncertainty, 2017 turned
out to be a very positive year for economic growth in Europe.
Helped by a resurgence in domestic demand, many countries
achieved a combination of rising growth and confidence, and
falling unemployment, all at the cost of only slightly higher
inflation. Politics will be just as prominent in 2018 if not more
so but, with the international economic landscape looking
broadly benign, we expect this positive momentum in Europe
to continue through 2018 and 2019. The UK looks rather more
subdued, though still positive, over the next three years partly
due to the impact of Brexit. The next major headwind for
Europe could be a cyclical downturn in the US, probably in late
2019/2020.
Real estate investment is at elevated levels and Europe looks set
for another year of robust investment activity. With several of
the major European investment markets already approaching
full capacity, the main challenge for investors in 2018 will be
sourcing core deals - France and the UK appear to offer the best
potential for investment growth. With assets under
management also growing rapidly, pressure on investors to
deploy capital will intensify.
This level of investment appetite will also generate further
interest in specialist real estate asset types, such as healthcare,
education, build to rent and leisure. For many global investors
the term ‘specialist’ no longer really applies, as most of them
already have a formal allocation to these asset types. What we
expect to see in 2018 is an even greater willingness to enter
specialist territory in the search for enhanced returns, for
instance through direct investment in smaller niche sectors,
or exposure to operational risk through mechanisms such
as management contracts. The acquisition of real estate
through company or platform purchases is also becoming
increasingly popular.
On the pricing front, increased US long-term interest rates will
begin to feed through to higher rates in Europe, which will start
to pose a challenge to property pricing in many markets. We
expect prime property yields to remain largely flat during 2018,
but in 2019 rising interest rates will put upward pressure on
© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018
4 5
property yields. Even so, the historically high spread will
cushion the scale of any increase. With growing investor
interest outside traditional core territory, and generally
improving occupier markets, there is scope for secondary yields
to come down, narrowing the yield gap between prime and
secondary.
Occupier markets will reflect a combination of cyclical and
structural influences. Office leasing levels should continue to
rise gradually and we will see growing interest, in more places,
in a range of flexible office formats, driven by changing
technology and workforce preferences. The logistics market is
in a period of strong growth driven by ever-closer integration
with retailing – expect positive rental growth in the main hubs
and the emergence of new formats.
Retailing itself will see further structural change relating to the
role of the store in an omnichannel environment. Retailers’
store network strategies are increasingly focussed on
competing for the best pitches in key cities, and we will see
rental growth in these locations.
Prices for residential units are rising across continental Europe,
and the service and amenity offer of the private rented sector
will improve. Similarly, hotel operators will continue innovating
and differentiating their offer to support efficiency and
customer experience.
”Real estate investment levels will remain
robust. With growing pressure to deploy
capital, we see rising appetite for niche
and specialist assets, and the possibility
of lower prime-secondary yield spreads.
Occupiers’ real estate decisions will, in
various ways, focus on improving the
user experience”.
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 E CON OM I C AND POLITICAL OUTLOOK EC ON OM I C A N D POL I T I C A L OU T LOOK

H O W LO N G W I L L T H E C YC L E
LAST IN EUROPE?

2017 IN PERSPECTIVE
2017 turned out to be very positive for economic growth across
most of Europe. Excluding the UK, the Western and Central
European economies saw growth accelerate to 2.4%, up from
1.8% in 2016. This was comfortably ahead of the US where the
equivalent figures were 1.5% and 2.1%. The big change from
2016 is that domestic demand became a bigger driver of
economic growth, making growth less reliant on export
demand supported by the very competitively valued euro in
recent years.
Although unemployment remains high in some countries,
there is now a virtuous circle of rising growth, falling
unemployment and rising confidence. All of this has been
achieved with only a modest rise in inflation. Growth in the core
Consumer Price Index (CPI) in the EU, excluding the UK, was
just 1.1% in September, up from 0.7% a year earlier.
The UK bucked the trend, with GDP growth slowing from 1.8%
in 2016 to 1.5% in 2017 as Brexit-related uncertainty slowed
growth and the inflationary impact of exchange rate
depreciation hit real incomes. Even so, UK growth turned out to
be rather more robust than had been forecast immediately after
the referendum result, and UK property returns have surprised
on the upside in 2017.
THE INTERNATIONAL BACKGROUND
The international economic environment looks benign in
2018. US economic growth is picking up after a hesitant start
to 2017, the Chinese economy is slowing but only marginally
and fears of an emerging markets crisis have receded. Oil
prices have only risen a little since the end of 2016 and, at
around $60 a barrel, are far below the $100 plus prices seen as
recently as early 2014.
Unforeseen events aside, the next major headwind for Europe
is likely to be the potential for an economic slowdown in the
US in late 2019/2020. Short-term interest rates have already
been increased four times in the US since the end of 2015 with
more to come. This monetary policy normalisation process is
also being accompanied by the unwinding of quantitative
easing (QE). At present, the US economy is enjoying a renewed
bout of growth and this could be reinforced by tax reform and
the new budget. By 2019, however, this growth spurt could be
running out of steam and tighter monetary policy could start
to bite leading to a sharp slowdown in economic growth, with
the possibility of near zero percent growth in the US in 2020
before a cyclical rebound in 2021.
ECONOMIC GROWTH IN EUROPE
Most European economies are finishing 2017 strongly and
economic confidence is within a whisker of a 30-year high, so
we see no reason why the positive economic environment
should not continue into 2018 and 2019. In GDP growth terms,
the countries leading the recovery are Spain, Sweden, the
Netherlands, Ireland and practically all of Central Europe.
Equally significant, however, is continued strong growth in
Germany – by German standards – and the pick-up in French
economic growth inspired by the Macron reform programme as
well as the generally positive European economic environment.
Growth expectations for 2018 generally compare favourably with
the recent past (Figure 1). The exceptions are Ireland, Sweden
and the UK. These are all ahead in the cycle, but Ireland and
Sweden are still expected to have a very positive year in 2018 with
GDP growth rates well ahead of the Western European average.
The European economic recovery is likely to run out of steam by
2020 as higher long-term interest rates and the potential US
slowdown take their toll but, if the US economy behaves as
expected, there could be a rapid bounce back in 2021 to 2022
once interest rates have fallen back.
The 2020 slowdown will dent long-term growth averages but, as
Figure 2 shows, many parts of Europe are still expected to
outgrow the USA. Of these, the hardest to forecast is the UK.
The forecast assumes another three years of subdued but still
positive economic growth followed by a strong bounce back
once the Brexit-related uncertainties are out of the way and the
international economy picks up again. That said, clear
uncertainties remain – in both directions.
The key points of the economic outlook are:
• Two more good years for economic growth in 2018 and 2019
• Potential US -driven cyclical slowdown in 2020
• Central European countries, plus Ireland, Spain and Sweden
are amongst the countries with the best five-year GDP
growth potential
• Slow and below-trend growth in the UK in 2018 to 2020, but
better longer-term potential
• Improved ranking of France compared to the recent past

