Real Estate Correction is Looming

Despite positive signals like resilient rental growth, the Real Estate market is facing a new correction phase, just 18 months after a sluggish recovery. This shift is primarily driven by anticipation of rising interest rates, which dampens the sector’s attractiveness compared to other asset classes.

However, as with every cycle, certain defensive assets - such as student housing - continue to perform. Following the release of Natixis CIB Research’s latest quarterly report, we sat down with our Real Estate analysts, Thierry Cherel and Sylwia Hubar.

Thierry Cherel: We are indeed seeing strong fundamentals on the rental side. The shopping center segment is performing exceptionally well, with robust rental growth supported by rising tenant turnovers- performance we haven’t seen in a decade.

Logistics is also showing signs of a favorable turnaround, with shrinking supply and rebounding occupier demand, following a challenging period where the market experienced the exact opposite: a contraction in demand paired with rising supply, which had weakened the upward pressure on rents.

As for the office sector, while it remains in a transitional phase, the expansion of new supply is slowing down. In short, across all these segments, occupier markets are globally moving in the right direction as supply remains contained overall, combined with a slight rebound in demand. This is paving the way for a gradual recovery in the occupier market, which is holding up well.

Thierry Cherel: Unfortunately, it’s not that simple. This rental resilience is colliding with a broader macroeconomic shift: a sudden and continuous rise in sovereign yields.

Central banks are leaning hawkish as geopolitical risks intensify. Policymakers are squarely focused on rising inflation risks - fueled by geopolitical uncertainty and extreme weather events that threaten energy and agricultural output - rather than growth, which remains resilient. Consequently, our macro scenario now forecasts a third ECB rate hike by year-end, and one to two additional hikes from the Fed.

This upward pressure on yields mechanically reduces the relative attractiveness of Real Estate as investors are recalculating the risk premium of property yields compared to other asset classes.

Thierry Cherel: In this market environment, we are inevitably heading toward a decompression of property yields, even though the process is slower in Real Estate than in liquid bond markets. Decompressing yields mean falling capital values when rents remain flat. The slight growth we see in rents today is simply not enough to offset the impact of rising interest rates.

As a result, we are entering a new correction phase less than two years after the molle 2024 recovery. The market is effectively moving downward in steps. Initially, investment volumes will slow down. Transactions will stall because buyers’ yield expectations will exceed what sellers are willing to accept.

This yield gap will drag prices down, but in a much milder proportion than in 2022-2023 - where capital values fell by 10% to 30%. This time, we anticipate a milder decline, roughly three times smaller than the previous crisis.

Thierry Cherel: Yes, as in any Real Estate cycle, certain living and operational sectors are showing remarkable resilience.

Student housing is a prime example, on which we have just published a paper. This asset class consistently delivers robust and attractive investment opportunities. Average prime yields hovered at 4.9% in Q1-2026, maintaining a stable risk premium of 100bp over the Real Estate euro bond index, while rental growth stabilized at +3.5% in 2025 (marking a cumulative 23% increase over seven years). Key European markets like France, Germany, Spain, and Italy face virtually no oversupply risk, and existing stock could scale significantly before reaching saturation.

Beyond student housing, highly prime offices, high-quality hospitality and prime shopping centers should fare well, while data centers remain relatively immune.

Conversely, residential, secondary offices, secondary logistics (due to sluggish rental growth), and secondary retail will feel the squeeze. Additionally, rising construction and maintenance costs - driven by inflation - will weigh on property values.

Sylwia Hubar: In short, rising rates cool demand, but supply deficits keep prices positive. Overall, the cost of borrowing for European households for house purchase increased to 3.54% in July, up from 3.35% in January.

Bank lending rates are projected to rise further, and credit standards are projected to tighten further across all major European economies. This is not necessarily due to a decline in borrower creditworthiness, but rather primarily driven by heightened risk perception and lower risk tolerance amid a worsening economic outlook and softer housing market prospects.

Even so, structural shortages should keep price growth in positive territory. As Thierry explained, inflation - particularly in energy costs - is feeding into higher construction costs and weighing heavily on homebuilding activity. This persistent structural undersupply will remain the primary support for home prices.

Thierry Cherel: In the short term, higher construction costs will curb new supply, which could paradoxically support rental growth. Meanwhile, resilient GDP growth gives central banks the leeway to fight inflation without triggering a recession.

Since inflation and energy shocks are cyclical, we expect inflation to cool over the next 18 to 24 months. This should lead to a normalization of monetary policies. While interest rates will likely remain higher than in the previous decade, a slight stabilization or decline would create a favorable backdrop for a Real Estate rebound.

For now, we have entered a less painful, but necessary, correction phase that is likely to last at least another year.