Logistics sector sees first hints of rise in business confidence

Although the logistics real estate market in Europe has seen demand faltering in the last few months following a period during which levels were extraordinarily high, we are starting to see the early signs of business confidence returning and a halt to the slide, according to Cushman & Wakefield’s head of EMEA logistics and industrial research and insight Sally Bruer.

Bruer presented her latest research during Real Asset Media’s Future Trends: Demand, Supply Chains, ESG & Logistics Real Estate briefing at the recent Transport Logistic show, staged in Munich, Germany.

New leasing and sales, excluding lease renewals, indicated an “extraordinary level of occupier demand through to the middle of last year”, Bruer said. Demand hit 46 million sq m in the 12 months to the end of June 2022.

This was spurred on post pandemic and particularly by ecommerce-related demand.

However, demand slowed in the 12 months to the end of March 2023. “We’re down to 37 million sq m, so 19% off the peak we saw in the middle of last year.”

Feedback from the market indicated, across the board, that this was attributable to slower occupier decision making rather than an actual lack of demand. The uncertain business environment – particularly inflation and consumer restraint – meant occupiers questioning whether the time was right to be taking new buildings. Enquiries are there “but taking longer to crystallise as deals.”

Data indicate that business confidence lags consumer confidence by about six to nine months and occupier demand lags business confidence by about the same interval. Bruer pointed out that a recovery in consumer confidence has begun, although consumers are still fairly pessimistic. “We are starting to see the early signs of the green shoots of business confidence returning and therefore we will start to see the market arresting its fall and starting to correct as we come into the end of 2023 beginning of 2024.”

Geographically, most markets are behaving in a similar fashion, she added.

Also across Europe vacancy rates have reached record lows over the last seven years but there is a slight uptick in vacancy as occupational markets have slowed down. More product is coming to the market but vacancy is still very constrained, “so the opportunities for occupiers to find the right building, should they be looking, are still limited”.

Development completions across Europe had also reached an “extraordinary level” by the end of last year – just shy of 170 million sq m over the 12 months to the end of Q3 2022. This too has slowed as developers have started to feel the occupier market slowing down, particularly on the speculative development side.

“We are still seeing some markets with good supply, but perhaps it’s a little more patchy rather than all markets being tight,” she said.

Rising development costs have been a particular challenge. “Increases in costs of wood, cement, concrete, plaster, cladding and iron and steel products were more than 85% higher than in 2015.” While the figure is now down to 62%, wages and construction labour costs have increased almost 30% in five years. Only shipping costs have dipped to pre-covid levels.

“We are expecting there to be further price correction but we are hearing from developers that more stable prices are coming back from contractors so they now have the ability to see the whole construction term now, rather than the prices changing from the initial quote.”

“Rents have grown massively since March 2017,” Bruer said. Looking at a five-year horizon an occupier facing a rent review today would be looking at a 34% increase on the level of five years ago on average.” In Czech Republic the increase is about 56% and in the UK, 49%. Most of this rental growth occurred in the 12 months to the end of March 2023. Krakov saw rents increase 90% of which 75% was in the past 12 months. While this is easing in some markets, the pace is gathering in others such as Germany and France.

Investors have shown strong conviction to the sector and investment volumes reached €80 billion. But towards the beginning of 2022 volumes fell for several quarters, but this is not necessarily due to lack of conviction in the sector, but it was due to pricing. “The pricing correction has come very hard and fast,” she said.

Yields had compressed to record lows. “In some markets we’ve seen yields for logistics and industrial property lower than retail – that’s never happened before.”

Bank rates increases and the subsequent hikes in financing costs have brought price correction “hard and fast”, particularly in the UK which, “not only had a pricing correction and interest rate rises but also political instability contributing to the lack of confidence in capital markets generally.”

However, Bruer pointed out that the phenomenon was not therefore exclusive to logistics and industrial property.