Figure 1: GDP growth: 2018 compared to previous five years Figure 2: GDP growth: selected countries, 2018 - 2022

2013 - 2017 Average

4.0
Central Europe
3.5 Ireland
3.0 Spain
UK
percent per annum

2.5
Sweden
2.0 USA
France
1.5
Western Europe
1.0 Netherlands
0.5 Germany
Italy
0.0
Central Ireland Spain Sweden Netherlands USA Germany France Western Italy UK 0.0 05 1.0 1.5 2.0 2.5
Europe Europe percent per annum
Source: CBRE Research Source: CBRE Research

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 E C O N OM I C AND POLITICAL OUTLOOK EC ON OM I C A N D POL I T I C A L OU T LOOK

Figure 3: Ten-year government bond yields(%), 2001-2022

C I T Y G R OW T H : O U T PAC I N G NAT IO NA L R AT E S Euro Area (GDP weighted) UK USA

6.0
These projections relate to national growth rates but the dominant feature of the last 20 years has been the capacity of city FORECAST
economies to outgrow their national equivalents. Over the past five years, the combined GDP growth of the capital cities of 5.0
the UK, France, Germany, Italy, Spain, Sweden, the Netherlands and Ireland has been 2.2%, which compares very favourably
to the 1.6% achieved by the sum of the countries concerned. 4.0
This trend towards greater concentration of economic activity in major cities will continue, whatever the national growth
3.0
rate. In some areas, as we note in the relevant sections, this trend is also affecting market access – such as in the widespread
issues around housing affordability in cities – as well as giving rise to land competition and planning issues, such as in the
2.0
development of city logistics networks.

1.0

0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

INTEREST RATES AND INFLATION fall in US long rates in 2020 which will also spill over into Source: CBRE Research/Macrobond

Inflation in Europe remains subdued. October Eurozone CPI European markets.

inflation came in at 1.4% (core inflation was 0.9%). This should
pick up gradually as the economic recovery continues. It may
already have moved close enough towards the target to allow
the ECB to discontinue its Asset Purchase Scheme when the
current extension comes up for renewal in September 2018.
Despite the move on QE, the ECB’s re-financing rate is still
likely to stay on hold through 2018 and possibly beyond. The UK
has already seen a 25-basis point increase in policy rates but is
likely to stick at that until 2019 despite high UK inflation.
The main influence on long rates is likely to come from outside
Europe rather than from domestic policy changes. As already
mentioned, the Federal Reserve has already started to tighten
US monetary policy and this is expected to result in markedly
higher US long-term interest rates in 2018 and 2019.
Increased US long-term interest rates will feed through to
higher rates in Europe, possibly with a slight lag. International
long-term interest rates are highly correlated and it is difficult
to see how Europe can avoid the impact of such a radical
change in US policy especially now that European QE is being
scaled back. Once the US economy turns down, however, we
expect a sharp reversal of the Fed’s policy, leading to an abrupt
POLITICS IN EUROPE
By and large, Europe managed to avoid the potential political
pitfalls of 2017. Worries over possible far right election wins in
the Netherlands, France and Germany proved unfounded.
In France, the landslide election win of a centrist pro-reform,
pro-business president was a major positive and, so far,
President Macron is proving rather more successful in
introducing economic reforms than any other recent president.
On the other hand, the far right AfD did better than expected
in the German elections and it is taking much longer to form
a new government than originally hoped. At the time of writing,
the likely outcome looks to be another version of the
CDU/CSU/SPD Grand Coalition but this is still far from
certain. The current instability in Catalonia is also a
reminder that the threat of significant political upsets has
not disappeared entirely.
Catalonia goes to the polls on 21st December. Recent opinion
polls are very close with the combined separatist parties neck
and neck with the constitutional parties in predicted seats. The
separatist parties are unlikely, however, to have a majority of the
popular vote. Should this be the result it is likely that there will
be negotiations between the central Government and the
Catalan Parliament to agree a political and economic
framework in the context of reform of the Catalan Statute of
Autonomy and/or the 1978 Constitution.
Other events to watch out for in 2018 include General Elections
in Italy in Q1 and Sweden in September, where opinion polls
indicate that the ruling Social Democrat/Green coalition is set
to consolidate its position. The situation in Italy looks more
uncertain with the populist 5-Star movement currently ahead of
the ruling centrist Democratic Party, and the re-entry of Silvio
Berlusconi into Italian politics providing an extra twist.
The slow pace of the Brexit negotiations has been another cause
for concern. At the time of writing it looks like a last minute
agreement will be reached that will allow the negotiations to
move onto discussion of the future trading relationship after
the EU Summit in December. Nonetheless, an atmosphere of
uncertainty will remain until the nature of the UK’s final
relationship with the EU is clear.
PROPERTY IMPLICATIONS
More detailed property trends are discussed in the following
sections but a number of themes can be drawn from the
economic background to 2018 and beyond:
• Economic growth is driving increased demand for
commercial real estate, and spare capacity is gradually being
eroded particularly in the big cities
• This is also partly due to a muted development response so far
in this cycle in many cities. This will make 2018 another good
year for rental growth particularly for prime properties
• The UK and London, in particular, will be an exception. This
is partly due to the fallout from the EU referendum and
partly because London, unlike most other big cities, has
actually seen a significant development response to the
post-global financial crisis economic recovery
• Brexit-related uncertainty will be an issue for UK property for
the next three years, but our view is that prospects will
improve from 2021
• Higher long-term interest rates will start to pose a challenge
to property pricing in many markets despite the anticipated
rental growth in 2018 to 2019, but rates should fall back
in 2020

