Navigating 2026: Avignon’s Managing Director, Doug Burton-Cantley, Discusses Market Outlook
As 2026 begins, we outline our latest view on market conditions and the opportunities we expect to define the real estate sector in the year ahead.
Capital inflows beginning to shift back toward real estate
2025 marked the first year since the pandemic where investors identified genuine value in real estate pricing. This repricing has reignited interest from both domestic and international capital, with investors re‑entering the market with increased conviction and a growing appetite for well‑located, high‑quality assets. Market indicators show strengthened sentiment, with JLL reporting that real estate capital market momentum increased notably in H2 2025, signalling renewed confidence across core sectors. This trajectory is forecast to continue into 2026. Simultaneously, Cushman & Wakefield note that capital is now “flowing more forcefully” back into property, supported by a lower interest‑rate environment and accelerating demand linked to AI‑driven occupational growth. Collectively, these trends suggest that the market is transitioning into a new phase of stabilisation and opportunity.
Competitive debt markets and improving lending conditions
Debt availability increased through 2025, with lenders competing for high‑quality sponsors and assets. This improved availability, combined with widening spreads between asset yields and borrowing costs, has reopened genuine arbitrage opportunities, supporting both new transactions and refinancing activity heading into 2026. European CRE lending conditions remained favourable throughout 2025, with rising liquidity and tighter margins, while ECB and BoE rate cuts helped restore the yield‑debt cost arbitrage that had been absent in prior years.
Inflation stabilising and the UK poised for further rate cuts
Inflation has continued to stabilise, setting the stage for further UK rate cuts and reduced real estate pricing volatility. By late 2025, inflation had normalised significantly, allowing monetary policy to ease across Europe. The UK is expected to follow the eurozone’s low‑rate environment, with UK inflation falling to 3.2% and the Bank of England cutting rates to 3.75% in December 2025, signalling a clear downward trajectory. Declining capital costs are further supported by Goldman Sachs’ forecast that gilt yields will fall to around 4.0% in 2026, improving affordability and investor conviction. With additional BoE rate cuts anticipated in early 2026, the outlook points to a more supportive financing environment and stronger real estate demand as borrowing conditions improve and pricing visibility increases.
Renewed confidence in rental growth across select sectors
Prime central office locations continue to show stable or rising rents, supported by resilient occupier demand and limited Grade A supply. The leisure sector has maintained strong momentum following its post-pandemic rebound, while PBSA remains one of the most robust rental markets, driven by both a structural undersupply and cyclical student demand. While we expect UK PBSA rental growth in the 2025/26 academic year to be more muted and uneven across regions, the underlying fundamentals remain strong, and we anticipate a return to firmer rental growth into 2026. Recent data underscores this longer-term resilience, with UK PBSA rents growing 2% nationally in 2025/2026, while UK BTR and PBSA rents rose 2.1% in H1 2025. Europe continues to outperform, with European PBSA rents up 5.4% in 2024 and occupancy at 98%, reflecting exceptional demand fundamentals.
Flight to quality remains a dominant theme
Occupiers continue to gravitate toward best‑in‑class assets that deliver strong sustainability credentials, efficient layouts and prime locations. Only high‑quality stock is capturing meaningful rental growth, reinforcing the need for targeted refurbishment and repositioning strategies. Over 60% of regional UK take‑up is now concentrated in Grade A space (Knight Frank).
AI as a complement, not a threat, to real estate
Rather than reducing demand, AI is reshaping occupational needs and accelerating the upgrade cycle for modern, resilient, tech‑enabled buildings. Much like prior technological shifts in the 1980s and 1990s, AI is stimulating a renewal phase in real estate as occupiers seek space capable of supporting advanced digital infrastructure. According to Morgan Stanley, AI can automate up to 37% of real estate tasks and generate an estimated $34bn in efficiencies by 2030, underscoring its supportive economic role. This is mirrored in physical demand. JLL reports that AI companies already occupy 2.04 million sqm of commercial real estate in the US as of 2025, reinforcing that AI‑led growth is expanding the footprint of knowledge‑intensive industries rather than contracting it. This trend is expected to accelerate through 2026 as AI adoption deepens across all sectors.
Capital raising activity expected to increase
After a subdued 2025, during which many managers paused new fund launches, early indicators point to renewed momentum. Fundraising activity rose 16% year‑on‑year in H1 2025, signalling that capital is re‑engaging with the market. Although fundraising cycles have lengthened to an average of 23.7 months (PERE), overall capital availability remains strong, with institutional investors selectively deploying into strategies aligned with upgraded risk‑adjusted return expectations. This is reinforced by a notable surge in inflows into core strategies in early 2025, reflecting growing appetite for stability‑oriented, income‑focused vehicles as the market moves into a more favourable rate environment.
Accepting the ongoing geopolitical backdrop
While global tensions continue to influence investor sentiment, there is growing optimism that the next two years will offer a more predictable macro environment compared with the volatility seen since 2020. Real estate performance remains sensitive to geopolitical factors, including tariff uncertainty and shifting trade dynamics, but both the Eurozone and UK markets show signs of stabilisation despite ongoing macro risks. This improving backdrop provides a more constructive foundation for capital deployment, enabling investors to make medium‑term decisions with greater clarity.
Industrial and Logistics
The industrial and logistics sector continues to outperform, supported by strong structural demand. Momentum in the sector strengthened through 2025, underpinned by resilient occupier needs, supply‑chain reconfiguration and sustained e‑commerce activity. UK logistics take‑up rose 23% quarter‑on‑quarter in Q3 2025, according to CBRE, indicating renewed depth in occupier appetite. Performance has remained robust over the medium term, with industrial and logistics assets outperforming all UK commercial sectors in 2024 and prime rents forecast to grow a further 4% in 2025. This trajectory is reinforced by occupational market strength, with Q2 2025 demand up 10% and H1 take‑up reaching 16.8 million sq ft. Against this backdrop, high‑quality, well‑located units continue to lead the market, and selective opportunities persist for both repositioning and development through 2026 as supply remains constrained.
Avignon 2026 Outlook
At Avignon, we are entering 2026 with strong momentum and a clear strategic focus. We see significant opportunity across our portfolio to execute high‑quality ESG‑focused refurbishments in the UK, Germany, the Netherlands and Belgium. These projects will position assets to capture premium rents and meet evolving occupier demands. Core‑plus and value‑add strategies remain central to our approach as we target assets where sustainability, design and location can unlock durable income and capital growth. The industrial and logistics sector remains underpinned by strong structural demand. While yield compression has stabilised, well‑located, modern units continue to outperform, and we expect selective opportunities for both repositioning and development throughout 2026.
Looking Ahead
With a highly skilled and uniquely integrated team operating across four offices and six countries, and supported by strong capital partners, we believe the future is bright for Avignon. We look forward to a successful 2026 and extend our best wishes to our readers and investors for the year ahead.
