Increased commitments to defense spending across Europe are creating new opportunities in real estate, particularly in mid-sized cities with established defense and aerospace industries. A new report from LaSalle Investment Management highlights how this shift is elevating markets in Germany, Norway, and France, creating a more concentrated and uneven growth landscape across the continent.
For the first time since its launch in 2000, LaSalle has incorporated projected defense expenditure into its European Cities Growth Index (ECGI). This new factor, which accounts for 8% of the index's weighting, is already causing significant changes in the rankings of cities poised for occupier demand and investment growth.
Key Takeaways
- NATO nations' increased defense spending commitments are driving demand for real estate in European cities with strong defense industries.
- LaSalle Investment Management has added defense spending as a new factor in its 2025 European Cities Growth Index, with an 8% weighting.
- German cities, particularly Munich, are major beneficiaries, with Germany expected to see the largest overall impact on its real estate sector.
- Other cities rising in the rankings include Oslo, Bordeaux, Lyon, and Bristol, while markets like Dublin and Zurich have slipped due to trade volatility risks.
- The report suggests economic growth in Europe will be highly concentrated, with 30% of GDP growth expected in just 3% of city regions.
A New Factor in Urban Growth
Following a NATO commitment to increase defense spending, analysts are now measuring the potential impact on private real estate. European nations would need to invest over €900 billion to meet the ambitious new spending targets, a move that would have widespread economic consequences.
In response to this trend, LaSalle Investment Management has updated its influential ECGI. The 2025 index now includes projected defense spending, a metric designed to identify which urban areas will benefit most from the expansion of military and aerospace infrastructure.
Index Weighting Breakdown
The 2025 European Cities Growth Index is calculated based on several factors:
- 64% Economic Growth (including human capital and energy costs)
- 23% Risk Factors (including climate and sovereign default risk)
- 8% Projected Defense Expenditure
- 5% Productivity
This adjustment reflects a significant shift in the drivers of urban economic health. According to Dan Mahoney, LaSalle's head of research and strategy for Europe, the inclusion of defense spending provides a more accurate picture of future real estate demand.
Germany Emerges as a Key Beneficiary
The LaSalle report indicates that Germany is positioned to gain the most from this new wave of defense investment. The country is home to a high concentration of defense production sites for major companies like Airbus and Diehl Defence.
As a result, German metropolitan areas account for 39% of the top-scoring defense locations in the index. The city of Munich has seen a notable rise, climbing three positions to rank fourth overall in the 2025 ECGI. When looking exclusively at the defense category, Munich is third, just behind the smaller German markets of Saarbrücken and Nuremberg.
Fiscal Policy as a Differentiator
Germany's ability to fund this expansion is also a critical advantage. Mahoney noted that the country's "fiscal flexibility to actually do that spending" sets it apart. Earlier this year, the German government reformed its constitutional 'debt brake' to allow for increased public expenditure, directly supporting this growth.
"In terms of increase in [defense] spending, Germany stands out," said Dan Mahoney, highlighting the country's proactive fiscal measures.
The positive outlook extends beyond real estate. The report shows that German metros are projected to contribute 30% of all GDP growth across the entire ECGI index over the next five years, signaling a robust long-term economic forecast.
Other Cities on the Rise
While Germany leads, other European cities with strong military or aerospace ties are also climbing the ranks. The increased focus on defense has propelled several mid-sized markets into more prominent positions.
Notable Climbers in the 2025 Index
- Oslo, Norway: The city has moved into the seventh position overall, benefiting from increased defense budgets.
- French Cities: Bordeaux and Lyon have both seen their rankings improve due to their roles in the aerospace and defense sectors.
- UK Hubs: Bristol and the Manchester-Liverpool conurbation are also recognized as beneficiaries, given their established industrial bases.
These shifts suggest that real estate investors may begin looking beyond traditional top-tier markets like London and Paris for growth opportunities directly linked to industrial and defense expansion.
Economic Resilience and Shifting Dynamics
Beyond defense, the 2025 index introduces other new factors, such as energy costs and supply resilience, which are also reshaping the investment landscape. These elements have particularly benefited Spanish cities.
Madrid remains stable in eighth place, supported by Spain's strong economic growth, low energy costs, and a reliable power grid heavily reliant on renewable sources. Mahoney explained this gives Spanish markets a competitive edge.
The Impact of Energy Costs
High energy prices have negatively impacted industrial sectors in countries like Germany and the UK, creating what Mahoney calls a "competitive disadvantage." In contrast, Spain's investment in renewable energy has helped cities like Madrid and Barcelona (ranked 17th) offset other risks, such as exposure to extreme heat.
Meanwhile, some previously high-ranking markets have slipped. Dublin, Geneva, and Zurich have all declined in the 2025 index. Mahoney attributed this to their vulnerability to trade volatility. Smaller economies with specialized industries, such as pharmaceuticals in Dublin, are more exposed to shifts in US tariff policies.
An Uneven Growth Landscape
The report paints a picture of what Mahoney describes as "lumpiness" in Europe's economic future. Growth is not expected to be uniform but instead highly concentrated in a select number of urban areas.
LaSalle's research projects that a staggering 30% of Europe's GDP growth will be absorbed by just 3% of its city regions. This concentration has significant implications for investment strategy.
Mahoney suggests a more focused approach will be necessary in the coming years. "Today, having 10 winning cities versus trying to spread that basket across 30 cities is a more attractive strategy, because of that concentration that we’re seeing," he concluded.
This uneven distribution means that while some cities will experience cumulative growth of over 5% in the next five years, many others may see flat or even negative growth, making careful market selection more critical than ever.
