How defense and infrastructure spending impacts European industrial and logistics

August 21, 2025

Daniel Tomaselli

Manager, Global Research

The European industrial and logistics sector has withstood several challenges over the past years, including a moderation in occupier demand following pandemic-driven expansion, the energy crisis, and a sharp adjustment in capital values due to monetary tightening. In recent months, the sector has reached a new equilibrium and it is now leading other property types in the early stage of a real estate recovery cycle, supported by improving economic conditions and favorable structural trends.

The positive drivers making the case for industrial and logistics are well-documented and include e-commerce growth, automation, and tightening sustainability regulations. However, in this paper, we focus our analysis on a powerful new catalyst expected to shape the sector from 2026 onward: the significant fiscal stimulus for defense and infrastructure projects. We will present Germany and France as detailed case studies, to illustrate a broader positive trend poised to shape the European industrial and logistics landscape.

A new tailwind for European logistics

European industrial and logistics real estate is one of our highest-conviction investments. With nearly 40% of existing stock already over 17 years old and increasingly unfit for purpose, we anticipate that the demand-supply imbalance for modern logistics assets is set to widen over the coming years. In our Inside Real Estate Mid-Year Outlook, published in July, we outlined the key structural drivers supporting this thesis. On the supply side, tightening sustainability standards and land scarcity are expected to constrain future development, amid the increasing complexity of ground-up projects and the high cost of upgrading older assets to meet regulatory requirements. On the demand side, Europe’s relatively low (and uneven) e-commerce penetration, combined with the growing importance of warehouse automation and sophistication, is expected to support leasing activity, particularly for modern and energy-efficient assets located along the continent’s main logistics corridors and end-customer clusters.

More recently, a powerful new demand catalyst has started to emerge. The current geopolitical climate, marked by the war in Ukraine and the prospect of reduced U.S. engagement abroad, has fundamentally changed European priorities and its fiscal stance. Up to the end of 2024, markets were broadly anticipating a prolonged phase of fiscal consolidation in Europe, aiming at reducing the excess levels of government debt accumulated to support businesses and households coping with the negative effects of the global pandemic first and the energy crisis later. However, during the first months of 2025, the new strategic imperative of strengthening national security has prompted a decisive policy shift, with governments abandoning austerity in favor of increased investment in defense and infrastructure. This new direction was cemented during the last NATO summit in June, when most European members agreed to raise core military spending from the current 2.0% to 3.5% of GDP, plus another 1.5% in related infrastructure, by 2035.

Exhibit 1: European NATO members pledged to gradually increase defense spending to 3.5%

Additional capital required from current levels to reach the 3.5% annual target, $bn

Chart showing members of NATO and the amount of capital needed to increase their defense spending to 3.5% annually.

The end of German austerity supports a renewed positive outlook for industrial and logistics

The German industrial and logistics real estate sector endured a prolonged period of cyclical headwinds. The German economy was the most exposed to the energy crises that followed the Russian invasion of Ukraine, due to its geographical proximity, lack of alternative energy sources, and a heavy exposure to the manufacturing sector, including energy intensive heavy industries—such as chemicals, metals production, and building materials—whose competitiveness relied upon the availability of cheap fossil fuel imports from Russia. Meanwhile, the automotive sector, a pillar of the German economy accounting for 5% of its GDP and roughly 15%-20% of its exports, has also been under strain amid growing global competition, particularly from Chinese EV brands, and declining new car registrations. Thus, when the ECB started to restrict its monetary policy, both investor sentiment and occupier demand for industrial space weakened.

Exhibit 2: German logistics rental growth outpaced inflation over the last three years

Industrial/logistics annual rental growth and CPI, percentage change

Chart showing rental growth alongside CPI in Germany.

Source: MSCI, Colliers, Principal Real Estate, Q2 2025.

France’s prominence in the global defense and aerospace sectors sets the stage for industrial and logistics upside

In France, the industrial and logistics real estate market experienced a clear moderation over the last three years, following a record demand in 2021. The market was initially buoyed by a surge in e-commerce and supply chain restructuring during the pandemic, which drove high levels of take-up and development. However, as the pandemic-driven momentum naturally subsided, logistics take-up in the key city markets declined for three consecutive years to more normalized levels, down from 2.4 million sq. meters in 2021 to around 1.3 million sq. meters in 2024, according to PMA. The moderation was mostly driven by the larger format as occupiers grew more selective in response to changing market conditions and a worsening operating environment, including rising borrowing costs and weakening consumer confidence. Fortunately, France was less exposed to the energy price shock that followed the Russian invasion of Ukraine, due to its exposure to nuclear power—between 70% and 80% of the country’s electricity supply is generated from nuclear sources. This favorable energy mix reduced France’s exposure to volatile gas prices, helping to keep inflation at more manageable levels. While inflation exceeded 11% in Germany, Italy, and the UK, it peaked at just 7.3% in France, placing less pressure on household disposable income and companies’ profit margins.

Going forward, we believe increasing government spending for defense projects is set to sustain industrial and logistics real estate demand further. France has less fiscal room compared to Germany due to a much higher debt-to-GDP ratio of 113% (behind only Greece and Italy) and a budget deficit of 5.8% of GDP (far higher than the EU limit of 3 per cent). Finding the capital required to incrementally rise core military spending from the current 2.1% of GDP to 3.5% by 2035 may prove challenging. However, even assuming very conservative projections, it is reasonable to believe that French firms will benefit equally from soaring demand overseas. This is because France is a major global player in the defense and aerospace industries, with a very strong orientation towards exports, which account for 82% of the industry’s consolidated turnover. For example, France is the world’s largest exporter of aircrafts and spacecrafts, and the world’s second largest exporter of arms, after the United States. Indeed, France’s industrial base comprises several leading international companies, such as Airbus, Dassault Aviation and Thales, supported by roughly 5,000 small-medium enterprises. Overall, these firms provide a full spectrum of military production capabilities, ranging from small tactical weapons to nuclear-powered aircraft carriers and other advanced systems that are difficult to source elsewhere in Europe. Thus, the effects of growing domestic and international demand should produce a significant positive impact. French companies are already racing to hire new staff and ramp up production.

Exhibit 3: France is the World’s second-largest aerospace exporter

Top 5 aerospace exporters, $bn, 2024

Chart showing top 5 aerospace exporters in 2024.

Conclusion

The European industrial and logistics real estate market has found a new equilibrium, following a rapid expansion during the pandemic and a prolonged period of macroeconomic uncertainty. The occupier market has now stabilized and is positioned for further improvement, underpinned by structural drivers such as e-commerce growth, automation, tightening ESG regulations, and a slowdown in new supply. Additionally, the mobilization of capital towards defense and infrastructure projects is set to provide a powerful new catalyst for demand, particularly in and around key logistics hubs and defense-aerospace clusters, as illustrated in the cases of Germany and France.

Meanwhile, capital values have already rebounded by 4% as of Q1 2025, after a peak-to-trough correction of 21%, indicating the market has entered the early stages of a new cycle. With investor sentiment improving and debt once again accretive, conditions are in place for the recovery to gain momentum. Thus, we believe, the second half of the year offers a compelling entry point for investors seeking to secure durable income and long-term capital appreciation in a sector with robust fundamentals and solid growth prospects.

For more on European industrial and logistics real estate sectors and how defense and infrastructure spending is impacting European countries, access the full report here.

Real estate

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In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

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This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.