If you want peace

How European real estate investors can respond to new geopolitical realities

Real estate 01 Apr 2025 5 min read

Olafur Margeirsson

Head of Real Estate Research & Strategy EMEA ex DACH

In December 2024, we wrote, that 鈥渋f regional procurement increases, European defense contractors will likely need to expand their manufacturing capabilities, which may include a larger real estate footprint.鈥�

After tectonic geopolitical changes over the last few weeks, we reiterate our opinion from a few months ago: the scenario where Europe rearms itself as it wants to avoid a wider war with Russia 鈥� si vis pacem, para bellum (if you want peace, prepare for war) 鈥� is becoming reality and real estate investors must react accordingly.

The situation in short

Countries in the European Union, the majority of which are also members of NATO, have allocated less than the recommended 2% of GDP to defense spending for decades. According to the , the last time defense spending in the EU crossed the 2% mark was in 1993, two years after the fall of the Soviet Union. It sank as low as 1.31% of GDP in 2015 (a year after Russia annexed Crimea).

Figure 1: EU countries鈥� public expenditures to defense, % of GDP

Figure 1 shows EU countries鈥� public expenditures to defense, % of GDP — Source: World Bank, March 2025.

This line chart illustrates the trend in defense spending as a percentage of GDP by EU countries from 1960 to 2023. The chart shows a consistent decline from over 4% in the early 1960s to a low of around 1.2% in the 2010s.

But Russia鈥檚 full invasion into Ukraine in 2022 and, more importantly, US鈥檚 recent stance that Europe must take more responsibility of its defenses have created a jolted action. Germany鈥檚 change in constitutional debt break allows for, in practice, unlimited debt-financed defense spending. The EU is pushing for to increase its European defense capabilities while the UK aims for by 2027. Poland, the EU鈥檚 sixth-largest economy, is nearly at the 5% mark and is considering putting a 4%-of-GDP minimum spend on defense .

In short, the situation was so , on 4 March, by Ursula von der Leyen, President of the European Commission:

We are in an era of rearmament. And Europe is ready to massively boost its defense spending. Both, to respond to the short-term urgency to act and to support Ukraine but also to address the long-term need to take on much more responsibility for our own European security.

The consequences for the European defense industry

A crucial ingredient in the expansion of European defense capabilities is increased self-sufficiency. The Draghi report from September 2024, which we highlighted repeatedly in relation to how actions based on it are likely to boost the fundamentals of the life sciences sector in Europe, emphasized the lack of competitiveness amongst European defense contractors due to e.g., firms鈥� small size, fragmentation and lack of long-term orders for materiel. This is no wonder, given the low level of defense spending in the region for the last couple of decades at least.

Due to the lack of manufacturing capabilities, low research and development and high prices, the armies of Europe often sourced a large part of their materiel from companies outside of Europe, as we pointed out in December. Now, the European Union 鈥榮trengthening [Europe鈥檚 Defence Technological and Industrial Base, EDTIB], which will reduce dependence on external suppliers and foster innovation within the EU.鈥�

In short, the added defense spending will be focused, in particular, on European defense firms. This immediately reduces the uncertainty for companies in the EDTIP, allowing them to plan for the long term.

This has already had an impact: Europe鈥檚 biggest missiles maker, MDBA (a joint venture between Airbus, BAE Systems and Leonardo) now plans to to meet demand from European governments eager to increase the region鈥檚 defense capabilities. The order backlog: EUR 37 billion.

The European defense industry is suddenly under pressure: they need to expand production capabilities as quickly as they can.

And for that, they need real estate.

What are defense companies looking for in terms of real estate?

The needs of the defense industry when it comes to its real estate footprint are somewhat special. Key elements include:

Manufacturing facilities, large enough to house the production of weapons, ammunition, and vehicles.
Testing grounds or training facilities, usually secure and often expansive, for testing weapons and equipment.
Warehouses for safely storing raw inputs, including hazardous materials and explosives, and finished products.
R&D centers for innovation and design, often closely linked to the manufacturing and testing facilities themselves.
High on-site safety and security needs, including e.g., fences, video surveillance and watchmen to stop sabotage, but also compliance with regulations to manage risks associated with the storing and handling of hazardous materials and explosives.
Access to skilled personnel, such as engineers, electricians and general technicians along with R&D staff from disciplines ranging from computer sciences, material sciences, chemistry and physics to name just a few.