The CBRE UK Outlook (forthcoming) contains extended commentary on the possible outcome and impacts of the EU-UK Brexit negotiations

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 I N VE STMENT OUTLOOK
A B U N D A N T C A P I TA L :
H O W A N D W H E R E T O D E P LOY I T ?
The European economy is in good shape and this is reflected in property investor
sentiment. Real estate investment is at elevated levels and while the market is in a
prolonged stage of the cycle, Europe looks set for another year of robust investment
activity in 2018, supported by positive occupier and investment market fundamentals.
KEY POINTS
• The asset management industry will continue to see rapid
growth in assets under management – particularly in
alternatives such as real estate – which will continue to put
pressure on investors to deploy capital
• Rising influence of global capital in the European real
estate investment market
• Market entering a consolidation phase, and maturing of
the cycle will fuel demand for mergers-and-acquisitions
(M&A) type transactions as investors are increasingly
resourceful in finding exposure to real estate
• This is also attractive to global capital seeking a European
presence but which is not in the market for trophy assets
• Most of the major European investment markets
approaching full capacity in terms of investment volumes
• France and UK main markets to offer potential for
investment growth
• Disparity between ECB and Fed monetary policy, but rise in
international long-term interest rates will feed through to
Europe
• Yields for prime product likely to remain largely flat
throughout 2018; room for yield compression in the
secondary segment
• Cost of debt expected to remain low and new entrants offer
financing in wide range of asset types
GLOBALISATION AND CONSOLIDATION OF THE
REAL ESTATE INVESTMENT INDUSTRY
The asset management industry will continue to see rapid
growth in assets under management (AUM). Global AUM are
forecast to grow by an annualised 6.2% between 2016 and
2025 (PwC, 2017), driven by inflows from high net-worth
individuals and retirement savings. Due to growing
transparency, diversification strategies and an ongoing search
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10
I N VES T M EN T OU T LOOK
acquisition of Empark by Macquarie and the acquisition of Of the other major investment markets, this appears to leave
Triuva by Patrizia. The maturing of the cycle will fuel demand France as the area of greatest potential, particularly in light of
for M&A-type transactions in the real estate market as the improvement in economic performance and investment
investors are becoming increasingly resourceful in finding sentiment that followed the Macron victory in the May
ways to find exposure to real estate. 2017 election.
Aside from logistics platforms, Asian buyers were also behind The UK cycle looks different from the rest of Europe.
for yield, AUM in alternatives – including real estate – are three large trophy asset allocations in London in 2017 and, Investment volumes peaked in the 12 months to Q3 2015, after
expected to more than double in size over the same period. capital controls permitting, they remain attracted to which uncertainty around the EU referendum affected trading
This will fuel further competition between investors in the similar product. activity. There has been a 2017 bounce back driven by landmark
search for product to deploy capital. deals in Central London and by the UK’s share of the big
SOURCING PRODUCT IN A LATE - CYCLE MARKET logistics platform deals, but a continued recovery on the same
Propelled by this increase in capital inflows, the globalisation For investors, the main challenge for 2018 will continue to be scale looks unlikely in 2018.
of the investment industry is set to continue. Global capital sourcing core deals at this stage of the cycle. Most of the major
markets have become increasingly intertwined – a trend European investment markets are already approaching full Secondary markets are another area of growth, supported by a
also clearly visible in the real estate market. After years of capacity, with limited room for further growth. Germany, the broadening economic recovery and relatively attractive yields.
substantial cross-regional capital flows, global capital main driver of investment growth in Europe over the past 18 to While gateway cities remain the centre of economic activity,
has become a major force in the European market, and 24 months, looks likely to have posted a record high sharply lower vacancy has seen these markets tighten
these investors will continue to influence the investment investment level in 2017. Other regions that are already seeing considerably over the past two years. This is causing spill-over
market, not only in terms of buying activity but also by unprecedented levels of investment activity are Benelux, CEE, effects into secondary markets, which have typically seen less
operating the substantial AUM they have amassed over the Nordics and Southern Europe. aggressive rental growth: tenants may be attracted by the more
the years. favourable cost base.
A source of equity that has been particularly active in Europe
of late is Asian capital, most notably in exceptionally large Figure 4: Eurozone prime office yields and ten-year government bond yields(%), 2001-2025
logistics platform deals. The sale of P3 (€2.4bn) by TGP to GIC
was the first deal driven by a substantial amount of 10-year Bond Yields Prime Office Yields
Asian capital. In the following nine months, two additional 7.0
ultra-large platform deals were acquired on behalf of Asian FORECAST
6.0
investors: the Logicor (€12.3bn) sale by Blackstone to
CIC and more recently the acquisition of Brookfield’s IDI 5.0
Gazeley platform (€2.4bn) by GLP.
4.0
These mega deals are part of a broader consolidation phase
that is not confined to the real estate market, but is illustrative 3.0
of the maturing of the cycle. Europe saw a very strong 2017 for
2.0
activity in M&A, reflecting the demand for efficiency and
economies of scale. There have been notable examples in the 1.0
real estate industry specifically. These include the
aforementioned platform deals by Asian investors, but also 0.0
2001 Q1
2001 Q4
2002 Q3
2003 Q2
2004 Q1
2004 Q4
2005 Q3
2006 Q2
2007 Q1
2007 Q4
2008 Q3
2009 Q2
2010 Q1
2010 Q4
2011 Q1
2011 Q3
2012 Q2
2013 Q1
2013 Q4
2014 Q3
2015 Q2
2016 Q1
2016 Q4
2017 Q3
2018 Q2
2018 Q3
2019 Q1
2019 Q4
2020 Q3
2021 Q2
2022 Q1
2022 Q4
2023 Q3
2024 Q2
2025 Q1
2025 Q4
the delisting of Sponda by Blackstone for €1.8bn, the
Source: CBRE Research
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 I N VE STMENT OUTLOOK I N VES T M EN T OU T LOOK

