Europe’s economy is expanding modestly, and despite ongoing caution, the office market is holding up — with prime assets leading and AI changing future demand.
Modest Growth, Tight Labor Market
The Eurozone is forecast to grow 1.1% in 2026 and 1.6% in 2027, with Central and Eastern Europe and Southern Europe outperforming Western markets. The Services PMI reached 51.9 in January 2026, signaling expansion, and unemployment remains at a record-low 6.2%, according to a new Savills report.
Leasing Stable, Prime Cities Outperform
Office take-up across Europe was flat year-over-year in 2025. A strong first half offset a weaker second half, with fourth-quarter activity down 10% amid geopolitical caution. Savills expects leasing to rise 3% in 2026.
Frankfurt and Dublin significantly exceeded their five-year averages, supported by large deals. Southern Europe and CEE markets also contributed to overall stability. Banking and technology firms became more active, while venture capital investment into European AI companies reached a record €21 billion in 2025, up 31% year-over-year — a trend beginning to translate into office demand.
AI Brings Short-Term Disruption, Long-Term Change
AI adoption is prompting companies to reassess headcounts and productivity expectations. Some job displacement is expected in the near term, particularly in graduate-level roles, as routine tasks become automated. Over time, new roles are expected to emerge, and office-based employment is projected to grow 4% over the next decade.
Vacancy Rises, But Prime Tightens
Overall vacancy increased to 9.0%, though prime vacancy in major markets remains far lower at roughly 2–3%. New development is unlikely to meaningfully increase before 2027, keeping supply constrained in top locations.
Occupiers are concentrating in high-quality CBD offices, widening the divide between prime and secondary space.
Rents Outpace Expectations
Prime rents grew 3.4% on average last year, with further growth of 3.7% expected in 2026. Rental performance has exceeded earlier investor forecasts, with prime rents now more than 10% above initial projections made in 2021.
Meanwhile, capital expenditure pressures are rising, and performance gaps between top- and bottom-tier assets are at a nine-year high.
Prime assets in strong cities are benefiting from limited supply and selective demand, while secondary stock faces greater pressure. As AI alters work and hiring, quality and adaptability are becoming the sector’s defining advantages.
