European logistics is resilient but ‘not back to normal’ yet

The logistics sector in Europe is showing resilience in the face of economic turmoil, delegates heard at Garbe’s Investment Briefing – France: Real Estate Outlook 2023, which took place this week on Real Asset Media’s REALX.Global platform.

Tobias Kassner, Head of Research, Garbe Industrial Real Estate

“Last year was not as bad as we feared when energy prices spiked in the summer, in addition to higher financing costs and higher construction costs,” said Tobias Kassner, head of research, Garbe Industrial Real Estate. “Despite a weak Q4, 2022 turned out to be a very good year, but we are by no means back to normal.”

There was a slight decrease in investment volumes last year compared to the 2021, which was a record year, but still above the five-year average. The logistics sector still accounts for over a quarter of all investments in commercial real estate and its share has nearly tripled since 2007.

“Now we’re seeing good transaction volumes but many investors are stalling because of the uncertainty over prices,” said Kassner. “We expect the pace of transactions to pick up again in the summer, especially for equity-rich players, with debt-oriented investors to follow.”

There are opportunities on the horizon as markets change and supply chains shift.

“Occupiers are still seeking more space to secure their supply chains and facilitate expanding stock,” said Kassner. “They are moving from a just-in-time model to a just-in-case model.”

High inflation, fuel and energy prices, environmental considerations and growing shortages of materials are all factors leading to supply chain realignment. Nearshoring and reshoring are now firmly on the agenda for an ever-growing number of companies.

“China as a partner in trade is not reliable anymore, so many manufacturers are playing it safe and  adopting a China-plus-one,” said Kassner. “For some companies the plus one is Indonesia, India or Vietnam but for many others it’s a country in Europe.”

Looking ahead, another positive for the logistics sector is that more battery production sites will be established in Europe by 2030, as Germany and other European countries are planning to increase production.

As supply is limited and demand is set to pick up, logistics rents will keep rising, which will provide an added incentive to invest in the sector.

“Lack of space and increasing demand are causing rents to rise faster and faster in Europe,” said Kassner. “We expect prime rents to rise by 4.1% this year and to rise further in 2024.”

The Eurozone is also more attractive to investors because it has proved to be more resilient than expected, thanks to higher than average temperatures that have led to a reduction in gas consumption.

“The combination of higher gas storage levels and falling energy prices has reduced the threat of gas rationing, and this positive development has spilled over into the real economy,” said Riccardo Marcelli Fabiani, economist, Oxford Economics. “Downside risks have receded and the downturn will be shallower.”

Despite these positive surprises, the outlook for 2023 is still sluggish for the Eurozone as, despite inflation easing, the European Central Bank has indicated that it will increase interest rates again. The further tightening of monetary policy will take its toll.

“But after March we expect interest rates to plateau and then next year they are likely to fall,” said Marcelli Fabiani. “This year is a mixed bag, and a lot will depend on the war in Ukraine, but I am a lot more optimistic about 2024.”