INTEREST RATES, YIELDS AND DEBT COSTS attractively priced from a historic perspective. In line with
As previously mentioned, we expect European long-term growing investor interest outside the traditional core markets
interest rates to rise in 2018 and 2019 until an economic and further improving occupier markets, the gap between
slowdown, anticipated for late 2019 to early 2020, allows them prime and secondary yields is expected to tighten throughout
to come down again. There are two main ways in which interest 2018.
rates have an impact on the pricing of real estate: the relative
value of real estate compared to other financial products, such The base rate for the cost of debt for fixed and variable interest
as government bonds, and the cost of debt, as lower lending rate loans is related to swap rates and interbank lending rates
costs boost the affordability of buying real estate. (EURIBOR and LIBOR for Europe) respectively. In line with
interest rate expectations for the ECB, short-term rates such as
The yield on ten year government bonds – a benchmark for the interbank lending rates are expected to remain low in 2018,
yield on a ‘risk-free’ investment is still at historically low levels while swap rates may drift up slightly as they are typically closer
in the major European economies. The spread between prime related to international long-term rates.
office yields and the risk-free rate, is currently around 250bps,
which is 40bps above the 15 year average. Whilst competition Regarding margins, the story is similar to that for property
for prime assets may result in further yield compression in yields on direct investments. Lenders find it challenging to
certain markets, property yields are likely to remain largely flat secure deals in a market environment flooded with equity.
during 2018. Further out, rising interest rates will put upward Growing competition and limited opportunities have put
pressure on property yields in 2019 although the historically margins under downward pressure. While room for further
high spread will cushion the scale of any increase. tightening of margins in the prime segment is limited, new
market entrants diversifying into niche markets will offer
It is important to note that these benchmark yields refer to the lending for a widening range of asset types.
prime segment. Looking at secondary yields, the market is

Figure 5: Eurozone prime - secondary yield spread (all sectors composite), 2007-2017

Combined - prime Combined - secondary Spread: prime - secondary

9.0% 350

8.0% 300
Net initial yield (all sectors)

250
Yield spread (basis points)

7.0%
200
6.0%
150
5.0%
100
4.0%
50
3.0% 0
Q3 2007
Q1 2008
Q3 2008
Q1 2009
Q3 2009
Q1 2010
Q3 2010
Q1 2011
Q3 2011
Q1 2012
Q3 2012
Q1 2013
Q3 2013
Q1 2014
Q3 2014
Q1 2015
Q3 2015
Q1 2016
Q3 2016
Q1 2017
Q3 2017

Source: CBRE Research

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 OFFICE OUTLOOK
THE YEAR OF THE
FLEXIBLE OFFICE
POSITIVE LEASING FUNDAMENTALS
Office leasing markets enter 2018 in a period of modest
improvement, driven by a strengthening economic outlook in
most of Europe and a range of objectives designed to position
real estate as an arm of corporate brand and talent strategies.
Most major markets will see another strong year for
office-based employment growth with London possibly being
the only major exception. This will support further gains in
leasing activity. After growth of around 3% in 2017, we expect
European office leasing to rise by a further 5% in 2018. Leasing
momentum is strongest in Spain, the Netherlands and Italy;
with Germany, the UK and France seeing slower growth.
Brexit remains a source of uncertainty in the office market.
With negotiations proceeding, Brexit presents a potential
downside risk to the UK office market, London in particular, in
the event of corporate relocations to cities in continental
Europe or Ireland. We expect international occupiers to defer
some space decisions pending greater clarity about future
trading arrangements between the UK and EU. Given the
time-limited negotiation period, clarity around these
arrangements will be needed in the first half of 2018.
TECHNOLOGY AND FLEXIBILITY:
A PERFECT STORM
Technology will be a key driver of office markets, both as a
space user in its own right and an enabler of workplace change
and building selection for a wider range of corporates. As a
direct source of occupier demand across Europe, the
technology sector eclipsed both financial services and business
services in 2017 and is expected to do so again in 2018. In some
tech-dominated cities such as Berlin, Amsterdam and
Barcelona, demand growth in this sector is producing stronger
rental growth in the main tech district than in the
corresponding prime market.
More broadly, business models for many office occupiers will
continue to be affected by the combined impact of accelerated
technology innovation, shifts in the labour market such as
growth in self-employment in small and medium enterprises
(SMEs), and changing worker preferences.
© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018
14
OF F I C E OU T LOOK
Evidence from CBRE’s Occupier Survey 2017, shows that a
growing number of corporates regard technology, in various
forms, as the key ingredient of a flexible working strategy.
Combined with the growing ability to generate efficiency gains
within existing portfolios, this will sustain a more activist
approach by occupiers towards their corporate real estate. One
consequence is a growing appetite for flexible office space
which is rapidly permeating a number of European markets:
flexible office operators accounted for about 14% of office
take-up in London in 2017. Although there is widespread
variation in the appetite of different occupier types for flexible
office space, the phenomenon is here to stay.
Other occupier motives focus more on the needs of the
workforce, particularly in sectors and geographies where low
levels of unemployment or specific skills shortages are
constraints. Growing levels of occupier interest in wellness,
amenity, quality of working environment and user experience
will increasingly drive occupiers’ building selection and
management decisions, with a growing focus on quality.
On the supply side of the market, vacancy levels are likely to
edge lower in most major cities, with the exception of some
late-cycle markets notably London and Dublin, and some of the
smaller Central and Eastern Europe locations. In part, this is
driven by still-low levels of development in most markets, with
expected completions over the next two years equivalent to no
more than 3 to 4% of current stock. We expect increase in prime
rents in most markets in 2018, with Berlin, Stockholm,
Amsterdam and Madrid among the strongest.
”Office leasing will continue to rise
gradually as we head towards the end of
the cycle. Just as importantly, office
occupiers across many sectors will be more
rigorously assessing the efficiency, quality
and amenity of their buildings in the light
of rapid technological innovation and
evolving workforce demands”.
CBRE RESEARCH CBRE RESEARCH EUROPE REAL ESTATE MARKET OUTLOOK 2018 ©© 2017
2016 CBRE
CBRE Limited
Limited
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 RE TAIL OUTLOOK RETA I L OU T LOOK

