Just when you thought it was safe to go back in the water – will tariffs derail a recovery in the European economy?
European economic overview
The recent imposition and subsequent rollback of US tariffs – referred to in policy circles as the ‘Liberation Day’ tariffs – has introduced renewed volatility into global trade dynamics. While the tariffs were initially positioned as a corrective measure to address trade imbalances, the economic impact has been broadly negative. The US, in particular, has experienced a disproportionate slowdown, with the policy ultimately acting as a form of economic self-sabotage.
The IMF’s revised global GDP forecasts for 2025 reflect the broader consequences of this disruption. The US economy is expected to see the sharpest downgrade, while the UK’s growth forecast has been revised from 1.6% to 1.1%. The Eurozone, which already had a relatively weak outlook, saw a more modest reduction, from 1.0% to 0.8%. These revisions come at a time when European manufacturing had shown early signs of recovery, with Purchasing Managers’ Indices (PMIs) trending upward in several key markets. The tariffs risk undermining this progress, particularly in export-oriented sectors like Germany that are sensitive to shifts in global demand.
Notably, there is a significant disparity between different economic forecasters, while the IMF cut the UK forecast by 50 bps, Oxford Economics has only cut its forecasts by 10 bps, and HMS Treasury Forecasts point to a 30 bps reduction in GDP growth. All of this is to say, the final outcome of this period of uncertainty is far from certain.
Consumer sentiment has also weakened in response to the trade uncertainty. While sentiment indicators are inherently volatile, the most significant decline has been in consumers’ perceptions of the broader economic environment. Historically, this component is the most reactive to external shocks. Nonetheless, a sustained decline in consumer confidence typically translates into reduced household spending, which in turn lowers the volume of goods moving through supply chains.
For the logistics sector, this may result in a short-term softening in demand, particularly in consumer-facing segments. One silver lining here is a growing movement of consumers who are looking for European alternatives to US products; however, as with everything, it’s unclear how impactful this could be, but if this trend gains traction, it is likely to boost European manufacturing at the expense of US imports.
However, the redirection of trade flows away from the US has created opportunities for European ports. Container traffic has increased notably at several key entry points, with Rotterdam experiencing a particularly strong uptick in port entries. This shift may translate into increased demand for logistics space as importers seek to expand their warehousing capacity to accommodate higher inventory volumes. Notably, with Trump backing down, with a 90-day moratorium on tariffs first for all economies bar China, and recently including China, it’s unclear if this represents a short-term shock or a long-term trend.
From a macroeconomic perspective, this increase in inventory may also exert a mild deflationary effect, helping to ease supply-side pressures. This could support further interest rate cuts, particularly in the eurozone, where inflation remains below target. Indeed, rhetoric from the majority of central banks remains dovish, with markets now pricing in an additional 25–30 bps of cuts this year.
The current environment also raises questions about long-term supply chain strategy. Drawing parallels with the Brexit period in 2019, when businesses significantly increased stockpiling ahead of key deadlines, the recent increase in port activity suggests a broader shift in occupier behaviour. Rather than treating such disruptions as isolated events, many occupiers are beginning to plan for volatility as a structural feature of global trade. This may lead to a more permanent expansion of logistics footprints, particularly among firms with complex or time-sensitive supply chains.
European occupier market
Yet another false start for the occupier market sees Q1 in the doldrums
After a strong end to 2024, momentum in the market slowed, with take-up in Q1 2025 totalling 6.1 million sq m. This was a fall of 26% compared to the previous quarter, but in line with the start of 2024. Take-up was 27% lower than the pre-pandemic Q1 average, and it appears that the market is stuck in a holding pattern over the last year, with take-up recovering every second quarter before declining again.
With the geopolitical environment remaining highly unstable, we do not expect 2025 to buck this trend; if anything, we would expect take-up to decline in Q2 with a potential V-shaped recovery by the end of the year. The best historical example of a change in the status quo for global trade is, of course, Brexit. Looking back, take-up in the UK fell by 30% in 2017 post-referendum before recovering the following year, rising by 41%.
Quarterly declines in take-up were more or less uniformly negative across Europe. The greatest quarterly declines were in Portugal (-68.3%), Budapest (-63.5%) and Belgium (-53.7%). In annual terms, the biggest decreases were in Portugal (-49.3%), Madrid (-20.7%) and Poland (-12.2%). Despite a weak quarter overall, several markets saw improvements in take-up relative to Q1 2024, with Dublin (+290.3%), Barcelona (+57.0%) and Bucharest (+42.9%) seeing the strongest growth by this metric.
Prime Eastern European hubs, such as the Czech Republic, Poland, and Hungary, continue to see increased activity and stable rental growth. While these markets have seen overall vacancy rates rise in the last quarter, a surface-level analysis misses the nuance that the prime assets in the prime sub-regions are tightening. The recent introduction and escalation of US tariffs have had a significant impact on the existing supply chain, with APAC occupiers proactively eyeing Southern and Eastern Europe as new markets, and established occupiers considering strategic shifts in their supply chains. Competitive rents, government tax incentives, and stronger infrastructure, along with the adoption of automation & sustainability regulations, continue to reshape I&L Occupier requirements across EMEA.
