Garbe: the worst is over for European logistics markets

The worst is over for the logistics sector, delegates heard at Real Asset Media’s European Logistics Property Markets: Has the Investment Market Bottomed Out? briefing, organised in collaboration with Garbe, which took place online yesterday.

Tobias Kassner, Head of Research & Member of the Executive Board, Garbe Industrial Real Estate

“Looking ahead I am positive,” said Tobias Kassner, head of research, member of the executive board, Garbe Industrial Real Estate. “Many European markets have bottomed out. The pace of recovery is still slow but it is picking up.”

Logistics investment volumes dropped by 51% in 2023, less than offices but still a significant fall. However, the decline was nowhere near as dramatic as after the GFC, and transaction volumes have fallen back to their long-term average.

“What is important is that logistics now has a bigger share of investors’ portfolios, and that interest continues,” said Kassner. The average share for logistics is 21% in the Eurozone but it goes as high as 25% in some countries, so it has more than doubled in the last ten years.

The macro-economic backdrop will determine the timing of the pick-up in transactions. On the positive side, the fight against inflation is proving increasingly successful. Producer prices are a harbinger of inflationary trends, as they are falling faster than consumer prices.

But the expectation that interest rates would fall quickly might have been too optimistic. “There were hopes that the ECB would intervene in Q1, but now it looks like it will happen in the second half of the year,” said Kassner.

The Garbe Pyramid 2024, the only pan-European market overview focusing on key indicators of the investment and rental market

Prime yields are back at 2018/19 levels and decompression dynamics are decreasing, especially in the top German markets.

Half of the market players (52%) questioned for Garbe’s 2024 survey said they expect constant returns, up from 34% in the 2023 survey. This year 23% of respondents believe yields will fall (down from 30% last year), and an equal percentage (23%) is convinced they will rise (down from 26%).

“The expectation is that the situation will be more stable this year, as the next investment cycle is about to start,” said Kassner.

Take-up declined by 29% in 2023 but it is stabilising at pre-pandemic levels. “There are two main reasons for this: one is that in many submarkets vacancy rates are so low that there is no space to rent,” said Kassner. “The other reason is that some tenants are experiencing difficulties because of the recession and the impact of geopolitical tensions, so they are being very cautious.”

Rental growth has been the wind in the sails of the logistics sector: prime rents have increased by 36% on average in the last five years. But the rental growth momentum has slowed down in H2 2023, declining from +6.5% in Q3 to +3.1% in Q4.

The survey shows that fewer respondents (45%) believe rents will continue to rise, compared to 61% last year, while 38% think they will remain constant, up from 26% last year.

“The expectation is of moderate rental increases in the next few years, at a lower pace than in the past,” said Kassner. “It will pick up again from 2026 onwards, because e-commerce still has the potential to grow and companies will expand their footprint as the economy recovers.”