Higher borrowing costs put European CRE market under pressure

In some cases, discounts are exceeding 10%, as government bond yields across Europe and internationally remain at multi-year highs, increasing financing costs for a sector that is particularly sensitive to changes in interest rates.

According to MSCI data reported by Reuters, transaction volumes in European commercial real estate fell to €43 billion in the third quarter of 2026, the lowest level in three years. Year to date, transaction volumes are down 3% compared with an already subdued 2025, while office property sales have dropped to their lowest level since the 2009 financial crisis.

Buyers Seek Lower Prices Through Renegotiations

A growing indication of market pressure is the increasing tendency to renegotiate transactions before completion, with buyers seeking price adjustments to reflect higher financing costs.

Executives at UK investment firm M&G said such renegotiations typically result in price reductions of between 2% and 3%. However, according to an executive at another British property development company, discounts can exceed 10%, depending on the circumstances of each transaction.

Rising interest rates, influenced by developments in the Middle East and concerns over inflation, are making loan refinancing more expensive. At the same time, lenders are becoming more cautious about the levels of leverage they are willing to provide.

Nevertheless, according to real estate finance advisers at CBRE and JLL, financing remains available for most properties, although lending conditions are becoming increasingly stringent.

Investment Freeze and Slower Development Activity

The pressure has already affected some of Europe’s largest real estate investors.

DWS, the asset management arm of Deutsche Bank, temporarily restricted investor redemptions from one of its real estate investment funds. Meanwhile, Vonovia, Germany’s largest residential property owner, highlighted the impact of higher interest rates on transactions and announced that it would reassess its property development activities.

In the UK, Land Securities and British Land have suspended development projects in London with a combined value exceeding £1 billion, reflecting more challenging financing conditions and heightened uncertainty surrounding the market outlook.

Similarly, Blackstone, the world’s largest investor in commercial real estate, reported in its third-quarter results that higher interest rates had slowed portfolio growth in both Europe and the US multifamily housing market. Despite the short-term challenges, the group believes the market could recover over time.

A New Cycle of Uncertainty

Europe’s commercial real estate market is facing an environment in which the cost of capital, availability of financing and valuation expectations are playing an increasingly decisive role in investment decisions.

“For six years, it feels like we have experienced a so-called ‘black swan’ event every year,” said Chris Gow, Head of Debt and Structured Finance for Europe at CBRE, describing the succession of crises and disruptions that have affected the sector.

Declining transaction volumes, price discounts and the postponement of new development projects suggest that the market adjustment remains incomplete.

For investors, the key challenge is now to strike a balance between higher financing costs and the returns that properties can generate. For sellers, the challenge lies in accepting the new valuation environment without further undermining transaction activity.