The long-term case for multi-family vs. office/retail

In the heart of Europe's bustling urban centers—from the canals of Amsterdam to the boulevards of Paris—real estate investors face a stark divide. On one side, a chronic housing shortage grips cities, driving relentless demand for multi-family residential properties amid rising rents and affordability crises. On the other, office towers stand half-empty, and high streets grapple with e-commerce's shadow. As we navigate 2025, with interest rates stabilizing and economic uncertainties lingering, the question isn't just about short-term yields—it's about resilience. This blog explores why multi-family residential emerges as the clear long-term winner over office and retail in Europe's urban markets, backed by data on supply dynamics, tenant behaviors, and risk-adjusted returns.

Europe's real estate landscape has evolved dramatically since the pandemic. Multi-family assets, encompassing apartments and mid-rise buildings in dense cities, have posted the strongest performance, with year-over-year rental growth hitting 6.4% in key markets. In contrast, office values dipped 1.9%, and retail held flat. Projections for 2025 suggest nominal prime rental growth of 2.5–3% across sectors, but multi-family's structural tailwinds—fueled by urbanization and demographic shifts—position it for outsized gains. Why the divergence? Let's break it down.

Mapped: Europe’s Housing Cost Burden by Country

The Multi-Family Imperative: Demand Outpacing Supply

Europe's urban housing crisis is no secret, but its scale in 2025 demands attention. Over one-third of European cities report unaffordable housing, exacerbated by rising interest rates and persistent rental shortages. Between 2010 and Q1 2025, average EU rents surged 27.8%, outstripping wage growth and pushing more households into cost-burdened territory—where over 40% of income goes to housing. In cities like Berlin and Lisbon, shortages exceed 400,000 units, with infrastructure bottlenecks and regulatory hurdles stifling new builds.

This scarcity creates a perfect storm for multi-family investors. Urban millennials and Gen Z, drawn to city amenities, prioritize rental flexibility over ownership amid high entry barriers. Immigration and remote-work nomads further inflate demand in supply-constrained markets like Paris (where completions lag by 20% annually) and Stockholm. Transaction volumes for residential properties have climbed, capturing a larger share of total deals—from 15% in 2015–2020 to over 25% in 2020–2024 across Europe. (See chart below for transaction trends.)

Rental growth isn't just robust; it's sustainable. Forecasts from CBRE indicate multi-family yields compressing to 4–5% in prime urban spots by year-end, driven by low vacancy (under 3% in many metros) and capex-driven value-add plays like energy-efficient retrofits. ESG integration—mandatory under EU directives—enhances appeal, attracting institutional capital seeking green premiums. In short, multi-family isn't cyclical; it's essential infrastructure for Europe's 540 million urban dwellers.

Share of Residential in Total Transaction Volumes (%) – Europe 2015-2024

 

Office Sector's Persistent Headwinds

Once the darling of commercial real estate, Europe's office market now contends with a "new normal" of hybrid work. Average vacancy rates hovered at 8.4% in Q1 2025, edging up 10 basis points from prior quarters, with peaks expected at 9% continent-wide. In Hamburg, vacancies climbed to 6.4% by Q3, reflecting tepid leasing amid economic slowdowns. Major hubs like London and Frankfurt report double-digit voids in non-prime submarkets, as firms downsize footprints by 20–30% post-COVID.

The culprit? Persistent remote and hybrid models, with 40% of EU workers logging in from home at least part-time. Completions have plummeted—from 7 million sqm in 2021 to under 4.6 million in 2025—yet absorption lags, squeezing rents and yields (stable at 6.6% but top-tier at 4.3%). Conversions to residential or mixed-use offer a lifeline, but regulatory delays and high costs limit scale. For long-term holders, obsolescence risks loom large in aging stock, eroding NOI as tenants demand flexible, amenity-rich spaces.

European Office Net Absorption, Stock Growth and Vacancy Rate – Average of 41 Markets

 

Retail's Uneasy Transformation

Retail, too, bears scars from digital disruption. While e-commerce penetration stabilized at 25% of sales in 2025, discretionary spending weakness—tied to inflation and geopolitical tensions—has made it Europe's most distressed sector. Margin compression and credit tightening plague operators, with flat performance masking undercurrents of store closures in overbuilt malls. Projections show modest 1.7% annual real sales growth through 2029, but volatility reigns: tariffs could shave 0.5% off GDP, hitting consumer wallets.

Urban high streets fare better, with experiential retail (think pop-ups and food halls) drawing footfall in cities like Barcelona. Yet, overall vacancy hovers at 5–7%, and yields remain elevated at 5.5–6.5% due to capex needs for omnichannel pivots. Grocery anchors provide stability, but non-food segments face existential threats from Amazon and Shein. Investors chasing retail must bet on adaptive reuse—converting big-box to logistics—but execution risks abound in a fragmented regulatory environment.

Why Multi-Family Wins: Resilience and Returns

Comparatively, multi-family's edge is undeniable. While office and retail grapple with 8–10% vacancies and erratic demand, residential boasts sub-3% voids and 4–6% rental uplifts, translating to total returns of 7–9% annualized through 2026. Lower leverage (50–60% LTV) mitigates rate risks, and hedging tools shield against FX volatility in cross-border plays. ESG alignment—via energy-efficient builds—unlocks subsidies and tenant loyalty, contrasting with the retrofit burdens in legacy office/retail assets.

In value-add strategies, multi-family shines: renovations yield 10–15% IRRs in Berlin or Milan, far outpacing office repositioning amid tenant flight. Long-term, demographic inevitability—Europe's urban population swelling 10% by 2030—cements its primacy.

Looking Ahead: Bet on Beds, Not Desks or Shelves

As Europe's cities densify and work/life patterns solidify, multi-family isn't just resilient—it's recession-proof. Investors eyeing 2025 and beyond should pivot portfolios toward urban apartments, blending yield with societal impact. In a world of flux, housing remains the ultimate constant.