Thriving Demand For Logistics Real Estate

Like other real estate sectors, valuations in the logistics segment fell rapidly.

Like other real estate sectors, valuations in the logistics segment have fallen rapidly due to the sharp rise in interest rates in the second half of 2022. Overall, we believe that ‘Between June 2022 and March 2023, the value of European logistics real estate fell by almost 20%.

Although the sector is not immune to a recession, the market and long-term opportunities remain strong. That said, going forward, it will be essential to focus on asset quality and the fundamentals that underpin returns. Some stability has started to emerge in 2023 and we are already seeing signs of renewed investor interest in the UK and the Netherlands.

WILL THE WAREHOUSES CONTINUE TO BE OPERATED?

Supply chains have been severely disrupted by the Covid-19 pandemic, which has reinforced the valuation of efficient logistics structures. But structural factors have been at work for some time now and we have recommended overweighting logistics real estate for many years. The shift in fundamentals began almost a decade ago, with the emergence of three key trends: de-globalization, the birth of large-scale e-commerce, and the need for modern, energy-efficient supply chains.

First of all, the protectionist policies implemented in the United States and the United Kingdom show that de-globalization has been underway for some time. The Covid crisis has further accelerated various aspects of this underlying trend, leading to a strain on existing supply chains and an increase in offshoring. We have recently seen in some countries greater energy interdependence and a trend towards domestic production of car batteries. This trend has shortened supply chains, which has led to the establishment of new warehouses and the creation of logistics assets close to end users.

Second, e-commerce remains an additional long-term demand driver, despite a recent slowdown in growth following the pandemic-related boom. Although much of this slowdown is related to the rise of Amazon, brick-and-mortar stores have also invested in their supply chains to increase online sales and compete with the market leader. But existing warehousing infrastructure is not suited for this type of demand-driven distribution. It is therefore essential to invest in new sites and in modern warehouses.

Third, ESG criteria and carbon neutral emissions targets are becoming increasingly important to tenants and investors. Stricter regulations – such as the new European directive on the energy performance of buildings, encourage investors to modernize their building stock in order to improve their efficiency. As for tenants, soaring fuel bills are pushing them to look for better located and better quality facilities.

DO THE FUNDAMENTALS REFLECT THE THEORY?

In the 13 largest logistics markets, overall rental demand was 23% above the average of the last five years in 2022. Germany, Poland, France, the Netherlands and the United Kingdom take the share du lion with 78% of rental activity. Quality continues to play a key role, with the vast majority of transactions taking place at the new warehouses.1

Despite some areas of increased development, such as the UK, we expect supply to remain limited in 2023 and 2024. The average logistics vacancy rate in Europe fell by one percentage point to 2.9% in 2022, a historically low level. In many markets, the supply of high-quality space is negligible and most rental activity is decided during the pre-lease or construction phases. 2

In Europe, rents have only experienced strong growth in the past two years. The pace of rent growth should slow as market forces begin to normalize, but that will take time.

WILL LOGISTICS SIGN ITS RETURN IN 2023?

Logistics real estate is well positioned to navigate the current environment marked by high inflation, rising rents, strong market fundamentals and indexation of European leases. Supported by historically low vacancy rates and demand, rental growth is expected to maintain positive momentum in most UK and European logistics hotspots. Logistics space in good locations remains undersupplied, which means cash flows should be resilient and strong, with long-term returns growing.

Although continued economic, political and financial uncertainties may disrupt near-term investment trends, the e-commerce boom and supply chain reconfiguration are expected to remain growth drivers for logistics.

This article is originally published on allnews.ch

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.