Tariff uncertainty hits both leasing demand and investment volumes in Q2
European economic overview
Europe entered 2025 with stronger-than-expected momentum, posting its best quarterly GDP growth since 2022: +0.6% quarter-on-quarter (QoQ) in the euro area (EA) (+0.5% EU). The uplift was driven by a rebound in exports and a sharp rise in business investment, though consumer spending remained weak. Q2 data points to continued expansion, albeit at a slower pace. The European Commission’s Spring Forecast projects full-year growth of 1.1% for the EU (0.9% EA), suggesting a modest trajectory following Q1’s outperformance.
The forecast had assumed a 10% base tariff on EU exports to the US. However, the final deal settled at 15% – a more punitive outcome than anticipated, with implications for trade-sensitive sectors.
Consumer fundamentals and logistics implications
Household consumption remains a drag. Real disposable income per capita declined slightly in Q1 (-0.1% EA, -0.2% EU), with real spending falling further (-0.2% EA, -0.3% EU). Inflation and tax pressures offset nominal wage growth, prompting a rise in savings rates (15.4% vs. 15.2% prior). Retail volumes were flat, up just 1% year-on-year (YoY) by March. While easing inflation and wage growth were expected to support demand in Q2, sentiment remains fragile – likely influenced by negative media coverage around tariffs.
For logistics, this translates into a cautious consumer environment and subdued retail throughput, though business investment and trade flows offer some offset.
Manufacturing recovery and trade dynamics
Manufacturing is showing signs of recovery. The Euro Area Manufacturing PMI hit 50.1 in April – with output expanding for a fourth consecutive month. Export orders surged, driven by pre-tariff stockpiling from overseas buyers. EU exports rose +1.9% in Q1, making net trade a positive GDP contributor. Input costs are moderating, enabling producers to cut output prices for the first time in years – a welcome development for inflation control.
By mid-year, industry was stabilising. Spain and Greece returned to growth, and Germany’s contraction eased. Business confidence among manufacturers reached its highest since early 2022, though resilience remains contingent on external conditions.
Trade policy and strategic shifts
The final EU–US trade deal represents a compromise: 15% tariffs are far from the tariff-free terms initially proposed, but notably lower than the 30% global rate previously threatened. German automakers are among the hardest hit, though US domestic producers also face rising input costs.
Importantly, the worst-case scenario of ‘Liberation Day’ tariffs has been avoided. With bilateral deals now in place, decision-makers in logistics and industrial sectors have greater clarity. Early signs suggest Southeast Asian firms are recalibrating global strategies – prioritising European expansion over the US.
European occupier market
A tumultuous start to the year economically quickly put an end to the survive-to-2025/thrive-in-2025 narratives. The market remained sluggish, with take-up in Q2 2025 falling by 1% QoQ to 5.95 million sq m, the weakest quarter since 2015. After a similarly weak start to the year in Q1, leasing activity across Europe totalled just under 12 million sq m, the weakest start to a year since 2015. This was a fall of 17% compared to H2 2024, and a quarter lower than the first half of 2024.
The question now is whether greater clarity from trade deals with the US by both the UK and the EU will drive a recovery in take-up in H2. As we previously noted, in the aftermath of Brexit, take-up fell by 30% in 2017 before recovering by 41% in 2018. Crucially, our UK-focused Savills Requirements Index, which provides a forward-looking view of demand, shows clear warning signs of weaker occupier activity in the latter half of the year.
Quarterly changes in take-up present a mixed picture. The greatest quarterly declines were in the Netherlands (-56.1%), Belgium (-34.3%), and Luxembourg (-31.9%). Some markets did recover, with the largest increases in Budapest (+144.8%), Poland (79.7%), and Portugal (53.8%).
Looking at the first half of the year as a whole, just four markets have improved on H2 2024: Romania (+19.7%), the UK (+13.0%), Dublin (+7.5%), and France (+7.1%). The largest declines were in Belgium (-44.5%), Portugal (-41.2%), and Spain (-34.8%).
Anecdotally, Savills local teams have continued to see strong demand in parts of CEE, particularly Poland. Food and beverage, pharmaceutical, defence, and construction-focused manufacturing occupiers have been especially active. We have noted a renewed focus on buildings that fulfil occupiers’ long-term strategic requirements, especially for stock with strong ESG credentials.
Across many markets in Europe, we have observed a pendulum shift from a landlord-favourable market to one that favours occupiers. This has put occupiers in a better position to negotiate more favourable commercial terms compared to what they have previously been able to achieve. This likely represents the best opportunity many occupiers will have to achieve these long-term goals before the market starts to recover more strongly in the second half of the decade.