STRUCTURAL AS WELL AS
C YC L I C A L I N F L U E N C E S

RAPI D CHANGE AHEAD
2018 will see the retail industry face the challenge of growing
inflation, nervousness about interest rates and the most
competitive market for consumer spend we have ever seen.
Retail rents will come under pressure from occupiers and, while
the gap between prime and secondary will remain, there will be
a recognition that secondary assets each need to be evaluated
on their own merits as opposed to being grouped together.
THE CHANGING ROLE OF THE PHYSICAL STORE
The physical store and its relationship to the consumer is
changing. It is no longer enough to have a store that isn’t fully
integrated into a retailer’s omnichannel strategy. Consumers
have clear expectations of being able to interact online or offline
in exactly the same manner.
“As we reach the end of the decade the
number of pure play only retailers will fall
dramatically. The majority of pure play
retailers will also have physical stores to
ensure they engage with the consumer
across all aspects of the omnichannel
experience. Both the retail and the
logistics industries will work hard to
ensure that these stores operate not only
as brand ambassadors but also as a key
part of the supply chain.”
Online sales in eastern Europe, at 4.8% of the total, remain
lower than for western Europe (8.6%) but are expected to grow
more rapidly. This partly reflects the lower starting point, but in
any event such growth will increasingly drive the requirement
for warehousing space as well as logistics capability in this
region.
The desire to be in the right location in the most appropriate
city is as important as ever and this is helping drive prime
rental growth. With numerous indicators showing a strong
move towards city-living the focus for retailers across Europe
will be to get their city strategy correct. Retailers’ desire to enter
a country and expand to multiple locations within that country
is decreasing. Far more prevalent is the strategy of selecting key
cities across Europe. To achieve this aim, retailers appear to be
more willing to wait until exactly the right pitch becomes
available.
 

While the online experience has not always progressed from
being a functional way to shop, the store has certainly
developed as an experience centre. The store increasingly needs
to communicate the essence of the brand message and offer a
highly-engaging experience. The consumer can then choose to
buy in-store or, increasingly, online. The opening of a physical
store drives increases in online sales, and vice versa: there is a
halo effect of opening a physical store that is felt far beyond the
store itself.
As the role of the store is changing, so too is the importance of
the logistics sector. A retailer’s delivery and returns processes
are a growing differentiator against the competition. The
increased demand for warehouse space across Europe has been
largely driven by the growing online share of the retail market.
There is little likelihood that this will decrease in the coming
years and there will need to be continued innovation in the
logistics sector to facilitate the growing volume of online
deliveries.
SHOPPING CENTRES : EUROPE IS DIFFERENT
In contrast to the US, where the main issue facing landlords is
an overprovision of shopping centre space (around five times
more than in the next closest European country), we are still
seeing shopping centres in Europe expanding. Most are adding
space, especially for tailored food and beverage options and a
more diverse range of leisure. There is minimal development of
new shopping centres in Europe except in Turkey, Russia and
Poland: strong forecast retail sales are facilitating demand for
new space in these countries.
Consumer spending and retail sales volume growth in Europe
(excluding the UK) have had their best year since before the
global financial crisis and the momentum should continue into
2018. This will provide a favourable backdrop for retail property
despite the challenges from e-commerce. In fact, we expect
prime retail rents to be amongst the fastest growing of any
sector. Average rents, by contrast are expected to remain under
pressure in 2018 due to the continued shift taking place from
physical sales growth to online sales growth.

© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018 CBRE RESEARCH CBRE RESEARCH EUROPE REAL ESTATE MARKET OUTLOOK 2018 © 2017 CBRE Limited

