Italian Outlook 2025: Start with Momentum

Offices: Quality Over Quantity

In 2024, the office market in Milan and Rome continued to record solid demand, although slightly slower compared to previous record years characterized by large transactions. However, demand remains significantly higher than the pre-pandemic period, especially for Milan.

Quality and location continue to be pivotal factors in the selection of office spaces. Over the past decade, high-quality office space has accounted for approximately 70% of total demand in Milan, while in Rome it has reached around 50%. This reflects the different dynamics of the city of Rome compared to Milan, where urban planning constraints and the complexity of renovation work on historic buildings severely limit the availability of modern buildings, reducing the supply of space able to meet current occupier needs.

Central and consolidated areas of the city, characterized by the presence of numerous services and amenities for employees, public transport, and other businesses that guarantees long-term attractiveness and competitiveness, as well as the quality of space combined with attention to the environmental sustainability of buildings, are key requirements for Corporate seeking offices today. At the same time, there is a growing gap in availability between central areas, which are increasingly in demand, and peripheral areas.

This led to an upward pressure on rent which is expected to continue. In Milan, in the CBD area, prime rent, estimated at €730/sqm/year at the end of 2024 with an annual growth of 4%, is expected to register a further increase of about +3% in 2025 and over +1% in 2026. In Rome, in the CBD area, prime rent, which stands at €600/sqm/year in 2024, with an annual growth of almost 4%, is expected to grow by about +2% both in 2025 and 2026. These figures highlight a consolidating market dynamic in both cities.

With regards to the investment, the office sector recorded lower activity in 2024 compared to the past, accounting for approximately 20% of the overall real estate market volume. Nevertheless, interest in office spaces is on the rise, albeit extremely selective, polarizing on the central areas of Milan and Rome. In these locations, the focus is mainly on core+ products or properties to be repositioned, while for core properties, the price/yield dynamics remain a critical factor, effectively limiting transactions.

At the same time, there is more product available on the market compared to the beginning of the year, even for significant-sized assets: the extreme selectivity of investors, coupled at times with misaligned market valuations, continues to constrain transactional activity. Despite that, we start 2025 with a new cautious optimism among investors and we believe that, once the price discovery will be completed, we will witness a stabilization of values during 2025, with stabilizing yields and/or a slight compression for high-quality assets.

Looking beyond 2025, the reduction of carbon emissions and climate risk management will continue to influence long-term strategies. European regulations are expected to further impact asset values, rental rates, and tenant demand. An increase in property repositioning operations is expected, both in Milan and Rome, in consolidated office locations where rental rates could continue to grow.

Conversely, in less attractive city areas, where the vacancy rate has reached 17% in the last 3 years, a decrease in interest from tenants is expected, with a consequent slowdown in rental growth. Here, it will be appropriate to evaluate alternative enhancement scenarios, such as conversion to more requested uses, from hospitality to residential and all various living declinations (student residences, senior living, co-living).

Retail: Recovery Drives Rebirth

In Europe, after difficult years, the retail market has shown resilience and there are expectations for a recovery. During 2024, retailers activity, reflected in an increased take-up and rental growth, has improved the sector's attractiveness to investors, thanks also to higher yields offering interesting leverage opportunities. The prospects for 2025 are positive, particularly for the high streets of the most commercially desirable cities, where rental rates and values are growing and are expected to improve with increases of around 2% and 2.4%, respectively.

Following the European trend, the retail sector in Italy, after showing resilience to the stress tests of the pandemic, online shopping, and the war, is back in investors' sights. The fundamentals of shopping centers continue to strengthen: in October 2024, they confirmed the positive trend with sales up 0.6% year-on-year and footfall up 1.5% (source: CNCC/EY). The rebound recorded in 2023 is finding further consolidation, marking a stable and sustained recovery of the sector. This, combined with a product that has renewed and evolved over the years, very competitive yields, and banks more willing to finance, is translating into renewed interest from investors.

In 2024, investment volumes were positively impacted by transactions with significant volumes, exceeding the €2 billion threshold and returning to levels not seen since 2018. Over the next year, we will continue to see dynamic activity with growing volumes. We expect greater demand from institutional investors, with the entry of new players who, supported by lower money costs and greater confidence in the sector's resilience, could lead to a compression of yields, especially for high-quality properties in prime locations.

Hotel: Record 2024 for Italy, Good Prospects for 2025

The growth in hotel sector performance since 2022 has helped offset the negative effects of rising operating costs, raw materials, and financing in a context of geopolitical uncertainty. We expect a stabilization of revenue growth levels in 2025, which will be accompanied by a gradual improvement in yields, thus favoring the increase in hotel asset values and investment volumes. Italy is set to close 2024 among the best years ever, with investments in the hotel sector estimated at over €2 billion by the year end, an increase of over 30% compared to 2023.

This growth is a consequence of the sector's solid fundamentals, renewed support from the banking system, and growing interest from investors. The hotel asset class is on the radar of a wide range of global investors, differing in profile, yield levels, and end-users. In particular, Italy, which has no equal in Europe for performance levels and growth, variety, and number of mega-markets and luxury destinations, has steadily gained the second position for investment volumes in commercial real estate. Operators continue to focus on Italy, with ambitious expansion plans covering all segments, from luxury to hybrid. New openings, rebranding, and renovations aim at both younger travelers and the high-end market segment.

