The geopolitical landscape is becoming more fragmented and uncertain. Governments are reassessing long-held assumptions around collective security, placing greater emphasis on strategic autonomy and resilience. At the same time, technological change is transforming the battlefield, altering both the capabilities armed forces require and the infrastructure that supports them.

Against this backdrop, governments are committing significantly more resources to national defence. Global military expenditure reached $2.9tn in 2025, equivalent to around 2.5% of the world’s GDP. This upward trajectory looks set to continue, reinforced by NATO allies’ 2025 Hague commitment to raise defence spending to 5% of GDP by 2035, including 3.5% for core defence requirements.

Global Defence Spending

Source: Savills research using Stockholm International Peace Research Institute and Macrobond

A modest defence dividend

The numbers are significant, but the impact on economic growth is likely to be more muted. Historically, defence expenditure has been concentrated in specialist manufacturing sectors, while personnel and operational costs absorb a substantial share. Many countries also import a large proportion of their equipment and munitions, reducing the multiplier effect on domestic activity.

The economic impact will also depend on countries’ fiscal headroom and spare capacity. Debt-funded spending can provide a larger near-term stimulus. But it may increase borrowing and debt-service costs, putting upward pressure on interest rates and crowding out private investment.

High-debt, high-deficit economies have limited room to fund additional commitments without raising taxes or reducing other spending. Meanwhile, economies already operating close to capacity face a different constraint: additional demand is more likely to fuel inflation as the defence sector competes for scarce labour and other resources.

The countries best placed to capture the benefits will combine fiscal headroom and spare capacity with an established domestic defence industry. In Europe, Scandinavia and Germany are well positioned, while France’s strong defence sector partly offsets its fiscal constraints. South Korea and Taiwan stand out in Asia Pacific.

In North America, Canada has a relatively strong fiscal starting point. But in the US, limited spare capacity increases the risk of an inflationary trade-off, but the global dominance of its defence industry should keep more of the benefit at home.

Yet several factors suggest this cycle could be different. A sustained, investment-led increase in defence spending has greater potential to generate lasting gains for the wider economy. OECD analysis suggests the recent expansion in military capacity has been more capital-intensive than in the past, consistent with evidence that non-wartime increases in spending tend to focus more on equipment and capabilities than personnel.

This matters because investment in infrastructure and technology can expand productive capacity, generating benefits that persist beyond the initial fiscal stimulus. The sharp rise in venture-capital (VC) funding for defence start-ups reinforces this shift towards a more investment and innovation-intensive cycle.

Global VC investment in defence sector

Source: Savills research using PitchBook Inc (Data has not been reviewed by PitchBook analysts)

Buying closer to home

Greater emphasis on domestic manufacturing and strategic self-reliance could also keep more defence spending at home, strengthen local supply chains through onshoring and challenge the US’ dominance of global defence exports. The EU is targeting 50% of its defence procurement to come from within the bloc by 2030, rising to 60% by 2035. Meanwhile, Canada plans to reduce its reliance on the US by raising domestic procurement to 70% over the same period.

However, promoting national champions also risks reinforcing the fragmentation that has historically constrained the defence sector. Yet the reality is proving more collaborative. Rather than simply retreating behind national borders, defence companies are localising production through cross-border investment, joint ventures and partnerships, with US firms expanding in the UK and Europe and British and European manufacturers building their presence in the US.

Technological change will demand greater investment in innovation and R&D, which could lift productivity across the wider economy as defence technologies find civilian applications. This is a well-documented phenomenon: GPS began as a US military system and defence-funded research laid the foundations for the internet.

Redrawing the property map

Whatever the size of the dividend, the broader economic story will be one of reallocation and redistribution. Higher defence budgets will reshape public spending priorities. The UK is already funding part of its defence uplift through cuts to overseas aid, while fiscal constraints elsewhere will increasingly force similar trade-offs.

Strategic autonomy will also redirect investment and industrial capacity towards defence and reshape global trade flows in line with shifting alliances. For real estate, this redistribution matters more than the headline impact on economic growth. As capital and production move between sectors and geographies, so will demand for space.

The clearest effects will be felt in industrial and logistics. Expanding domestic production and rebuilding inventories will require additional manufacturing and storage capacity for components, equipment and munitions. Some of that capacity could come from converting facilities and redeploying workers from industries facing structural pressures. Europe’s automotive sector is a case in point: competition from Chinese manufacturers is contributing to excess capacity and encouraging some companies to pivot towards defence. Self-reliance will further add to demand for storage through its requirements for larger stockpiles of critical minerals, semiconductors and other specialised inputs.

However, much of this activity cannot be accommodated in conventional industrial buildings. “Buildings operating under certain security clearances in the UK, for example, can require blast-resistant structures, secure perimeters and access to testing facilities,” says Rob Pearson, Director, Defence Lead, Savills. “Storage requirements are often similarly specialised. “Critical infrastructure and sensitive facilities are therefore likely to favour build-to-own and build-to-suit development, particularly where national security requires government or occupier control. Less sensitive activities, where security requirements are lower, may be accommodated in conventional real estate, creating more direct competition for existing stock.”

Demand will also be redistributed geographically. Our analysis of the world’s 100 largest defence companies highlights the industry’s concentration around established defence hubs. Sensitive and knowledge-intensive activities cluster around skilled, security-cleared workers; specialist suppliers; testing facilities; and secure infrastructure.

From Karlskoga in Sweden and Aviation Valley in Poland to Adelaide in Australia and Gyeongnam in South Korea, many of these clusters sit outside gateway cities traditionally favoured by institutional capital. For the wider supply chain, access to ports and strategic transport networks will remain important. However, with little need for proximity to households, defence suppliers have greater scope to seek cheaper facilities outside established logistics markets.

A similar dynamic could emerge in the office sector. “Defence is a holistic category, and we’ll see a rise in office take-up resulting from the increased requirement for cybersecurity personnel, software developers, technical specialists and central support functions,” says Pearson. “We’re also seeing the clustering of R&D functions around existing academic institutions, supporting demand for laboratory space and science parks.”

Employment growth could also shift housing demand towards expanding defence clusters. Mid-sized cities with limited housing supply may face additional pressure as companies recruit or relocate specialist workers, creating opportunities in residential and wider social infrastructure.

Taken together, these dynamics could direct real estate demand towards locations and property types that have become less popular in an increasingly selective market. Secondary logistics locations could benefit from businesses seeking affordable space, while security requirements may favour self-contained suburban offices and business parks. More broadly, the concentration of defence activity outside traditional gateway cities could support demand across a range of real estate sectors in mid-tier markets that have historically attracted less institutional capital.

What the Great Reallocation means for investors

The investable opportunity will ultimately remain narrower than the shift in occupier demand implies. Major defence contractors can offer strong covenants, long leases and revenues supported by government contracts. Regulatory clarification around the compatibility of defence investment within existing ESG frameworks may also widen institutional participation. But bespoke specifications create reletting and residual-value risks, while national-security considerations may restrict third-party ownership of sensitive assets.

Overall, the opportunity lies not in a uniform defence-driven uplift across real estate, but in a redistribution of demand towards specialist industrial and logistics, secure offices and housing in selected defence clusters. We expect the greatest opportunities to emerge in countries with the fiscal and economic capacity to accommodate higher defence spending without significant trade-offs elsewhere, and in the property types and locations best able to absorb the resulting movement of labour and capital.