A new report from PwC and the Urban Land Institute (ULI) provides a cautiously optimistic forecast for the European real estate market in 2025. Analysts emphasize sustainable development, commercial real estate, and the growth of digital infrastructure, such as data centers, while also acknowledging challenges posed by geopolitical instability, stricter regulations, and rising construction costs.

The majority of European real estate executives expect business confidence and profitability to remain stable or increase in 2025, largely due to more predictable interest rates and price stabilization.

While many lenders report being "open for business," borrowers remain cautious about financing terms and costs, potentially leading to a slow and uneven recovery. Optimism about capital inflow into Europe could be short-lived if geopolitical events trigger inflationary pressures and lead to rising interest rates.

Investors are increasingly looking for opportunities in physical infrastructure that will support future technologies, innovation, digitalization, and decarbonization. Among the top investment categories for 2025:

1. Data centers rank first for investment, development, and revenue potential.
2. New energy infrastructure is gaining momentum, reflecting the shift toward sustainability.

Despite regulatory and financial hurdles, environmental, social, and governance (ESG) factors continue to shape the industry, both in the short and long term. Meanwhile, artificial intelligence (AI) is increasingly being integrated to enhance operational efficiency.

Two key concerns affecting the real estate sector amid heightened climate risks and the transition to net-zero emissions are:

1. Access to energy – ensuring stable power supplies for digital infrastructure.
2. Insurance costs – rising expenses for property protection against climate-related risks.

To maximize efficiency, industry leaders are turning to fully integrated real estate and operational platforms.

Market size and liquidity are the top factors for investors selecting cities for development and expansion. The industry is shifting beyond traditional office and retail spaces, diversifying portfolios across a broader range of geographic locations.

The top investment destinations for 2025 include:

1. London – maintains its #1 spot for the fourth consecutive year.
2. Madrid surging to second place, driven by macroeconomic strength and quality of life.
3. Paris – ranked third but remains strong due to Olympic-related investments and major infrastructure projects.

According to MSCI data, London and Paris accounted for 11% of all European real estate transactions in the first nine months of 2024, totaling approximately €14 billion in investments.

Other notable cities include:

• Munich (#5), Frankfurt (#8), and Hamburg (#9) – demonstrated resilience despite Germany’s economic slowdown.
• Berlin (#4) and Milan (#7) – held steady in the rankings.
• Lisbon (#10) – dropping two spots due to market adjustments.
• Amsterdam (#6) – maintaining a strong position.

While Southern European cities face challenges, Central European markets such as Warsaw, Vienna, and Prague are seeing rising investor confidence. However, Dublin and the UK’s regional cities have declined in rankings after years of steady growth.

Dublin now ranks 17th out of 30 European cities in the "Emerging Trends in Real Estate 2025" report, down from 13th place last year. While still a positive result, challenges include infrastructure shortcomings and complex planning regulations.

According to Joanna Kelly, Head of PwC Ireland’s Real Estate Practice, addressing these issues and ensuring tax stability could solidify Dublin’s role as a key player in European real estate. As the only English-speaking capital in the EU, Dublin remains attractive due to its strong economic fundamentals and young, dynamic workforce.

"By prioritizing infrastructure development, Dublin can create a more sustainable and competitive real estate market, fostering long-term growth and stability," Kelly emphasized.

More than 80% of real estate professionals expect business confidence and profitability to hold steady or improve in 2025, with about 50% forecasting growth. However, concerns persist:

• 85% of respondents worry about geopolitical uncertainty (up from 74% last year).
• 83% cite conflicts in Europe and the Middle East as key risk factors.

Interest rates in both the U.S. and Europe and Asia’s evolving political landscape remain crucial influences on investor sentiment. Some industry leaders predict a three- to five-year recovery period, potentially longer than originally expected.

According to the survey:

• 77% of respondents are concerned about European economic growth.
• 62% express similar concerns at a global level.
• 74% identify regulatory tightening as the top challenge in the EMEA region.
• 70% cite rising construction costs as a major hurdle.
• 44% remain worried about declining demand for rental properties (down from 48% last year).

While ESG remains a top priority, over 70% of respondents are concerned about environmental regulations in 2025, and 72% believe these concerns will persist for at least five years. Some experts note difficulties in maintaining ESG compliance, and survey results indicate growing industry resistance to strict ESG policies.

Artificial intelligence is gaining momentum:

• Nearly 50% of respondents used AI in their business operations last year.
• The majority believe AI and machine learning will reshape real estate in the next five years.

At the same time, digital risks are a growing concern:

• 59% of respondents rank cybersecurity as a top business challenge.
• 42% cite digital transformation as a key issue.
• 35% highlight AI risks.

Over five years, cybersecurity has become the second most critical business concern (63% of respondents).

Access to capital remains a major issue as investors face:

• Ongoing global uncertainty.
• The realities of a “new economic norm”.
• Shifting demands in property ownership.

Despite falling property values, institutional investors still struggle with the denominator effect, where slow real estate revaluations hinder new investment opportunities. Additionally, real estate must continue proving its value against more stable asset classes like long-term bonds.

Among the top investment opportunities for 2025:

• Data centers leading the market due to digital expansion.
• New energy infrastructure - reflecting the shift toward renewable energy.
• Student housing and logistics – benefiting from long-term demographic trends.

However, supply shortages remain a challenge for sectors such as logistics, storage, and housing. Some experts warn that optimistic growth projections could lead to overvaluation in certain markets.

Meanwhile, investment in office and retail properties remains uncertain due to ongoing structural changes in these sectors.

The real estate industry is facing increasing risks from extreme weather events and the transition to net-zero emissions. Financial costs and operational disruptions are becoming more evident, with nearly two-thirds of respondents expecting insurance costs to rise over the next five years.

Despite widespread awareness of climate-related challenges, the current responses from the industry are inadequate, given the scale and urgency of the issue.

Despite geopolitical and economic uncertainty, there is a cautious sense of optimism in the European real estate sector. Industry leaders must navigate regulatory challenges, ESG (Environmental, Social, and Governance) demands, and digital risks. Those who adapt, innovate, and embrace new technologies will be best positioned for success in the coming years.