Another energy shock tests the resilience of European logistics occupiers and investors
Here we go again?
For the European industrial and logistics market, and admittedly, much of the commercial real estate markets in general, it’s hard to avoid a sense of déjà vu in Q1 2026. After a strong end to 2025, with tariff fears receding, we struck an optimistic tone in our last quarterly spotlight. The Eurozone (EZ) economy was on track for solid growth, inflation was moderating, and EZ manufacturing was expected to see a nascent recovery after a period in the doldrums. What a difference one quarter can make.
In late February, the sudden outbreak of military conflict between the US, Israel and Iran and its proxies led to an effective closure of the Strait of Hormuz. Roughly one-fifth of the world’s oil and liquified natural gas (LNG) transits through the strait. As a result, tanker traffic has collapsed from 130 ships per day to just a handful, leading to a sharp spike in Brent crude oil prices, which were around US$85 per barrel to a peak of US$115 in Q2 2026. While a tentative ceasefire was declared in early April, negotiations between Iran and the US have so far failed to reopen the strait, and the US has declared a naval blockade on ships using Iranian ports.
The global economy is now undergoing a sudden energy price shock in addition to elevated war-risk insurance premiums and freight costs. The OECD has revised inflation sharply upwards by between 50 bps to 100 bps across Europe, and 150 bps in the UK, which is more exposed to global energy prices. The destruction of energy production infrastructure across the Persian Gulf is eyewatering, with energy infrastructure analysts estimating a period of three to five years for production capacity to recover, and an estimated repair bill starting at US$34bn. The reality is stark; even if the Strait were to reopen tomorrow, the reverberations of this geopolitical event will rumble through the energy markets for the foreseeable future.
How does this affect industrial and logistics real estate? We identify three key channels.
Firstly, inflation will erode consumer confidence and disposable incomes. Taking the outbreak of the Russian invasion of Ukraine as a historical example, the ensuing energy shock saw consumer confidence deteriorate -8 points to -27 points. This led to an annual contraction in retail sales volumes in France, Germany and the UK of between 5% and 8%. With consumer confidence falling to -21 points in April, history is likely to repeat itself. This will inevitably reduce the flow of goods through the economy, in turn reducing demand for space from retail and logistics operators.
Secondly, rising energy prices will suppress industrial production, once again taking Ukraine as a historical example: energy prices, which were already increasing post-pandemic, rose sharply in response to sanctions on Russian energy exports, with the Euro Area energy component of HICP rising by 48.4% in March 2022, precipitating a decline in Euro Area manufacturing PMIs from 58.2 points in February 2022, (a strong expansion) to 18 consecutive months of contraction in the sector.
Finally, the inevitable increase in inflation, which will only be fully realised later this year as energy prices feed through to the wider economy, has placed central banks in an impossible position. At the start of the year, further interest rate cuts were considered necessary to stimulate economic growth. So far, the ECB has reacted cautiously to the energy price shock, maintaining interest rates at their current level, with a wait-and-see approach until energy prices pass through into core inflation. The aim here is to reduce second-round inflation rather than offset the initial shock. This makes a stagflation scenario likely, characterised by high inflation, weak or negative economic growth, and rising unemployment.
European occupier market
Occupier demand slows, in line with seasonal patterns
Across Europe’s logistics market, total leasing activity reached 6.58 million sqm, 19% lower quarter-on-quarter but 6% higher than Q1 2025. Over the quarter, activity has been mainly driven by a few key markets, led by the Netherlands (+41% quarter-on-quarter), followed by the UK (+14%) and Belgium (+7%). Further down the rankings, but positive overall, were Spain and parts of Central and Eastern Europe.
Madrid and Barcelona combined recorded over 540,000 sqm of take-up in Q1, an increase of 6% from the previous quarter, marking their highest quarterly total since Q4 2022 and highlighting continued strong demand in Iberia. This is supported by solid performance in markets such as Budapest, which recorded more than 190,000 sqm of take-up, 19% above its long-term Q1 average, indicating ongoing occupier confidence in select CEE locations.
