Average European prime CBD office yields move out by 13 bps in response to higher bond yields during Q3 2026.
Bond yields surge in Q3 2026, lifting prime yields
European government bond yields jumped by an average of 80 basis points (bps) during Q3 2026 as markets became increasingly concerned around inflation, government debt sustainability in some economies and the ongoing US/Iran war. Brent crude oil prices rose around the $100 per barrel mark by end-September, from $70 per barrel at the end of Q2 after the number of vessels transiting the Strait of Hormuz fell to the lowest in more than two months following attacks on tankers.
Domestic political uncertainty continues to cast a shadow over major European economies, most recently by the announcement of Spain’s snap election, following the failure of a key vote on housing measures. In the UK, investors await Andy Burnham’s Autumn Budget at end-October, while the release of France’s draft 2027 Budget lifted French 10Y government bond yields above 5%, the highest level since 2002, as concerns over the country’s fiscal outlook and political uncertainty intensified.
Eurozone inflation rose by 3.8% YoY in September, the highest level in three years, and above forecasts of 3.6%, as Eurozone energy prices rose by 18.8% YoY. European governments have considered releasing strategic oil reserves to ease mounting fuel costs, following President Trump’s threat of banning US oil exports. More concerning for Europe heading into winter is the relatively low gas storage levels of 68% in September 2026, down from 81% in September 2025.
Oxford Economics anticipates ECB interest rates will rise to 2.75% by the end of 2026, to prevent a rerun of the inflationary spiral observed in 2022. However, the underlying level of demand is lower than during the post-pandemic recovery, meaning prolonged wage inflation is less likely, as illustrated by the latest Eurozone hiring expectations reading of 98.3, below the long-term average of 100.
Looking to 2027, the Eurozone economy is expected to grow by 1.2%, up from 0.9% in 2026. At a regional level, Central and Eastern European economies are forecast to see the strongest economic growth, led by Poland (2.7%), Romania (2.2%) and Hungary (2.0%), whilst Iberia will continue to deliver above-average growth, led by Spain (2.1%) and Portugal (2.0%). The core markets of the UK and France are expected to lag as debt repayments drag headline growth, while Germany will see a modest increase as infrastructure and defence spending gradually filters through the wider economy.
After a period of stable prime yields, higher long-term borrowing costs prompted outward yield movement across selected cities in Q3 2026. European average prime office yields rose by 13 bps during Q3 2026 to 5.1%. Warsaw, Paris CBD, Brussels, London City, West End and Manchester moved out by 25 bps in response to the higher risk-free rates. German top 6 cities moved out by 10–20 bps during Q3; Lyon moved out by 50 bps to 6.00%, whilst Lisbon moved out by 40 bps to 5.00%. In contrast, Stockholm moved in by 15 bps to 3.75%, reflecting the depth of domestic capital targeting prime assets. In particular, Swedish institutions have been active on the buy-side.
Do we need a further correction in office pricing for the investment markets to function properly?
The recent EXPO REAL 2026 conference reflected a mood of ambivalence, as buyers remain present but selective. Europe’s modest growth prospects are becoming increasingly exposed to (geo)political shocks, given the inflationary environment has increased the risk of holding real estate. The bid-ask spread for new acquisitions has widened, with instances of some buyers seeking to renegotiate to reflect higher costs of debt.
Uncertainty over financing costs and pricing is instilling a greater level of caution among buyers and lengthening due diligence processes. Core European buyers are selective to location and quality, focused on prime assets, though entry pricing remains challenging. Value-add buyers are focused on undersupplied office markets with solid demand foundations, supporting a more hands-on asset management strategy, although they are pricing in additional risk buffers for future capex requirements.
Real estate is also facing increasing competition from the returns available in infrastructure, which is being reflected in fundraising volumes. Although office fundraising strategies remain challenging, Vienna-headquartered Uniqa Real Estate announced it is launching a closed-ended fund targeting core and core-plus office properties across Europe with a target volume of €600 million.
There remains a depth of liquidity in Sweden, with Alecta acquiring a €451 million portfolio of offices in Stockholm, as inflation expectations and sovereign bond yields remain more contained. SCPIs remain active across geographies and continue to target new markets in CEE, with a number now analysing a potential entry into the Scandinavian region. CEE buyers remain active within the region, with appetite to look outside capital cities, with Czech and Hungarian investors acquisitive on a cross-border basis. German funds have increased bidding activity on an outbound basis, while private investors continue to purchase prime stock, including Pontegadea’s acquisition of Capital 8, Paris. The cross-border share of European office investment volumes has risen to 39% so far this year, up from 36% in 2025 according to RCA data, although this remains well below the peak of 54% in 2019, given the relative cooling in inbound APAC capital.
Even for prime assets, market pricing is becoming two-tier in some cases, as determined by lot size. Private buyers are generally bidding competitively for the €30–€50 million lot sizes, which remains the more liquid part of the market, achieving the sharpest yields. The trophy assets in excess of €100 million, traditionally targeted by the institutions, are generally less liquid due to the new cost of debt, though there are notable examples of private groups active in the larger lot-size range.
INREV’s latest sentiment survey shows that investor sentiment picked up in the third quarter following the initial US/Iran conflict, although it remains below the 50-mark, separating expansion and contraction. Investor sentiment towards the office sector improved by 15 percentage points over the last three-month period, supported by solid occupational dynamics and rental growth prospects.
Income will remain the driver of total returns
Debt market
Lenders remain keen to support best-in-class assets and sponsors, particularly in city centre locations and have been willing to either extend positions or refinance at relatively elevated LTVs. Among bank lenders, margins remain tight and leverage strong, driven by competition. Appetite for new lending opportunities has heightened as existing facilities are being extended despite macro headlines, which has further intensified demand. Credit funds remain active and are benefitting from a more dynamic approach to deals, including increased flex on covenants and other terms.
Outlook
Despite the concerns around debt levels, investors reviewing their own portfolios find that tenants continue to meet their quarterly rent payments and have few, or no, alternative options to relocate into prime space. Landlords are able to capture rental growth and meet loan repayments to lenders and are therefore happy to hold their best assets.
Although lender margins remain competitive, debt is not currently accretive to returns at current levels, and we anticipate a further correction in pricing. Since Q4 2021, the average spread between prime office yields and sovereign bond yields across core European markets has fallen from 280 bps to 0 bps. Savills now anticipates prime CBD yields will move out by 10 bps or more in 68% of European office markets, up from 26% over the same period during Q2.
In an income-driven environment, investors are more sensitive to economic growth prospects, justifying the above-trend proportion of investment activity in Iberia and CEE markets, and the higher scrutiny of pricing across core jurisdictions. It is a fine balance, though – should AI productivity gains fail to boost growth as much as forecast, or if demand drops significantly because of higher energy prices and interest rates, this clearly presents a downside risk to occupational demand, and future rental payments. Quality and security of income will remain key considerations for investors.
Ultimately, occupational markets delivering rental growth will maintain European offices’ appeal. The supply squeeze and tenants’ flight to quality present repositioning opportunities in connected CBD locations while new development remains unviable. Indexation across the majority of continental European office leases also shelters investors from inflationary risks. Office-based employment growth in key knowledge hubs across the professional, tech and finance sectors will underpin new tenant demand.