Supply chain improvements driving logistic sector forward

Supply chain improvements and the prospect of economic stability are underpinning the industrial and logistics sector, experts agreed at the Trends 2023 – The European Logistics Real Estate Census 2023 briefing, organised by Real Asset Media and Savills, which took place in London this week.

“It has been a challenging period of uncertainty, but now there is more confidence in the sector,” said Phil Redding, fund manager and partner, Tritax EuroBox. “We need macro stabilisation and more visibility on values, but there is a conviction that the fundamentals of the sector remain very strong.”

The rise in interest rates and the questionmark over valuations led to a pause in activity, but there are signs the sector is moving forward.

Even in the current slow market there are exceptions and pockets of activity. “In the Netherlands the core segment is sluggish, but the higher-yield, value-add segment is very active,” said Niek Poppelaars, co-head logistics and industrial, Savills Netherlands. “I see a general pick-up in the market happening at the end of this year or at the beginning of next year.”

Across Europe, despite the decrease in volumes, investor interest is still higher than before the pandemic, with investment into logistics property accounting for 17% of total real estate investment volumes compared to the average of 13% between 2017 and 2019.

“Investment volumes have fallen as low as in the covid lockdown days, but the negative cycle has been created by high inflation and high interest rates,” said James Markby, managing partner, Logistics Capital Partners. “It is an uncomfortable situation, but it’s a controlled environment, it is not the GFC. The underlying fundamentals of logistics stack up well, so as soon as interest rates stabilise activity will pick up again.”

The slowdown in the market and the drop in asset valuations have been painful but swift, unlike the financial crisis, raising hopes that the recovery may be equally rapid.

“The crisis has been quick, so the pick-up will happen relatively quickly too,” said Redding. “The solution will be a mix of things, but it will start with getting more diversity in the supply chain to avoid the disruption we have seen in the past.”

The challenge of building resilience in the supply chain is being addressed, and nearshoring is part of the mix. “It’s been talked about for a while but it’s becoming real now”, he said. “Holding stock nearer the consumer is part of the solution.”

The nearshoring trend is expected to further strengthen demand for logistics and industrial space.

In H1 2023 take-up decreased by 37% compared to the record high of the same period last year, returning to more normal levels. Historical trends show that the 13.2 million sq m of logistics space signed in H1 2023 still surpasses the 11.7 million sq m recorded in the same period in 2018 and 2019, before the covid pandemic.

Looking ahead, however, the Savills Census 2023 shows that 39% of occupiers expect to increase their take-up in the next three years, compared to 25% a year ago.

However, the census suggests that volumes will improve, and over 70% of respondents stated they want to invest in the sector.

There are already positive signs: investment volumes rebounded in Q2 this year, rising to €6.3 billion. It is an improvement on a dismal Q1, but the figure is still 54% below that of the same period in 2022, when assets worth €13.7 billion were traded and also 36% less than the five-year quarterly average for Q2.

The question is whether the positive trend seen in Q2 this year will continue. “The timing of a pick-up in the market depends on interest rates,” said Kevin Mofid, director, head of EMEA industrial and logistics research, Savills. “As inflation falls, then confidence will return. We hope and expect that things will settle by mid-2024.”