However, outside these higher-performing markets, several key Western European markets, including parts of Germany and the UK, are experiencing more subdued demand compared to the long-term average, with total leasing volumes down 24% and 20% from their long-term averages, respectively. Other Western markets were France (-62%) and Portugal (-53%). The underperformance in France is likely due to a combination of geopolitical and domestic uncertainty, with the government in a deadlock with no clear political majority. As a smaller market, Portugal is prone to significant swings in volumes from quarter to quarter.
A polarised vacancy landscape
By the end of Q1, the overall weighted EMEA vacancy rate (WAVR) had increased to 7.0%, a rise of 40 basis points over the past 12 months. However, this does not reveal the complete picture.
On one end of the spectrum, supply-constrained markets continue to report exceptionally tight availability. Barcelona, Valencia, and Prague all exhibit vacancy rates of approximately 2–3%, reinforcing the structural undersupply of modern logistics stock in these locations. Dublin also remains highly constrained, with vacancy below 3%, supporting ongoing occupational pressure in the Irish market.
Whereas, in contrast, a number of larger, more established markets are operating at significantly higher levels of availability. Vacancy in Madrid sits at just over 9%, while London and the South East are nearing 10%, reflecting both a more elastic supply pipeline and softer, short-term occupational demand. At the extreme end, Budapest stands out, with vacancy surpassing 15%, highlighting the delayed impact of increased speculative development in certain CEE markets and a mismatch between supply delivery and occupier absorption.
However, despite the macro outlook and its influence on leasing decisions, this increasingly divided vacancy profile highlights a broader structural change within the European logistics market: while some locations remain supply-constrained and price-driven, others are shifting into a more tenant-friendly phase.
Rental growth accelerated during the quarter
With a shortage of quality Grade A stock, resulting from the reduced speculative pipeline, this is helping support robust rental growth, especially across core markets, despite some lacklustre leasing. As a result, our Savills European Prime Rent Index has risen by 1.3% over the past three months and on an annual basis, increased by 2.7% on average across Europe. Still, we know some landlords are offering better incentives to sustain headline rents.
Somewhat counterintuitively, some of the strongest rental growth this quarter was in markets with relatively high vacancy rates. In Madrid, where the vacancy rate stands at 9.1%, down from a series high of 12.2% two years earlier, prime rents rose by 12.5% year-on-year. Budapest exhibited similar behaviour; the city’s vacancy rate has risen by 42% over the last year, reaching an all-time high of 15.1%, yet rents rose by 7.1% year-on-year.
This could point to something that we are observing in the UK, where, despite the highest levels of availability since the GFC, in our recent UK census, 43% of occupiers cited the availability of the right space in the right locations as a barrier to taking new space.
Supply pipeline and market balance
Although recently muted demand and a higher-than-average level of speculative development increased vacancy rates in recent years, a more challenging development finance market has now curbed speculative development. Across Europe, our Savills Development Pipeline Index is shrinking overall, remaining at 140.3, down from its Q3 2022 peak of 184.8.
But as the pipeline recalibrates, this will create a significant and meaningful gap in new stock due for delivery, leaving occupiers without Grade A expansion options. For developers who can, speculative development remains very much on the agenda, with some even planning to increase activity once again.
Our European census responses strongly support this, and it is particularly true for certain markets across Europe, where development pipelines remain active, especially in Spain and selected CEE locations. Both Barcelona and Madrid report substantial forward pipelines, while Prague also continues to deliver new stock, albeit mostly in line with existing demand.
Uncertainty brings investment volumes back down to earth after Q4 highs
The investment market finished 2025 on a high with year-end figures reaching €43.3bn, the highest level since the pandemic. Two factors have led to a pullback in Q1 2026, firstly it’s well known that Q1 tends to be the quietest quarter of the year, accounting for 22.7% of annual totals, while an average Q4 tends to account for 32.7% of the overall annual figure. As such, we can comfortably assume that in any given Q1, investment volumes should fall by 30.5% compared to the previous quarter.