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 I N D U S TRI A L AND LOGISTICS OUTLOOK
E V E R C LO S E R L I N K S W I T H R E TA I L , A N D
O P P O R T U N I T I E S I N E M E R G I N G F O R M AT S
STRONG DEMAND DRIVEN BY RETAILERS
Logistics markets in Europe continue to expand rapidly. 2017
witnessed strong growth in both new construction and
transaction volumes compared with the previous year. Virtually
all space added to the stock has been taken up: net absorption in
the Tier 1 markets, stable at around 10 million sq m annually
from 2014 to 2016, exceeded 13.5 million sq m in the first nine
months of 2017. With the market now showing very limited
availability of large-scale modern warehouse space, rental growth
has firmed and spread further across European markets. Prime
rents in the key logistics hubs are forecast to grow by around
2.5% on average in 2018 and considerably more in some.
With consumer spending growing at its fastest rate since before
the global financial crisis, retailing has cemented its position as
the prime driver of the region’s logistics markets. E-commerce,
in particular, is a demand accelerator as the handling of a
product ordered online requires up to three times more space
than a conventional sale. In the UK, about one-third of all
logistics take-up can currently be attributed to online sales
fulfilment with Germany, France and other key markets in the
region catching up quickly.
Figure 6: Net absorption, Tier 1* logistics markets, 2009-2017
16
14
12
10
Million sq m
8
6 service providers are looking for ways to combine quick access
4
2 city depots, as well as existing urban industrial property
0 (multi-let assets, storage facilities) will grow further. This
2009 2010 2011 2012
Source: CBRE Research
* UK, Germany, France, Spain, Italy, Netherlands, Belgium, Poland, Czech Republic
© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018
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I N D U S T RI A L A N D LOG I S T I C S OU T LOOK
Nonetheless, traditional retail sales remain the cornerstone of
logistics market performance.
The integration of retail and logistics real estate solutions is
evolving, with e-tailers looking for physical outlets and
traditional retailers strengthening their online channels and
restructuring their warehousing footprint. Stores are
increasingly a means to attract and tie-in customers and to
generate sales, both through store-based and online channels.
Supply chains therefore need to adapt.
Now that logistics ground has been gained with durable goods
retail, the battle front of supply chain restructuring is shifting
to fast-moving consumer goods. Supermarket chains have been
active in modernising their warehouse networks and exploring
online channels. This has supported growth in occupier
demand, a trend expected to continue in 2018. Although the
online delivery of food remains a challenge, the need for
temperature-controlled depots in or near the city is growing,
which represents an opportunity for developers and investors.
CAPACITY CONSTRAINTS DRIVING CHANGE leaner warehouse networks and shorter delivery times.
Some of the major logistics hubs are running out of both space The first steps are also expected to be taken towards an
to build and labour for their warehouses. On the one hand, this integrated (re)development of distribution centres and other
will shift occupier demand and development activity to urban functions such as retail, offices and leisure.
established hubs that are still able to grow, and increasing rents.
On the other hand, new locations will appear on the radar. The Another trend expected to emerge is on-demand warehousing,
construction of a mega-distribution centre for Inditex in Dutch or pop-up warehouses, where owners of excess warehouse
Lelystad is illustrative. However, in all cases, sites will have to space are matched with users that need it temporarily, for
tick several location factor boxes to succeed, especially for example to handle sales peaks. These will be the natural upshot
transportation and labour. Development plans that do not take of the gig economy and take their place alongside better-known
these elements into account should be viewed with caution. matchmakers such as Airbnb.
City logistics are the next challenge, and retailers and logistics
to the customer with warehouse network efficiency while also
protecting margins. In 2018, demand for cross-dock types of
results from the need to respond to pressure on the ‘last mile’
2013 2014 2015 2016 2017 Q1-Q3 resulting from rising sales volumes, growing city populations,
CBRE RESEARCH CBRE RESEARCH EUROPE REAL ESTATE MARKET OUTLOOK 2018 © 2017 CBRE Limited
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 RE S I DENTIAL OUTLOOK
FAVOURABLE CONDITIONS FOR THE SECTOR
T O E X PA N D A S A N I N V E S T M E N T C L A S S
AN EMERGING INVESTMENT SECTOR
Unlike the commercial real estate sectors, the European
residential investment market is still in its initial stages of
development. Multi-family residential, also known as the
Private Rented Sector (PRS), is one of the few segments that still
has gaps on the regional investment map. Building scale in the
multi-family residential market from a pure play investment
angle is a challenge in Europe.
© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018
20
Nonetheless, the sheer amount of capital available for real
estate investment will underpin growth in the sector in 2018. It
will primarily be driven by institutional capital partnering with
local developers to provide scalable opportunities and acquire
the local expertise needed to cope with the wide range of
regulations and market dynamics.
CBRE RESEARCH
RES I D EN T I A L OU T LOOK
European markets can in principle be classified into
three brackets:
1. Mature markets: Germany, Switzerland, Nordics and
the Netherlands – typically markets with a large rental
sector and a relatively deep investment market
2. Emerging markets: France, Italy, Spain, Ireland, Poland,
Central and eastern Europe – lower but growing shares
of rental housing and growing investor appetite
3. Remerging markets: The UK – where for a long time the
sector had been crowded out by a combination of
large-scale social housing provision and the rise in
owner-occupation, but is now increasingly attracting
institutional investment again
Prices for residential units, both for sale and rent, are rising
across continental Europe. The UK, and London in particular,
is seeing a plateau in pricing reflecting Brexit uncertainty and
strong growth at earlier stages of the cycle. For most markets
however, capital values are growing.
HOUSEHOLDER PREFERENCES INFLUENTIAL
Social changes are an important growth driver for the sector.
Millennials, in particular, have a strong preference for
locational decisions that are flexible. For them, buying an
apartment is a less favoured option than renting. House price
levels in the key European cities are obviously playing a
significant role too. Housing affordability in the major cities
has deteriorated in recent years, and in most markets this
situation is not expected to change in the short-term. Demand
and supply in most cities are seriously out of balance leading to
further price increases in 2018. Rental prices will follow.
CBRE RESEARCH EUROPE REAL ESTATE MARKET OUTLOOK 2018
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Consequently, land values are rising and the density of many
cities is increasing. The recent trend towards ‘micro-
apartments’ is expected to continue. Looking further ahead,
multi-family housing will increasingly incorporate hospitality
elements and move towards a full-service offering. Concierge-
services, car-sharing, in-house spas and gym facilities will
become more common. Placemaking and sustainability will
become critical in ensuring cities to develop in a multi-
functional, healthy and sustainable manner. Service charges are
expected to increase on the back of this trend and will form a
substantially larger proportion of total occupancy costs.
Changes in legislation are expected to start having an impact
in 2018. New regulation typically aims to protect the interests
of lower to middle income groups in cities. Given the structural
imbalance between supply and demand, additional regulation
is likely to have a dampening effect on construction -
developers will find it increasingly difficult to develop housing
for these groups, and may consequently decide to deploy
capital elsewhere.
The key challenges for the sector remain:
• Typically unsupportive legislation to increase density in
historical cities across Europe
• Strongly regulated social and middle-income housing
• Limited development plots in major markets
• Core capital that needs to become comfortable with
development risk across the sector
Despite these challenges, we believe 2018 will see strong growth
in the multi-family residential markets because of household
and tenure preferences, and the support of substantial
investment capital.
© 2017 CBRE Limited
 HOTELS OUTLOOK
M O R E D I F F E R E N T I AT I O N,
MORE INVESTMENT
ANOTHER STRONG YEAR AHEAD
2018 is forecast to be another strong year for European hotel
investment, underpinned by the sale of major hotel portfolios
and operating platforms across the region. A shortage of stock
and premium pricing in the main European gateway cities will
continue to prompt investors to look further afield at
investment opportunities in secondary and resort locations. We
expect appetite for alternative investments, including hostels,
to continue to gain momentum.
North American private equity funds are expected to be
increasingly active in southern and eastern European markets
to achieve their typically higher rates of return. From Asia, we
expect capital from Hong Kong, Singapore and other South East
Asian countries to dominate, following a slowdown in Chinese
investment resulting from state-imposed outbound capital
restrictions.
© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018
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In Germany and the UK, where there is a relatively high
proportion of stock operated under operational lease
agreements, we will continue to see strong European
institutional interest, as the annuity and insurance funds seek
stable, long-income assets.
HOTEL OPERATING PERFORMANCE
From a traveller’s perspective, political instability and safety
concerns will continue to affect decision-making and choice of
destinations. Barring further security threats, markets such as
Paris and Brussels are expected to continue to recover through
