Defence spending fuels industrial real estate boom

Increased government investment in national security and geopolitical instability are fuelling demand for industrial space across the defence sector and its supply chains.

Defence chart - CoStar

In 2025, defence-related companies occupied nearly 371,600 m2 of industrial space in the UK—more than double the previous year and the pre-2022 average, according to CoStar research. This surge reflects a 70% increase in take-up since the Ukraine conflict began, mirroring a 13% annual rise in Ministry of Defence (MoD) spending on industry and commerce over the same period.
While major defence contractors are expanding, a key trend is the significant growth among mid-tier and specialist firms, particularly in precision engineering and electronics, which require more manufacturing and storage capacity. The MoD's upcoming initiatives to support small businesses suggest this demand from non-strategic suppliers will continue to grow, boosting the need for smaller facilities. While large MoD suppliers typically lease around 23,225 m2, non-strategic suppliers average about 7,432 m2, with an average of 4,180 m2, placing them in the "mid-box" category.
Despite this growth, the defence sector's annual industrial take-up in the UK is comparable to that of high street retailers, accounting for roughly 13% of total national take-up. Recent improvements in net absorption and a slowdown in completions are helping to reduce the mid-box segment's vacancy rate from its 6.5% decade-high, which should support rental growth.
Looking at Europe, Savills' research indicates that rising defence spending, driven by Strategic Defence Reviews and new NATO commitments, could require up to 37 million m2 of additional industrial space. If NATO's new target of 3.5% GDP spending on military capabilities is met, European industrial and logistics take-up could increase by 17% when compared with take-up levels of 30 million m2 in 2024.
Like other manufacturing sectors, defence benefits from agglomeration economies, with firms and suppliers clustering to leverage shared labour, specialised sub-contractors, and established supply chains. These clusters also drive demand for industrial and logistics space in those specific areas.
However, the defence sector presents unique real estate challenges. Its specialised requirements—including stringent security protocols, geopolitical sensitivities, and bespoke infrastructure—mean that meeting this demand is more complex than servicing traditional retail or logistics occupiers. These defence organisations must also compete with booming e-commerce and manufacturing sectors for limited suitable space.