US policy shift and implications for Europe’s industrial and logistics sector
4 minutes to read
Geopolitical uncertainty in Europe has been intensifying due to shifting US policy towards NATO, Europe, and key trade partners such as China. These changes could have far-reaching implications, reshaping industrial and logistics networks across Europe. While some industries face challenges, there are also significant opportunities for growth, particularly in manufacturing and defence-related sectors.
Rising defence spending and industrial implications
Europe’s defence spending is on the rise and is set to increase substantially in the coming years. This expansion will not only bolster military capabilities but also drive demand in aerospace, engineering, high-tech research, and development. Additionally, with trade tensions escalating, Europe is emerging as an alternative manufacturing base for companies looking to diversify away from China and avoid tariffs.
NATO defence spending targets and industrial growth
The re-election of President Trump has increased uncertainty over NATO’s future, prompting European nations to accelerate their defence investment. Russia’s invasion of Ukraine in 2022 already spurred increased military budgets, with total European defence spending rising by 11.7% in 2024.
While all 32 NATO allies have pledged to meet the 2% of GDP defence spending target, only 24 currently do so. In 2024, NATO members collectively spent approximately 2.71% of GDP on defence—an increase on previous years, but still below US expectations.
With heightened security concerns over Russia’s war in Ukraine, discussions around further raising defence spending have intensified. NATO Secretary General Mark Rutte has suggested a target "considerably more than 3%," while French President Emmanuel Macron has advocated for spending above 3% of GDP. Meanwhile, US President Trump has proposed a 5% target, though this level remains unlikely. A final decision on NATO's new target is expected at the NATO summit in The Hague in June 2025.
Europe’s five largest economies—Germany, Italy, France, Spain, and the UK—have all committed to increasing defence budgets. The UK, France, and Germany have pledged to reach at least 3% of GDP, while Spain and Italy aim to hit 2% by 2029. If the NATO target is raised beyond 2%, these latter two nations may struggle to keep pace. To reach a collective 3% target, additional defence spending across these five economies would amount to approximately $157 billion (calculation based off figures from NATO), with Germany, Italy, and France requiring the most significant increases.
The European Union has unveiled a plan, dubbed “ReArm Europe,” that could funnel more than €800 billion into defence spending across the EU’s 27 member states. Part of this plan is a loan programme of €150 billion, which is fully utilised, would take EU defence spending to c.3% of GDP, just shy of the 3.4% spent by the US.
Boost for defence manufacturing
Rising military budgets will drive demand for Europe’s defence manufacturing sector, with various regions already positioned as key players. France’s Nouvelle-Aquitaine region, for example, is home to major aerospace and defence firms, including Dassault Aviation, Thales Group, Airbus Defence and Space, and Safran.
Germany's aerospace and defence manufacturing sectors are concentrated in several key regions, including Munich and Bavaria region in Southern Germany which is home to a division of Airbus SE, focusing on military aircraft and space systems, Krauss-Maffei Wegmann, a manufacturer of armoured vehicles, including tanks, and Hensoldt AG, which focuses on sensor technologies for defence and security applications. The Berlin-Brandenburg Region in Eastern Germany is another prominent hub and where Rheinmetall is converting two automotive plants to focus on defence production.
In Italy, Lombardy hosts Leonardo’s Helicopters and Aircraft Divisions, as well as firearms manufacturer Beretta. The Czech Republic, too, has seen growing activity, with Prague and Moravia emerging as key hubs for military equipment and aircraft manufacturing.
Implications for real estate
The expansion of defence and high-tech manufacturing will reshape Europe’s industrial and logistics landscape, driving demand for specialised facilities and strategic infrastructure.
Increased demand for manufacturing and warehousing space: As defence production ramps up, manufacturers will require additional space for assembly, component production, and storage of materials.
Bespoke facilities and specialist requirements: Aerospace and defence manufacturing necessitate high-security environments, controlled conditions, and proximity to skilled workforces.
This could drive increased demand for facilities that meet stringent security and technological requirements. This may drive increased demand for bespoke, build-to-suit facilities.
Strategic location considerations: Firms may prioritise sites near military infrastructure such as airbases, defence research centres, and ports equipped for military cargo. Similarly, demand for freight solutions that can accommodate oversized equipment, and secure storage will likely grow.
Shifting logistics requirements: Logistics providers may need to adapt, offering secure warehousing and integrating defence-focused supply chains into their operations.
As Europe navigates an evolving geopolitical landscape, these developments will have lasting implications for industrial property markets, supply chain resilience, and investment strategies. The interplay between defence spending, trade policies, and real estate will shape the continent’s economic and logistical future in the years to come.
Download the European Logistics Market Dashboad