It is no secret, 2020 turned out to be a good year for logistics property which was not the case for other areas of real estate. The buoyancy of the sector was emphatically stated during the REALX.Global panel on European Logistics. Demand from occupiers has been reflected in demand from investors. But with such a rush to the sector, could there be a day of reckoning around the corner?
Ben Bannatyne, president, Prologis Europe explained: “Clearly last year, March, April, going into May was not good, we basically put all new development on hold and our acquisition programme slowed down entirely.
“However, after the initial panic and, more importantly, once we could see where our customers were going, we ramped up again pretty quickly.”
The end result he said was that Prologis Europe finished 2020 slightly behind in terms of deployment and development, and roughly on track with operating KPIs (key performance indicators) such as occupancy.
However, in 2021 customer activity has ramped up again, Bannatyne said.
“There is lots of build-to-suit activity right across Europe, occupancy is trending upwards in most countries with rent growth again and markets like Germany are extremely strong. I think we are back to where we finished 2019 and ecommerce is a major play.”
Robert Dobrzycki, CEO Europe, Panattoni Europe said that while 2020 was an extraordinary year from many points of view, it was a record breaker for Panattoni in terms of development volume, tenant demand and investment volume.
“Demand wise we have very strong demand from ecommerce with pan-European rollouts of many large customers.” He added that in terms of investment it “feels amazing”.
“We feel very excited about what the future could bring.”
Ian Worboys, MD, head of European logistics, Trammell Crow Company said that 20 years ago logistics was seen as the poor cousin of the real estate market. “Now the total returns under any dynamic are the best performing, so people are moving into this market.” He said that the effect of that is yields being compressed to 3%.
“You wonder if, with a long-term amazon, it could dip below 3%. There is a huge appetite for logistics. A lot of investors all over the world cannot get the returns they want, so logistics is one of the few markets that is still growing.” He said that the huge growth in ecommerce over the next few years is being followed by the money “and that is bringing pricing in”.
And there is room for newcomers to the sector in Europe, such as Trammell Crow, said Kevin Mofid, director research, Savills.
He said that the statistics bear out that the pie is getting much larger so there is more to go round so new entrants do have the opportunity “to get a slice of that pie”.
Drawing from UK statistics, Mofid said that in January 2021 the requirements for logistics were 223% higher than in January 2020. “Of course, not every requirement results in a deal but that is a good proxy to show you the occupational interest which then has knock on impacts to the development and capital markets community.”
The demand has led to unprecedented low yields with no apparent floor as yet and no apparent risks or upward pressures in sight.
“You need to ask what are the property market conditions that would need to exist for yields to move out,” said Mofid. “Are we going to see a supply surge or is there going to be overdevelopment of speculative space?”
“There may be certain micro markets where the supply does rise and vacancy rises, but on the whole I don’t see a development-led rise in vacancy occurring. The question then becomes are we going to see second hand supply rise with the prevailing economic conditions?”
He pointed to the UK example where two major retailers have recently gone into administration and vacancy increased by only 0.3%. “You would need to see huge structural failure for secondhand supply to have a structural effect on vacancy,” he said.
Then he asked what conditions would arise for demand to fall. He said that the ecommerce story is well documented but pointed out that there is additional demand from changes to supply chains and the manufacturing sector. He said that demand could fall if there is another global recession, but that occupier market conditions mean that there is inward pressure across the continent.
Bannatyne agreed that the risks seem minimal at present. He said that on the supply side there is little funding available for speculative development. Meanwhile, demand continues to be stable. “I do think there will be a slowdown in consumer spending which will be relatively short term, so we don’t really see a doomsday scenario.”
One effect of the recent health crisis could be an easing of the planning and permitting process according to Wulf Meinel, founding partner, StoneVest.
“Covid has led to a softening in that respect. Public authorities are much more inclined to grant these permits knowing that ecommerce has become a vital element in keeping economies up and running and giving them a certain free hand to keep retail shops closed.”
He said that large Amazon warehouses would have faced significant political hurdles two or three years ago. “The same goes for battery factories. Suddenly the consumption of greenfield for these purposes in densely populated countries such as Germany, France and the UK is less of an issue.”
However, Bannatyne said that he is yet to see an easing of the difficulties in obtaining permitted land.
“Our biggest challenges at the moment are finding land and getting that land permitted. It is taking a hell of a lot longer than it used to to get the permits through so you are having to add six to 12 months to development which is expensive.”