After declining in 2024, average vacancy rebounded this quarter, rising by 71 bps in the quarter, from 5.91% to 6.62%. This follows several quarters of deceleration in the vacancy rate growth, and what appears to be the market turning the corner. We’ve consistently noted that the recovery is unlikely to be uniform or steady.
This increase in the vacancy rate was primarily driven by a sharp increase in vacancy across Central Eastern Europe, with Budapest (+253 bps), the Czech Republic (+172 bps) and Poland (+108 bps) reporting significant increases in national vacancy rates.
Looking ahead, we expect to see the vacancy rate trend downwards again in 2025, with Savills Development Pipeline indicating a downward trend in speculative development. The index has fallen from a peak of 222.1 in Q1 2023 to 168.4 in Q1 2025, representing a decline in the inflow of new stock of 24%.
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 0.6% compared to the previous quarter. This is an acceleration in rental growth compared to the 0.1% growth rate observed in the previous quarter. Annual growth remains positive, with the prime rental index showing an increase of 1.8% compared to a year earlier, a deceleration of 50 bps compared to Q4 2024. Looking at historical trends, rental growth remains elevated relative to the current vacancy rate, but this outperformance is weaker than previous quarters, potentially reflecting slower inflation in the wider economy.
European investment market
After seemingly finding its feet, the investment market falters once again
European logistics real estate investment volumes reached €38.2 billion in 2024, marking a 15% year-on-year increase, though still 15% below the five-year average. This strong performance was largely driven by a robust year-end, with €12 billion invested in Q4. However, the market cooled in Q1 2025, with investment volumes falling to €7.5 billion – a 38% decline from Q4 2024 and 16% lower year-on-year. Compared to the five-year Q1 average, this represents a 39% drop.
Quarterly comparisons in smaller markets have remained highly volatile this quarter. Comparing Q1 2025 against Q1 2024, the largest increases in annual terms have been in the Czech Republic (+1358%), Hungary (+445%) and Ireland (+371%). Of the core markets, the largest increases were in Italy (+95%), Spain (+81%) and Poland (+47%). The markets seeing the greatest decreases were Romania (-78%), the Netherlands (-49%) and Germany (-43%).
Despite the overall decline in real estate investment, the logistics sector maintained its resilience. In 2024, logistics accounted for 24% of total real estate investment – the highest share on record. This proportion has remained consistent since 2022, underscoring the sector’s relative strength amid broader economic uncertainty. We saw a decline in share of investment to 18% in Q1 2025; however, we’d expect to see this share grow throughout the year.
The final quarter of the year provided further evidence for our thesis that prime yields have peaked and the market is turning. Yields tightened in Brussels (-30 bps), Madrid (-25 bps), Copenhagen (-25 bps), Bucharest (-20 bps) and Vienna (-15 bps). Notably, Oslo was the exception to this trend, with yields rising by 10 bps.
Several factors are expected to influence investment volumes in 2025. Chief among them is the Trump administration’s recent tariff announcement and the subsequent 90-day moratorium, which are likely to suppress activity in the first half of the year. However, as the implications become clearer, a recovery in investment volumes is anticipated in the latter half. The pricing gap between buyers and sellers has been narrowing in recent quarters, and this trend is expected to resume as market clarity improves and deal activity picks up.
One consequence of the tariffs – and the broader US-China trade tensions – is the likelihood of China redirecting excess capacity to Europe. This could exert deflationary pressure on the European economy, potentially prompting further interest rate cuts by the ECB in 2025. Lower rates would, in turn, place downward pressure on prime yields. At the time of writing, while the US has agreed to a separate 90-day pause on tariffs with China – signalling a major de-escalation – an additional 10% tariff on pre-April 2025 levels remains in effect. The long-term outcome of this turbulence is uncertain, but the US’s reputation as a reliable trade partner has likely been damaged, encouraging deeper global integration elsewhere.
A notable trend in 2025 is the shift in investor preference from big-box, single-tenant assets to multi-let properties. Multi-let assets are increasingly attractive due to their ability to diversify tenant risk, offering greater resilience compared to single-tenant investments. In terms of location, Savills European Logistics census in 2024 identified a shift towards core locations by investors. Germany (65%), France (56%) and Spain (54%) saw the strongest interest.
Crucially, Industrial looks set to continue to outperform, with 85% of investors into European Real Estate looking to deploy capital into the sector over the next two years. In contrast, just Offices (49%) and Retail (45%) were significantly less popular amongst investors. While investors are likely to have cooled on industrial post-tariffs, as we note in the occupier section, nearshoring and defence, and infrastructure spending are likely to drive occupational demand in the sector in the medium term. This should provide momentum for a recovery in market fundamentals, raising investor confidence in the sector.