The economic outlook for Italy remains positive, despite a slowdown in the second half of the year with GDP growth expected around 0.5-0.7% by the end of the year. Inflation appears to be under control, below the 2% threshold, and the labour market is robust, almost at full employment rates.
However, risks persist due to global geopolitical instability and uncertainties surrounding the impact of new economic and industrial policies from the US, which threaten the overall outlook.
Despite this, the Italian real estate sector is preparing to face 2025 with momentum, supported by a combination of positive economic indicators and a growing investors’ demand. Class A office spaces in strategic locations continue to dominate the office market, while the retail, logistics, residential, and hotel sectors are consolidating their performance thanks to a marked improvement expected by the end of the year.
Offices
In 2024, the office market in Milan and Rome continued to record solid demand, although slightly slower compared to previous record years characterised 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, characterised 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.
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, polarising 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 stabilisation of values during 2025, with stabilising 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.
Retail
Following the European trend, the retail sector in Italy, after showing resilience to the stress tests of the pandemic, online shopping, and international conflicts, is once again attracting investors’ interest. The fundamentals of shopping centres continue to strengthen. The rebound recorded in 2023 is finding further consolidation, marking a stable and sustained recovery of the sector. 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.
Hospitality & hotels
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 stabilisation of revenue growth levels in 2025, which will be accompanied by a gradual improvement in yields, thus favouring 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 end of the year, 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. 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 travellers and the high-end market segment.
Market yields are stable, supported by the European Central Bank’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.
Logistics
Regarding the Italian logistics sector, the 2025 occupier market forecasts indicate trends in line with those observed in the current year, with the stabilisation of rental levels and a demand increasingly oriented towards quality assets in strategic locations. However, the large pipeline of available spaces, fuelled 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.
Living
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.
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, has stood out for its strong dynamism, fuelled 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.
If you would like to discuss the article further, please contact Daniele Zanni.