2018 in terms of hotel operating performance. Moreover, recent
occurrences have shown that travellers have tended to become
less sensitive to security incidents and regain their confidence
more quickly. This was reflected in London and Manchester’s
hotel performance levels in the wake of the 2017 terrorist
attacks.
CBRE RESEARCH
H OT EL S OU T LOOK
Hotel profits across Europe will be affected by rising operational
costs, particularly labour costs. Hotel operators must continue
innovating and adopt new technology to facilitate more
efficient service delivery. Mobile apps, for instance, are being
increasingly used for hotel bookings, check-ins and as room
keys, reducing the need for staff while enhancing the customer
experience.
GROWING DIFFERENTIATION
The differences between hotel concepts will become more
pronounced in 2018. On the one hand, there is increasing
development of limited service concepts that focus almost
entirely on the sale of rooms, with very limited ancillary
revenue streams such as restaurants. To expand the guest offer,
some of these brands are increasingly entering strategic
partnerships with successful food and beverage (F&B) operators
or surrounding businesses in the area, including health clubs
and gyms. This has proved particularly successful in urban
areas, and allows operators to maximise profitable guest rooms
while also providing their guests with access to other facilities.
For example, Hoxton Hotels are establishing partnerships with
nearby gyms, to offer their guests day-pass access.
At the other end of the spectrum, there are hotel companies
that invest heavily in F&B and public spaces with the intention
of enhancing returns through non-room revenue. Such hotels
are increasingly becoming social hubs for travellers, residents,
co-workers and members alike. Global hotel groups are
expected to imitate successful concepts from brands like Zoku
and Soho House & Co.
CBRE RESEARCH EUROPE REAL ESTATE MARKET OUTLOOK 2018
23
“We see further strong investor interest in
the hotels sector in 2018, coupled with
clear operator focus on service levels,
innovation and concept differentiation”
Additionally, we expect that brands and operators from other
real estate classes, particularly the retail and health sectors, will
increasingly move into hotels. For example, lifestyle furnishing
house West Elm and high-end gym operator Equinox have
already announced hotel openings in the US. If the past is
anything to go by, it is only a matter of time before these
concepts appear in Europe.
In overall terms, after strong European hotel investment in
2017, we expect this momentum to continue into 2018. Markets
like the UK and the Netherlands should see a strong first half to
the year as portfolios launched in late 2017 transact. Spain and
Italy are also likely to see high levels of investment activity in
the year ahead. Some markets might see a tempering of deal
activity, including Germany, where a shortage of investable
stock reflects the high number of transactions over recent years.
© 2017 CBRE Limited
 A LTE RNATIVES OUTLOOK
N O LO N G E R S P E C I A L I S T ?
NICHE SECTORS AND NEW STRUCTURES
INCREASINGLY ACCEPTABLE
Specialist real estate encompasses a variety of properties whose
value derives from their operational potential. Sectors which
have witnessed significant international M&A and property
investment in recent years include healthcare, education
and leisure.
The unprecedented weight of money targeting operational asset
classes means that 2018 is likely to be another very active year
for specialist markets. Key themes will include continuing yield
compression; trading of established portfolios and further
forays into ‘niche’ sectors to drive returns; cross-border
consolidation; and wider deployment of long-income real
estate structures.
MARCH TO THE MAINSTREAM
Established logic holds that when core markets heat up,
investors’ allocations to alternative types of real estate increase.
For many leading global investors, a number of the property
sectors traditionally viewed as ‘specialist’ are now firmly
embedded within their core strategy, and most have a formal
allocation to specialist assets. Many now have dedicated funds,
some with pan-European mandates. Overseas capital,
particularly from the Far East and the US and often bidding in
partnership with established investors, continues to bolster
demand for specialist assets.
Consequently, as we enter 2018, prime yields for the specialist
assets typically regarded as most defensive – for example care
homes, acute hospitals, student housing – are now at or close to
historical lows in the most mature European markets for these
asset types (France, Germany, The UK, and, for healthcare, the
Nordics). We expect yields to continue falling over the course of
2018. Existing investors will exploit this repricing to optimise
their portfolios through selective disposals, whilst continuing
to leverage their experience and credibility to reinvest in
emerging opportunities.
© 2017 CBRE Limited EUROPE REAL ESTATE MARKET OUTLOOK 2018
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INVESTORS TARGET NEW SECTORS IN THE SEARCH
FOR RETURNS
An emerging theme – partly driven by yield compression in the
core specialist markets has been a growing willingness to go
further into specialist territory in the search for enhanced
returns. As well as investment in less-established niche sectors,
this can include direct exposure to operational risk through
mechanisms such as management contracts. Realistic sector
and risk underwriting is key to making such strategies
successful: Prominent examples include:
• In the second half of 2017, we saw the first significant
forays by institutional investors into the UK retirement
living sector in the shape of AXA’s acquisition of
Retirement Villages and Legal & General’s acquisition of
Inspired Villages, both established operators with
development pipeline. These early investments, and others
likely to conclude in the first half of 2018, are evidence of a
more mature and sustainable platform-building approach
in the retirement living sector. This has the potential to
help transform it into an institutional asset class and to
deliver a significant social impact
• 2017 saw the launch of three new listed vehicles dedicated to
specialist social housing with a combined £1bn first-round
investment target. The challenge of deploying this scale of
investment into an emerging sector with typical unit values
less than £2m will demand creative engagement with
specialist care operators and housing providers. This
subsector is on the cusp of becoming an institutional asset
class but this will demand considerable ingenuity on the
part of investors, and downside risk is significant
A flurry of recent investments into previously niche European
healthcare property investment sectors (Italian and Spanish
private hospitals, Spanish care homes, German rehabilitation)
offering a yield premium over core markets will continue.
We expect a number of substantial transactions in H1 2018
and beyond.
CBRE RESEARCH
OPERATOR LANDSCAPE CONSOLIDATING
The ability of operators to respond to changes in wider trading
conditions is critical to preserving the value of their business
and in turn that of operational real estate. Going into 2018, the
defining trend across Europe will be consolidation. A buoyant
M&A market will facilitate this, but in many cases the
underlying rationale stems from a need to diversify in response
to sector-specific pressures in operators’ home markets.
Significant activity to date has focused on the UK, but
increasingly involves other markets as well:
• Leading operators including Fresenius (Germany – acute
hospitals), Orpea (France – nursing care), Bupa (UK –
nursing care and acute hospitals) have fundamentally
changed the ownership composition of the European
healthcare sector through a programme of cross-border
acquisitions of complementary businesses, bringing with
them expertise and specialist know-how. Collectively, they
deployed well over €7bn in 2017 and are expected to
further consolidate into 2018
• In the UK, a healthy market for portfolios of operational
care homes will continue to allow larger participants to
optimise their portfolios through divestiture of non-core
assets. Additionally, we expect at least two major UK care
home and healthcare operational platforms to transact
during the course of 2018
• The European student housing market, buoyed by growing
demand for higher education, will continue to see
in-country and cross-border consolidation with platforms
including Greystar Student Living (which recently acquired
the Spanish provider, Resa) on the M&A trail
• The private kindergarten, specialist school and
independent education sectors have witnessed significant
activity in late 2017, leading to a fundamental reappraisal
of their appeal and a real prospect of new development.
Continued activity by international PE groups and larger
European operators is likely in 2018 and beyond
Consolidation across a range of specialist operational sectors in
CBRE RESEARCH EUROPE REAL ESTATE MARKET OUTLOOK 2018
25
Europe will be beneficial for real estate investors: growth will
present opportunities for new partnerships, and a more mature
and stable operator market will enhance typical covenant
strength.
LONG INCOME WILL CONTINUE TO PRESENT
OPPORTUNITIES
In the UK in 2017, the long income market (typically sale and
leaseback, but increasingly ground rent and income strip
structures) supported the majority of operational real estate
transactions.
These, generally institutional, investors require long-term
‘super secure’ structures with inflation-linked rents and are an
optimal partner for established operational businesses
requiring low-cost capital to reinvest or expand, in return for
providing a long-term income stream.
With appetite for long income investments in operational real
estate expected to grow further, we expect to see consolidating
operators, long income investors and lenders forming
increasingly formalised strategic partnerships. The increasingly
pan-European focus of many investment and operational
platforms – as well as the impending impact of new lease
accounting regulations under IAS17 and enhanced
creditworthiness resulting from sector consolidation – have
created favourable conditions for long income to play a greater
role in the specialist markets in 2018.
© 2017 CBRE Limited
 C O N TAC T S
For more information about particular sections of this report or access to our detailed forecasts, please contact:

