Challenges emerging after ‘extraordinary’ year for logistics

While 2021 was “an extraordinary” year for the logistics real estate markets, cap rate compression could be concealing a multitude of challenges, delegates heard at Real Asset Media’s European Outlook 2022 – Focus on Logistics briefing, which was held online yesterday on the REALX.Global platform.

“It really has been the most extraordinary 12 months,” said Sally Bruer, head of EMEA logistics and industrial research and insight at Cushman & Wakefield. “In terms of occupational demand, it was the strongest year that we’ve recorded across Europe at 46 million sq m,” she added.

Investment volume for year end for industrial and across Europe. 2021 ended up in excess of €65 billion Bruer explained. “That’s an absolutely extraordinary volume in comparison to typically what we would have expected, about €40 billion per annum.”

Many markets are regularly seeing sub 3% deals, she pointed out.

However, Frank Pörschke, CEO, P3 Logistic Parks, said that the levels of yield compression that have been observed over the past year have been a cover for many “challenges”.

“Yield compression was basically the automatic solution for many things, like cost increases on the construction side which have been so significant over the last year and the previous year. And we are talking about 20-30% in some markets and land prices are going up too.

“So basically the mechanics for the developer have changed,” he said. “But by definition, this yield compression cannot continue forever.”

In a more inflationary environment, central banks are beginning to move in a more restrictive direction, he said.

For the time being there will be continued pressure on pricing, however. Michael Bohde, head of Germany, Cromwell Property Group said this pressure will be more or less pronounced across the risk return curve in Germany, at least. It will be a little less pronounced for the core logistics and likely a little more pronounced for the for the core-plus and value-add product. “We certainly believe for the industrial product as well it will be more pronounced,” Bohde said.

Bruer said that with such strong occupier demand, “nearly every market has seen rental growth and particularly in markets across the UK,” she said.  In some cases this has been more than 50%, and rents have also “soared” in the Czech Republic, and parts of Ireland. The increases have been particularly notable for last mile buildings.

This rental growth is making a difference. Rory Buck, managing director, Clarion Partners Europe said,

“I think investors are now more confident to underwrite that in their models and that’ll have a tightening effect on yields, but you do also need to be cognisant of lending rates. Those have changed dramatically over the last couple of months. I think that’ll have a negative impact on yield. So these things need to be balanced. “

But there is another side to the buoyant market. Raimund Paetzmann, vice president corporate real estate of the Berlin-headquartered online fashion retailer Zalando explained that the extremely high level of demand makes life difficult for occupiers.

Although Zalando has a large and established presence with a lot of employees in many locations, expansion is increasingly difficult with increasing construction prices and scarcity of space, he said. “When you do negotiations with the general contractors, within two months of negotiations the price increases 5%, so it’s a really challenging time.”