With investment volumes in Q1 totalling just €7.5bn, a decline of 45.0% compared to Q4 2025 and 19.2% lower than Q1 2025. The annual comparison illustrates the impact of the outbreak of the Middle East conflict in late February, with the weakest start to the year since 2023, when market activity bottomed out post-Covid boom, amidst the sharpest increases in interest rates. Indeed, since then, many deals have stalled or been put on hold, with reports of price chips in ongoing processes. Conveniently, the “Liberation Day” tariffs were only announced in April last year, so while the run-up to the announcement may have been on some investors' minds, we still have a reasonably fair comparison.
Some bright spots remained, in particular the Nordics. Finland maintained momentum from a strong Q4, with investment volumes increasing by 117% and 414% on a quarterly and annual basis, respectively. Sweden similarly performed well, with volumes rising by 130% year-on-year and 9% quarter-on-quarter. Poland was the other key standout, rising by 121% year-on-year, with Portugal (+29%) and Germany (+4%) rounding out the positive side of the equation.
While the Polar Night clearly migrated further south in Q1, the Czech Republic (-92%), Belgium (-89%) and the key markets of France (-69%) and the Netherlands (-59%) all dramatically underperformed compared to their Q1 2025 levels.
With investors clearly in a dour mood, the question now is whether we will see investors look through the geopolitical noise as they did in Q2 2025, or whether Q1 2026 is just the beginning of an overall weak year as investors batten down the hatches to ride out yet another unpredictable sequence of geopolitical instability.
Prime Yields
Prime logistics yields across Europe have remained broadly stable, with the EU average edging marginally higher to 5.26% in Q1 2026, up just 2 bps year-on-year. However, in contrast to the narrative of imminent compression that characterised much of 2025, the quarter saw selective outward pressure in a number of key markets.
Notably, Germany ended a spell of stability, with prime yields across the Big Six (Berlin, Frankfurt, Munich, Hamburg, Düsseldorf, and Cologne) all edging out by 10 bps to 4.5% during the quarter. Paris Île-de-France also softened, with prime yields moving out 25 bps to 5.00%, while Madrid widened by 25 bps year-on-year to 4.80%. London recorded a similar outward shift, with yields rising 25 bps over the year to 5.25%. Lille also moved out by 30 bps to 5.25%.
Against this, a handful of markets saw yields tighten. Dublin compressed by 10 bps year-on-year to 4.90%, Helsinki moved in by 25 bps to 5.25%, and Stockholm edged 10 bps tighter to 4.90%. Milan saw a marginal 5 bps compression to 5.20%, and Oslo improved by 10 bps to 5.40%. Meanwhile, several markets remained firmly stable through the quarter, including Amsterdam (5.00%), Barcelona (4.55%), Brussels (4.70%), Copenhagen (5.25%), Warsaw (6.25%) and Budapest (7.00%).
The net picture, at face value, appears to be one of stability, obscuring repricing in both directions across Europe. We had anticipated yields tightening this year, but the adoption of a wait-and-see monetary policymaking stance will delay any repricing from the fallout of the energy crisis when anticipated interest rate hikes start to feed through into asset prices.
Census data throughout the current market cycle has shown that investors are focused on core locations and robust income. While even the most recent survey data from the UK shows that most investors are targeting prime distribution and multi-let assets, we have noticed a considerable uptick in interest in secondary multi-let assets. This is a symptom of a lack of good-quality multi-let assets being brought to market, and is driving investors towards secondary stock to increase their exposure to the subsector.
We are seeing further evidence of this in the broad strategy types of investors that have been most active in the UK in early 2026. Value-add investment strategies accounted for £708.5m of acquisitions compared to £189.1m Opportunistic and £166m Core. At the same time, we have seen Core strategies account for the bulk of assets, selling £684m in assets.