Affordability of logistics space helps steady occupier demand

Given the current economic headwinds that are challenging real estate markets in Europe, all segments of property could perhaps be expected to be similarly adversely affected from both the investment and occupier aspects.

Logan Smith.

Logistics, however, is “one of the few property segments in which the occupational market is still relatively quite strong,” as Hines head of European logistics, senior managing director Logan Smith pointed out at Real Asset Media’s event European Outlook 2023 – Focus on Logistics, staged recently at the London office of law firm TaylorWessing.

“Obviously, things are softer for logistics: Every single asset class on planet Earth has repriced over the last three to six months and logistics is no exception,” Smith said. “But, when you look at what’s happening, it’s still driven by occupiers who need space.”

The extent of logistics’ robustness is in sharp contrast to other market segments but there are some paradoxical characteristics of the current market.

Andrew Creighton.

“I’m a little shocked in a sense that we’ve seen the market rental growth that we have over the past couple of years,” Smith said. “And, a couple of markets where we are seeing the weakest absorption, such as Paris, are in fact the ones where you’ve seen the highest level of growth.”

Financing logistics assets is also less straightforward than previously

“Everyone’s debt is more expensive, in logistics as it is everywhere else in the world. And it’s more difficult to underwrite exit cap rates. But there’s still a lot of capital that’s interested in logistics and, of all of the sectors within commercial real estate, we still have relatively strong tenant demand, and there is still a lot of equity to go.”

Cromwell Property Group head of investment management, Europe, Andrew Creighton shared the sentiment. “There’s a huge amount of capital trying to get into real estate generally, and the favoured asset class remains logistics.”

However, Creighton said that it is necessary to premise the statement in terms of private equity money trying to get into the marketplace. “They’re building up their reserves, and of course, generally that source of equity normally staples debt on to what they’re trying to do. Obviously that’s been challenged in the last six months.”

Will Prewer.

One key attraction of the logistics assets is that rents are still affordable for occupiers.

“When you look at the percentage of occupational cost which goes towards rent, it is still very limited. Labour is the number one [cost], and that is very stressed at the moment, then you’ve got energy costs, then you’ve got inflation, but as a percentage, rent is tiny and still very affordable.”

Will Prewer of DHL Supply Chain capital markets UK, Ireland and EMEA said that there are many drivers still finding their equilibrium in terms of rebalancing nearshoring and there has been a shift  towards using third party logistics companies.

“A few people are pausing just to see what the outlook is. We’re not the only people who are experiencing increased cost of debt, but fundamentally there is still a robust pipeline for us.”

Price can be an issue as Taylor Wessing partner Christopher Turley pointed out. “We haven’t yet reached the agreement between seller expectations and buyer expectations and we remain in this period of too late to sell, too early to buy. We are starting to see that narrowing though.”