Market yields are stable, supported by the ECB's interest rate cut in June and increased debt liquidity. Looking ahead to 2025, a gradual compression of yields for high-end assets and interesting value opportunities for secondary investments are expected.
In 2025, the hotel sector will continue to be dominated by private capital, institutional investors, and hotel groups. After a dynamic 2024, Italian hospitality looks to the future with optimism, supported by ongoing negotiations on numerous hotel assets and prospects for continued momentum in the new year.

Overall, the gap between buyer and seller expectations is narrowing in Europe. This is accelerating the transaction activity, with volumes estimated to reach around €20 billion by the end of this year. If this trend continues, the European hotel investment activity could exceed €25 billion in 2025.

Logistics: From Stability to Consolidation

Positive macroeconomic prospects for 2025 indicate a potential turning point for the logistics and industrial sector, with improved business and consumer confidence, lower interest rates, and greater fundraising capacity by investors. However, some uncertainty remains related to the early stages of Trump's second presidency, which could disrupt European trade, especially proposals related to the introduction of tariffs on European goods. Despite this, the potential impact could be less severe than expected.

Rental growth is expected to continue in 2025, but at a more modest pace than in previous years and varying from market to market. The UK, Slovakia, and Ireland will be the most active markets, as demand for high-quality buildings in strategic locations remains strong, while countries like the Czech Republic and the Netherlands may see slow growth or stable rent levels. In Italy, for the cities of Milan and Rome, with a prime value of €67/sqm/year at the end of 2024, the expected increase in 2025 is circa 2%.

Regarding the Italian logistics sector, the 2025 occupier market forecasts indicate trends in line with those observed in the current year, with the stabilization of rental levels and a demand increasingly oriented towards quality assets in strategic locations. However, the large pipeline of available spaces, fueled by new developments and operator consolidation, could lead to a temporary oversupply in the short-medium term, slowing rental growth. High-quality and "sustainable" properties in prime locations are likely to perform better than average.

On the investment side, the logistics sector continues to stand out as one of the most dynamic and sought-after asset classes. Investment volumes are expected to increase in 2025 as market volatility decreases and investor confidence strengthens. However, the pace of activity will depend on the availability of investment products. A progressive alignment between supply and demand is expected, with some owners ready to put their properties back on the market and investors particularly interested in this type of asset. The outlook for 2025 is particularly positive, thanks to the return of core capital, which will help consolidate the growth and attractiveness of the segment.

After a year of stability in the prime yield of the Italian market, with Milan and Rome confirmed at 5.50% at the end of 2024, a slight compression is expected in 2025. In particular, a reduction of 25 basis points is estimated for the Milan and Rome markets, in line with the decline between 10 and 20 basis points expected in most European markets.

Living: Changing Dynamics

The living sector in Europe has long been characterized by significant imbalances between supply and demand in various regions and market segments. This has led to stable and long-term growth in both rental rates and sales values. However, as in other sectors, sharp interest rate increases have negatively impacted values.

The Italian market also reflects similar dynamics. From the second half of 2024, the residential market shows signs of gradual improvement, with an increase in transactions expected in 2024 compared to 2023 slightly above 700,000 units, with further growth in 2025 around 5%, supported by stable values despite a slowdown in prices observed in the second half of 2023 (Source: NOMISMA).

In the rental market, demand remains high, particularly among younger populations who choose to rent in major cities to benefit from greater flexibility. Furthermore, the reduction in supply, driven by landlords' perception of low profitability and their preference for alternatives to traditional rentals, is pushing rents upward.

In the two main Italian markets, Milan and Rome, both sales prices and, even more significantly, rental rates are growing compared to 2023, particularly for new and modern products. This trend is influenced by the scarcity of supply, also due to the slowdown in new project developments, a trend that we believe may persist in 2025. With regard to investments, investor interest remains strong in Build-to-Rent (BTR) and Build-to-Sell (BTS) developments, as well as in the Purpose-Built Student Accommodation (PBSA) and serviced apartment segments.

Considering investment volumes in the living sector, the first nine months of the year recorded a slight decline compared to the same period in 2023; however, we expect the year will close with an upward trend compared to last year. Despite modest growth in volumes, market dynamics in 2024 were significantly impacted by administrative-judicial issues involving the City of Milan, one of the most active markets for transactions in the living sector in recent years. The prosecutor's investigation questions the legitimacy of municipal building approvals, which led to a halt in permit issuance and caused investors to focus on lower-risk operations, slowing sector investments.

The student housing segment, or PBSA (Purpose-Built Student Accommodation), has stood out for its strong dynamism, fueled by the growing number of international students and the significant shortage of beds in major university cities. In 2024, investors, considering that the Italian market is still in a consolidation phase, mainly focused on value-add operations. However, there were also some forward commitment and core acquisitions, with the expectation that the latter will become increasingly common as developments currently in the pipeline are delivered to the market.

The prospects for 2025 confirm the positive trend for the sector, which could benefit next year from a combination of factors: the resolution of the urban planning impasse in Milan—expected to be addressed with the signing of the Salva Milano decree— an increase in core transactions in the PBSA segment, and the continuation of the ECB’s expansionary monetary policies, which are anticipated to enhance returns for real estate operations.