Neil Blake Richard Holberton Machiel Wolters Joe Stather

Economic and Political Outlook Office Outlook Industrial & Logistics Outlook Hotels Outlook
+44 20 7182 2133 +44 20 7182 3348 +31 20 626 2691 +44 20 7182 2523
neil.blake@cbre.com richard.holberton@cbre.com machiel.wolters@cbre.com joe.strather@cbrehotels.com

Raphael Rietema Andrew Phipps Jos Tromp Edward O’Brien

Investment Outlook Retail Outlook Residential Outlook Alternatives Outlook
+31 20 204 4325 +44 20 7182 2116 +31 20 626 26 91 +44 20 7182 2849
raphael.rietema@cbre.com andrew.phipps2@cbre.com jos.tromp@cbre.com edward.obrien@cbre.com

For more information regarding global research please contact:

Nick Axford Richard Barkham Spencer Levy

Global Head of Research Global Chief Economist Head of Research, Americas
+44 20 7182 2876 +1 617 9125215 +1 410 951 8443
nick.axford@cbre.com richard.barkham@cbre.com spencer.levy@cbre.com

Henry Chin Neil Blake Jos Tromp

Head of Research, Asia Pacific Global Head of Forecasting Head of Research, EMEA
+852 2820 8160 +44 20 7182 2133 +31 20 626 26 91
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CBRE RESEARCH
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real estate market research and econometric forecasting to real estate investors and occupiers around the globe.

All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including
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