Market Radar Europe: Inflation rises and defence spending impacts real estate

In this week’s Market Radar Europe, we’re examining the eurozone’s inflation rise and its impact on ECB policy, the boost to European real estate from rising defence spending, and strong investments in the logistics sector.

Eurozone inflation rises, supporting ECB's rate hold

Eurozone inflation increased to 2.2% in September, surpassing the European Central Bank’s (ECB) 2% target for the first time since April, mainly driven by higher services prices and smaller declines in energy costs. Core inflation remained steady at 2.3%, with services inflation edging up to 3.2%.

Despite the uptick, the ECB is expected to hold its deposit rate at 2% for the third consecutive meeting, with markets pricing in a low probability of further rate cuts. The ECB remains focused on medium-term inflation risks, with forecasts suggesting a dip to 1.7% in 2026.

Germany, France, and Italy also saw inflation increases in September, with Germany’s inflation rising to 2.4%, while France and Italy’s figures stayed below the ECB's target, at 1.1% and 1.8%, respectively. These trends are unlikely to prompt immediate changes in ECB policy.

The recent GRI Barometer, surveying top real estate leaders active in Europe, found that 52% expect inflation to remain stable over the next 12 months, mirroring the eurozone's inflation outlook, where most anticipate limited volatility, with risks linked to supply chain disruptions and sector-specific costs potentially pushing inflation slightly higher.

Defence spending drives growth in European real estate

LaSalle’s European Cities Growth Index (ECGI) 2025 shows that rising defence spending is boosting real estate demand across Europe, with cities including Munich and Nuremberg seeing significant improvements in their rankings. 

Germany, benefiting from an increased defence budget, accounts for 39% of the top-scoring defence metros, while cities like Oslo, Bordeaux, and Bristol also rise due to the military and aerospace sectors. The top 10 cities are set to drive a third of Europe’s future growth, with London, Paris, and Warsaw leading the pack.

Cushman & Wakefield’s Strategic Sector Signals report also highlights the growing demand for industrial and logistics real estate in sectors like defence, clean energy technology, critical materials, and life sciences. 

Increased defence spending is driving demand for manufacturing and logistics space, particularly in Germany, Poland, and Romania. The clean energy technology sector, fuelled by the EU’s Net-Zero Industry Act, and the critical materials sector, focusing on raw materials like lithium, are key drivers of this growth.

Both reports point to selective investment opportunities in cities benefiting from these sectors, with a focus on sustainable and strategic infrastructure growth across Europe.

Logistics attracts significant investment despite uncertainty

Blackstone has launched a GBP 510 million CMBS deal, backed by its Indurent business’ 9.2 million square feet of UK logistics assets, primarily focusing on "last mile" distribution hubs supporting e-commerce. 

This follows a broader trend of growing investor confidence in logistics, with industrial properties, especially in last-mile logistics, dominating European CMBS issuance despite ongoing geopolitical challenges.

Nuveen Real Estate has further expanded its European logistics portfolio with two strategic acquisitions in Germany and Spain, adding modern, fully leased distribution centres in key markets. This strengthens their position in the logistics sector, which continues to be seen as a resilient investment choice. 

Meanwhile, CBRE IM raised EUR 500 million through its inaugural green bond to refinance existing debt and support growth, reflecting the growing demand for sustainable real estate investments.

ESR Europe has refinanced its Urban Logistics Income Fund (ULIF) with a GBP 103.3 million facility from NatWest, highlighting the sector's strength in Greater London, Manchester, Birmingham, and Sheffield, underpinned by e-commerce growth and last-mile distribution demand.

PGIM Real Estate also extended a GBP 40 million loan to Valor Real Estate and QuadReal Property Group's logistics joint venture, increasing its total lending to GBP 119 million for a five-asset UK portfolio. The loan will support the acquisition of additional last-mile logistics assets, which remain highly attractive due to strong occupier demand.

Further supporting the sector, QuadReal, the property division of Canada's British Columbia Investment Management, committed GBP 2.5 billion to UK property debt, focusing on logistics, housing, and data centres, capitalising on the UK’s growing digital infrastructure and housing demands. 

In a Warsaw Business Journal interview with Mateusz Skubiszewski, the Senior Director at BNP Paribas Real Estate Poland highlighted Poland's strong economic fundamentals and its resilience in the logistics sector, particularly in e-commerce and last-mile distribution, which continues to attract both regional and international investors. 

Polish performance is further explored in this recent GRI Hub article, where real estate leader insights reveal that a slowdown in new completions is anticipated to push demand for logistics properties even higher over the next 18 months.

Look out for a new edition of the GRI Institute's Market Radar Europe next week!