Europe is undergoing one of the most significant economic shifts in a generation. After years of relying on global supply chains and overseas manufacturing, policymakers and businesses are now accelerating efforts to rebuild domestic industrial capacity. This shift – driven by geopolitics, regional and global conflict, supply chain fragility, and subsequent industrial policy – is reshaping the outlook for real estate investors.
We believe that Europe currently lacks the required space, in terms of volume and quality, to support the demands of an industrial revival. That imbalance between demand and supply is creating a compelling necessity-backed investment opportunity across industrial and logistics assets.
A new economic reality is taking shape
The past year has brought a decisive change in tone from European policymakers. We believe there is a three-step process underpinning this reset:
- Acknowledgement: geopolitical fragmentation is exposing Europe’s reliance on external suppliers for energy, technology, defence and critical minerals.
- Policy response: industrial policy is being rewritten, with the EU and UK deploying incentives, subsidies and regulatory reforms to rebuild strategic sectors.
- Industry reaction: supply chains are being redesigned, as companies prioritise resilience over cost efficiency.
The result is a structural increase in demand for modern industrial space, including research and development facilities, light manufacturing, and large-scale logistics hubs.
Security is becoming a major demand engine
Ongoing conflicts near Europe’s borders are prompting a major reassessment of its defence strategy. At the North Atlantic Treaty Organisation’s summit in 2025, members pledged to spend 3.5% of gross domestic product on defence by 2035. They also pledged to spend 1.5% ‘to inter alia protect critical infrastructure, defend networks, ensure civil preparedness and resilience, innovate, and strengthen the defence industrial base. Savills projects that meeting the 3.5% target could drive demand for 37 million square metres in defence-related sectors, signalling a wider shift in advanced manufacturing beyond military equipment.
With defence supply chains already operating near capacity, private capital will be essential to deliver the required facilities.
Industrial policy is reshaping value chains
Beyond defence, Europe is deploying a suite of policies aimed at strengthening strategic autonomy. While elements of these policies are considered by some to be protectionist or anti-competitive, we believe that the fragmented global system means Europe can no longer afford to continue prioritising cost efficiency over necessity. Here are some of the key policies already in motion:
- The European Chips Act is catalysing semiconductor investment across Germany, France and the Netherlands.
- The Critical Raw Materials Act is securing inputs for batteries, electric vehicles and clean technology.
- The Carbon Border Adjustment Mechanism is levelling the playing field for European manufacturers.
- The Critical Medicines Act is reshoring pharmaceutical production.
- The Green Deal Industrial Plan (and its many sub-policies) is accelerating domestic renewable energy manufacturing.
Each of these policies increases the need for modern, energy-efficient industrial real estate, with further policies, such as the European Industrial Accelerator Act, set to mandate further local sourcing of components.
Nearshoring is accelerating faster than expected
Supply chain diversification is no longer theoretical. The share of procurement taking place in nearshoring locations has risen from 6% in 2019 to 15% in 2025.
Geopolitical tensions, increased shipping and insurance costs, advances in automation, and EU incentives are accelerating the shift towards local production.
Locations offering increased proximity to consumers, resilience enhancements, sustainability credentials, or cost reductions will benefit most.
E-commerce is back on its long-term growth trajectory
After the volatility of the pandemic, online retail has normalised and returned to its pre-Covid trend of 5-10% annual growth.[4]
A new catalyst is also emerging: the potential expansion of Chinese platforms, such as JD.com, Shein and Temu. As regulation tightens on low-value parcel imports, these retailers may need to build their own European distribution networks, which could potentially add tens of millions of square metres of demand.
Overall, e-commerce is expected to drive 50 million square metres of additional warehouse demand over the next five years.[5]
Cyclical momentum is turning positive
After three years of weak industrial output, Europe’s manufacturing Purchasing Managers’ Index (PMI) has moved back to 50. Germany’s PMI has risen from 40.7 to 51 in just over a year, prior to the start of its substantial fiscal easing.
Performance data shows industrials outperforming
Analysis of MSCI data highlights the robust performance of industrial assets. They achieved the strongest growth in both rental income and net-operating income (NOI) in 2025. NOI per square metre surged by 15% year-on-year in the third quarter of 2025. Over five- and 10-year periods, ‘other industrial’ rental growth has consistently outperformed logistics by 70-to-80 basis points annually. Shorter leases, higher operational intensity and urban locations allow light industrial assets to capture rental growth more quickly than big-box logistics. With investors seeking a blend of higher returns and strong cash flows, a strategic blend of industrials and logistics could offer a solution.
A necessity-driven opportunity for investors
Europe’s industrial property market is structurally undersupplied at precisely the moment when demand is set to accelerate. We don’t have the type, location, quality or scale of industrial property required to meet Europe’s changing economic needs. The return of conflict in the Middle East is a further reminder that the European economy is vulnerable to a more fragmented global system.
Industrial and logistics assets are not just beneficiaries of Europe’s economic and policy transformation – they are essential enablers of it.
[4] Green Street, Aberdeen Investments, December 2025.
[5] Green Street, Aberdeen, December 2025.
