Defence spending and the residential real estate boom in Europe’s midsized cities

In the wake of shifting geopolitical realities, NATO’s recent decision to raise defence spending targets from 2% to 5% of GDP marks a turning point for Europe. The headlines have focused on military budgets and procurement. But a quieter revolution is underway in the real estate sector – particularly in Europe’s midsized cities.

The surge in European defence spending is reshaping the continent’s urban landscape, with midsized cities at the forefront of this transformation. As billions of euros flow into defence industries and related sectors, demand for residential real estate is soaring in cities like Munich, Saarbrücken, Nuremberg, Oslo, Bordeaux, Lyon, Bristol and Manchester-Liverpool.

For investors, developers and policymakers, the message is clear: the next wave of real estate growth will be concentrated in a select group of cities with strong defence sectors and supportive policy environments. By embracing targeted investment strategies, prioritising ESG considerations and fostering public-private collaboration, stakeholders can ensure that the benefits of this boom are widely shared – and that Europe’s midsized cities emerge as vibrant, resilient hubs of innovation and opportunity.

 

The new defence spending landscape

The NATO summit in June 2025 set the stage for a dramatic increase in defence spending across Europe. Allied nations committed to boosting their defence budgets, with the ambitious goal of reaching 5% of GDP. Even if this target is not fully met, the implications are profound: LaSalle Investment Management estimates that meeting the target would require more than EUR900 billion in additional spending. This unprecedented injection of capital is not only revitalising defence industries but also transforming the economic prospects of cities with established defence sectors.

Recognising the significance of this shift, LaSalle’s European Cities Growth Index (ECGI) has, for the first time since its inception in 2000, incorporated projected defence expenditure as a key metric. Defence spending now accounts for 8% of the index’s weighting, alongside economic growth, risk factors and productivity. This adjustment reflects the growing consensus that defence-related investment is a major driver of urban growth and real estate demand.

 

Why midsized cities?

While Europe’s largest cities – London, Paris, Berlin – have traditionally dominated real estate investment, the new defence spending paradigm is elevating a different set of urban centres. Midsized cities such as Munich, Saarbrücken, Nuremberg, Oslo, Bordeaux, Lyon, Bristol and the Manchester-Liverpool conurbation are emerging as the primary beneficiaries of increased defence procurement.

What sets these cities apart? The answer lies in their concentration of defence production sites and related industries. In Germany, companies like Diehl Defence and Airbus have established significant operations in cities outside the traditional economic powerhouses. According to LaSalle’s research, Germany accounts for 39% of the top-scoring defence metros, thanks to its robust industrial base and recent fiscal reforms that have increased public spending flexibility.

The impact isn’t limited to Germany. Oslo has climbed to seventh position in the ECGI, while French cities like Bordeaux and Lyon, and UK hubs like Bristol and Manchester-Liverpool, are also rising in the rankings. These cities share a common thread: they have military or aerospace facilities serving as anchors for broader economic development.

 

Residential market impacts

The most immediate and visible effect of increased defence spending is the surge in demand for residential real estate. As defence industries expand and new infrastructure projects are launched, these midsized cities are attracting a wave of workers, engineers and support staff. This influx is driving up demand for housing – not only for employees directly involved in defence projects but also for the broader ecosystem of service providers, educators and healthcare professionals who support growing communities.

Munich has risen three places in the ECGI to rank fourth overall. It’s experiencing heightened demand for both rental and owner-occupied housing. The city’s strong defence sector is creating new jobs and attracting talent from across Europe, leading to increased competition for limited housing stock. Similar trends are evident in Saarbrücken and Nuremberg, where local governments are already exploring ways to accelerate residential development and ensure affordability.

This phenomenon isn’t uniform across Europe. LaSalle’s analysis highlights the “lumpiness” of growth: just 3% of city regions are expected to absorb 30% of Europe’s GDP growth over the next five years. In practical terms, this means that while a handful of cities will experience rapid expansion and rising property values, many others may see little or no benefit from increased defence spending.

 

Investment and development strategies

For real estate investors and developers, the new defence spending landscape presents both opportunities and challenges. The concentration of growth in a select group of cities is prompting a strategic shift: rather than spreading investments across a broad portfolio of markets, investors are increasingly focusing on the “winning” cities identified by the ECGI.

This targeted approach offers several advantages. First, it allows investors to capitalise on the outsized demand for residential real estate in cities with strong defence sectors. Second, it enables more efficient allocation of capital, as resources can be directed towards markets with the highest growth potential. Finally, it provides a hedge against the uneven distribution of economic gains, reducing exposure to cities that may be left behind.

However, this strategy is not without risks. Rapid population growth can strain local infrastructure, leading to challenges in transport, education, and healthcare. Housing affordability may become a pressing issue, particularly for lower-income residents who are not directly employed in the defence sector. Developers and policymakers must work together to ensure that new residential projects are sustainable, inclusive, and aligned with broader urban planning goals.

ESG (Environmental, Social, and Governance) considerations are also coming to the fore. As cities compete to attract defence-related investment, there’s growing pressure to ensure that new developments meet high standards of energy efficiency, environmental stewardship and social responsibility. This includes integrating renewable energy sources, promoting sustainable transport and fostering community engagement.

 

Legal implications of the defence spending and residential boom

The surge in defence spending and the resulting real estate boom bring a host of legal and regulatory challenges for investors, developers and policymakers.

At the European level, the regulatory framework for defence-related property development is evolving rapidly. The European Commission’s recent “Defence Readiness Omnibus” package aims to simplify and accelerate permitting, procurement and cross-border cooperation for defence infrastructure, including fast-track systems for new manufacturing facilities and expanded residential areas to support defence workers.

National governments are also reforming procurement laws and relaxing fiscal controls to enable large-scale investments in both defence and associated housing projects. But these changes must be balanced with existing EU competition law, state aid rules and national security screening, which can complicate mergers, acquisitions and public-private partnerships in the sector.

The fragmented nature of Europe’s defence and real estate regulations means that legal due diligence and compliance requirements vary significantly between jurisdictions, increasing complexity for cross-border investors. As the residential market expands in response to defence-driven demand, stakeholders must navigate a landscape of evolving zoning laws, ESG requirements and heightened regulatory scrutiny to ensure sustainable and legally compliant development.

 

Broader economic and social implications

The ripple effects of increased defence spending extend far beyond the real estate market. Local economies are benefiting from job creation, higher tax revenues and increased demand for goods and services. Schools, hospitals and public services are expanding to accommodate growing populations, while new infrastructure projects are enhancing connectivity and quality of life.

At the same time, these changes bring challenges. Rapid urbanization can lead to social integration issues, as newcomers from diverse backgrounds settle in midsized cities. Local governments must navigate complex regulatory environments, balancing the need for economic growth with the imperative to protect community cohesion and quality of life.

Public-private partnerships are emerging as a key tool for managing these transitions. By collaborating with private developers, local authorities can accelerate the delivery of new housing, infrastructure and services, while ensuring that projects align with community needs and values.