Many investors have become aware of their general overexposure to the US stock market. Europe and the euro have emerged as popular diversification strategies.
A similar case can be made for European commercial real estate. With regard to trophy office buildings, we believe that certain key cities present compelling opportunities for the core investor.
In summary, trophy office building cap rates have widened by 100 bps or better. And despite the correction in pricing, market rents have increased by 20% or more. This means investors can acquire prime offices in Paris or key German cities at prices that are 25% lower than in 2022, in very healthy markets.
This is a core strategy whose primary objective is the preservation of capital. We nonetheless project unlevered annual (cash-on-cash) returns in the range of 3.5%-5.0% and unlevered IRRs above 8%, based on projected value increases. Obviously for investors using debt, the returns will be higher. And for investors seeking higher (value-add) returns, we can propose other strategies, particularly Spanish logistics or big box retail.
Please see some links below for interesting further reading. In the words of DWS:
“Europe is entering a promising new chapter, with robust occupier fundamentals, limited new supply, stabilized yields, increasing liquidity and an easing interest rate environment. We believe the year 2025 is set to be a standout vintage year in European real estate. European real estate, with its intrinsic benefits of diversification, stable income, could potentially lead to attractive risk-adjusted returns.”
“Interest rate cuts are now well underway across Europe, providing tailwinds for the real estate industry. The outlook for modest economic growth driven by the challenges of an ageing population and diminishing productivity growth suggests a lower “neutral rate,” particularly when compared to the higher-growth U.S. For example, the European Central Bank has cut interest rates by 150 basis points since its peak of 4% in 2023. This sets the stage for European real estate markets to benefit from potential yield compression, unlocking potential for investors.”
On Europe’s relative strength:
DWS: https://www.dws.com/en-ES/AssetDownload/Index?assetguid=76aa891d-9476-4bbe-8ba6-6948f0216a86
Green Street: https://greenstreetnews.com/article/european-real-estate-recovery-to-continue-despite-us-tariff-turmoil/
Barry Sternlicht, Chairman & CEO, Starwood Capital Group: https://www.bloomberg.com/news/live-blog/2025-05-05/milken-institute-global-conference-day-1?cursorId=681911B3B21C0000
On US relative weakness:
AFIRE: https://www.afire.org/survey/pulse14425/
Please reach out to us for further detail.
Kind regards,
Korzo