It should also be noted here that a clear expansion of new technologies is taking place in the sector. The application of artificial intelligence is a key driver. Venture capital funding for the aerospace and defense industry in Europe jumped to nearly EUR 2.5 billion in 2024, doubling from 2023. European start-ups in the industry are working on e.g., unmanned and autonomous surveillance and sensor systems (), AI-driven geospatial analysis () and AI-powered defense systems to enhance situational awareness (). Startups in the industry are therefore also likely to be looking for more real estate space in the near future, given the flow of funding.

Figure 2: VC funding to European aerospace and defense companies (EUR billions)

Figure 2 shows VC funding to European aerospace and defense companies. — Source: Pitchbook, March 2025.

This bar chart presents venture capital (VC) funding levels to European aerospace and defense companies from 2014 to 2024, measured in EUR billions. The chart shows relatively low and stable funding from 2014 to 2019, followed by a steady increase from 2020 onward. A significant spike occurs in 2021 and again in 2024, reaching the highest funding level of nearly 3 billion euros in 2024.

How European real estate investors should react: offer a solution to defense companies鈥� and governments鈥� problems

The real estate needs of the industry are therefore somewhat specific and increasingly, in the VC space, moving towards access to secure data, good connectivity 鈥� including with satellites 鈥� and the integration of high-tech AI and manufacturing. Real estate investors can meet the needs of the industry in multiple ways including (many of which do not rule out another):

Proactively offer a solution. If you have a tenant in the industry, reach out and ask: 鈥榳hat do you specifically need in terms of facilities?鈥� Establishing and levering a good tenant relationship is key in being a partner for a company that likely is about to, or already has, seen its order book swell and needs to find a way of meeting that demand.
Participate in public-private partnerships. Collaborate with governments (key end customer), defense firms and industry bodies, offer e.g., to handle the construction and the expansion of production facilities. In return, seek a long-term leasing contract, potentially backed by government credit.
Identify strategic locations, especially in terms of access to workers that will be working on-site in building the materiel. Consider building up a landbank in the area, chances are this can also be used for a traditional logistics facility. This can also mean buying existing facilities with low land-use density, offering a value-add opportunity in terms of expanding and mixing new facilities with the existing ones.
Offer buy-to-let options to existing defense companies that own their manufacturing sites, they may well be interested in freeing up capital to finance their expansion in other parts of their business. Consider offering to expand the facilities in return for a long-term lease (again, potentially backed up by the government).
Consider the conversion of a low-quality office, that is unlikely to recover in value in its current use, to a mixed-use asset that offers office space, research and development facilities and assembly location for high-tech manufacturing output. The capex needs are likely to be limited compared to upgrading the asset to a prime-quality office and those companies are unlikely to look for a CBD location for such facilities.
Defense firms may also be looking for potential solutions that are more related to housing their workers 鈥� and given Europe鈥檚 structural lack of housing, this risk is not zero. Therefore, consider offering quick solutions to housing, e.g., manufactured housing or prefabricated multifamily buildings. Onsite energy provision, via e.g., solar panels on the roofs, can be considered as well, securing further the long-term economic viability of the area. Work with local municipalities, who will be happy to see more housing for their constituents along with more employment opportunities, on zoning and long-term use of the housing, e.g., for social housing, once and if the demand from the defense firms鈥� workers drops. Well-produced and durable housing units may even be removed and reused somewhere else if needed.

A new world, new challenges, new opportunities

We鈥檝e entered into a new world that many of us are not familiar with. It鈥檚 normal to feel whiplashed as old truths break down and new directions are formed in order to meet new threats.

This creates challenges for real estate investors and societies alike. Real estate investors need to display flexibility, entrepreneurship and develop new approaches to not only reap benefits from such shifts but also to facilitate society鈥檚 reaction. Real estate managers can indeed play a key role here, not only benefitting their clients but society as a whole.