The topic of ESG is still a critical non-negotiable for prime new space and is no longer a nice-to-have but is deemed a core business requirement in EMEA. Therefore, occupiers that are being advised by Savills EMEA Industrial & Logistics teams are looking at optimising their industrial and logistics portfolios with the aim of consolidation and upgrading of space where possible, therefore seeking larger, but fewer, newer and more efficient facilities.
Occupiers that rely on global logistics continue to diversify supply chains across EMEA, which is creating demand, with CEE, as a region, benefitting from nearshoring trends, strong manufacturing bases, and will continue to see sustained demand and rental growth with an uptick in defence, pharmaceutical, and manufacturing requirements.
After declining in 2024, average vacancy rebounded in the first half of the year, rising by 94 basis points (bps), from 5.79% to 6.73%. Last year saw average vacancy rates across Europe gradually decline, but increases in vacancy this year represent a new peak in vacancy.
This increase in the vacancy rate was primarily driven by a sharp increase in vacancy across Central and Eastern Europe, with Budapest (+542 bps), the Czech Republic (+191 bps), and Poland (+68 bps) reporting significant increases in national vacancy rates.
Vacancy has been driven by a mixture of weaker take-up and higher levels of speculative development. While take-up has remained muted, we are seeing signs that the pipeline is contracting. Indeed, the Savills Development Pipeline Index indicates a downward trend in speculative development. The index has fallen from a four-quarter moving average peak of 209.3 in Q4 2023 to 171.9 in Q2 2025, representing a decline in the inflow of new stock of 24%. Notably, in the UK, we have seen a significant cooling off in the speculative development pipeline, which has contracted substantially from its peak in Q4 2022, falling by 58% to current levels in Q2 2025.
While weak take-up and a return to vacancy rate growth continue to drag on rental growth, there are some silver linings. The Savills European Prime Rent Index edged up by just 1.5% over the last six months. Counterintuitively, rental growth appears to have accelerated this year, with overall annual rental growth increasing by 1.7% on average across Europe. Looking at historical trends, rental growth is now more or less in line with where we would expect it to be relative to the current vacancy rate. In addition to this, we would note that many landlords are opting to offer greater incentives, such as rent-free periods, in order to maintain headline rents.
European investment market
European logistics investment volumes reached €38.2 billion in 2024, up 15% YoY but still 15% below the five-year average. Transaction activity was heightened in the final quarter of 2024, and we expect a similar trend to play out in 2025.
Investment volumes moderated slightly in Q2 2025, given investor reaction to tariff uncertainty, totalling approximately €8.9 billion, down 8% YoY from €9.7 billion in Q2 2024.
Looking at the first half of the year, investment volumes reached €18.0 billion, a 4% decline from €18.8 billion in H1 2024, and approximately 20% below the five-year H1 average. This year-to-date slowdown reflects a more cautious investment environment across the region.
Given the tempered start to 2025, we compare H1 2024 with H1 2025 to highlight the shifts in market volumes. The largest increases in annual terms have been in the Czech Republic (+340%), Hungary (+108%), and Belgium (+95%). All of the core markets have seen annual declines, but notably smaller, more volatile markets have declined more sharply still. The markets seeing the greatest decreases were Austria (-91%), Ireland (-88%), and Greece (-63%).
Despite the overall decline in real estate investment globally, the logistics sector maintained its resilience. In 2024, logistics accounted for 22% of total real estate investment, a slight decline from the last three years, which saw 24% of shares. That said, the sector continues to see significant interest amongst investors, underscoring the sector’s relative strength amid broader economic uncertainty.
Prime yields were broadly stable in Q2 2025, edging down just 1 bp. Stockholm was the only notable mover, with a -10 bps decline.
As we enter the second half of 2025, the outlook for European logistics real estate investment is cautiously optimistic, with multiple indicators in our soon-to-be-published logistics census pointing toward a pickup in activity (both occupationally and investment-related). The major drag of H1 – the trade conflict – appears to be stabilising: if the current trade agreement between the EU and US holds, investor fears should continue to recede. When trade tensions fully resolve, we could see a release of pent-up investment demand, resulting in a sharp rebound in deal volumes (the hypothesised V-shaped recovery). On the other hand, even if some uncertainties linger, the market has largely adapted to the new reality, as evidenced by narrowing price gaps and resumed deal flow in Q2.
Monetary conditions are also in favour of a stronger H2. With the ECB’s rate cuts working through the system, financing is easier, and there is greater scope for yield compression, which could boost asset values and transactional momentum. Importantly, inflation is under control and expected to stay low, giving central banks room to keep policy accommodative. This macro stability should help underpin real estate investment decisions in the coming quarters.