Prime office yields stable at 4.9%, underpinned by competitive debt and resilient occupational markets.
ECB to maintain rates at 2.25% throughout 2026
Economic overview
The European economy stagnated during Q2 2026, as higher energy costs, weaker confidence and renewed geopolitical uncertainty weighed on growth. The Middle East conflict continued to shape the macroeconomic backdrop, although the announcement of a temporary ceasefire and the reopening of the Strait of Hormuz provided some relief to energy markets by late June. Into mid-July, the end of the ceasefire brought renewed geopolitical uncertainty, whilst Marine Le Pen’s announcement to run in the 2027 French presidential election lifted French 10-year government bond yields to 3.9%.
Inflation expectations remain higher than at the start of the year, prompting the European Central Bank (ECB) to raise its deposit rate by 25 basis points (bps) to 2.25% in June. However, inflation fell back 40 bps to 2.8% in June, given softer energy inflation, indicating that the ECB is likely to maintain rates at current levels for the rest of 2026. Oxford Economics upwardly revised its 2026 Eurozone GDP growth forecast by 20 bps to 0.6% and held its 2027 forecast stable at 1.5%.
Average prime European office yields remained broadly stable at 4.9% during Q2 2026. Dublin (-10 bps to 4.75%), Milan (-25 bps to 4.00%) and Brussels (-5 bps to 4.75%) compressed. Oslo moved out by 25 bps to 4.75% following an interest rate increase from the Norges Bank, whilst Düsseldorf moved out by 10 bps to 4.60%.
From a fair value perspective, Madrid, London City and Manchester remain most attractively priced relative to long-term averages, supported by real rental growth prospects and long-term yield spreads against risk-free rates.
Market view
The US-Iran conflict has slowed the speed of investment recovery in 2026 as deals take longer to complete. Buyers are increasingly willing to acquire European offices again, particularly where assets offer secure income and low future capex costs. Vendors are generally under no pressure to sell and are therefore holding firm on pricing expectations. A shortage of investable prime stock has continued to support pricing for best-in-class assets.
Yield outlook stable as cross border activity gathers pace
According to RCA data, cross-border investment into European offices accounted for 36% of activity during H1 2026, the highest proportion since 2022. In terms of liquidity, Spanish privates and German institutions remain active across Iberia, while Czech investors remain active across the CEE region, supported by strong rental growth prospects. SCPIs continue to seek higher-yielding office stock across UK regional and increasingly CEE cities, Swedish outbound investment has gathered pace, whilst we have observed a small increase in activity from owner-occupiers. Core European markets are underperforming their historical investment volumes, given investor concerns over domestic economic growth and a shortage of openly-marketed product.
There is returning appetite for larger lot sizes from institutional funds, however. Deka Immobilien acquired the 93,500 sq ft Stirling Square office building in London’s St James’s for £215 million. Castellum sold two large office buildings in Sweden for a combined SEK 18 billion, as institutions and pension funds remain active. However, the number of buyers for large office towers in non-prime locations remains thin, which has led to a handful of pulled sales.
Debt markets
Banks continue to favour prime assets with strong covenants, conservative leverage and clear exit liquidity. LTVs remain materially lower than in the pre-GFC cycle, which has limited distress and reduced the chance of forced sales. During Q2 2026, all-in debt costs for prime offices moved in by an average of 35 bps, reflecting an average 10 bps tightening in debt margins and a 25 bps fall in swap rates, as debt costs returned to accretive levels.
Alternative lenders and debt funds are becoming more competitive for non-prime stock, where refurbishment strategies require additional capital expenditure. This is gradually improving liquidity for value-add offices, but the buyer pool remains more selective. Fundraising conditions also remain challenging (although this depends on investor group), whilst open-ended real estate funds continue to manage redemption risk carefully.
Occupational fundamentals
The occupational story provides a compelling case for investors. European office take-up has been broadly resilient, but the composition of demand is changing. Occupiers are taking longer to commit to new space, and the proportion of lease renewals remain elevated, reflecting both economic caution and the high cost of fit-out. At the same time, the limited availability of prime space in central locations is supporting rental growth, particularly for highly amenitised, energy-efficient buildings.
Savills analysis indicates that since 2019, average European CBD vacancy rates have risen by 220 bps to 4.9%, whereas average total market vacancy rates have risen by 500 bps to 9.5% over the same period, reflecting rising occupier preference for prime locations. Relative to post-Eurozone crisis levels, total vacancy rates remain comparable, whereas CBD vacancy rates remain over 200 bps lower, illustrating the shift in occupier demand. Average prime CBD vacancy rates remain even lower at 2–3%.
The office development pipeline is at a ten-year low too. Higher construction costs, elevated financing costs and developer concerns around depth of investor demand for large lot sizes upon exit are delaying new starts. This should keep prime vacancy rates low and support real rental growth over the medium term, with Real Estate:UK anticipating average prime office rental growth of 2.5% pa. The implication for investors is clear: income growth will remain the main driver of total returns during the next 12 months.
Outlook
We expect the recovery in European office investment volumes to continue, but at a slower pace than previously anticipated. Higher ECB interest rates are likely to delay further prime yield compression until 2027 across most markets, although selected cities with stronger rental growth prospects and clearer pricing evidence are likely to outperform earlier.
The key distinction remains between prime CBD offices and secondary stock. Prime vacancy remains low across many major European cities and development completions are falling, which continues to support rental growth. However, investors remain cautious on older assets where the costs of refurbishment, ESG compliance and leasing risk are more difficult to price. Value-add investors who are willing to take on the capex risk are likely to be rewarded by rental uplift.
Overall, Europe remains relatively well positioned on a global basis. Economic growth is weak but still positive, inflation expectations are more contained than during 2022–23, and distress remains limited. The market is therefore not being led by forced sellers, but by a gradual rebuilding of confidence among buyers with focus on income growth.