Logistics is enjoying a moment in the sun as the pandemic fuels demand from customers and investors. But can it last? Paul Strohm reports.
Few trends in property have occurred with the rapidity of the last 12 months’ increase in occupier demand for logistics space, a result of the pandemic-enforced acceleration of the consumer switch to online retail.
The boom in demand from occupiers has been matched by the apparent desperation of investors to gain a foothold in the sector – investors who have been pedalling fast to catch up as they seek to rebalance their portfolios.
But the parallel rushes for logistics space and assets begs questions such as whether consumer demand will last beyond the pandemic, and whether the volumes of capital targeting logistics assets will distort the market to bubble-like proportions.
More from the Logistics Special
- Is there really no space left for logistics in Germany?
- ‘We just try to figure out where the customers want to be’
- No floor in sight as demand leads to record low yields
The answer to the first question is easier. Experts are pretty much unanimous that the pandemic merely accelerated consumers’ move online, even though different countries were starting from different points in terms of internet penetration and the reach of e-commerce. A bounce back in bricks-and-mortar shopping is expected as lockdowns end, but ultimately the online trend is expected to be long term.
That leaves the second question. European logistics investment reached €39 billion in 2020, according to Savills’ figures. Overall, that represented a 5% increase on 2019, but this figure cloaks large national differences: for example the UK figure was 22% above its five-year average; the Netherlands 32%; and Poland as much as 65%. The UK accounted for 27% of the deals and the other leading markets were Germany (17%), France and the Netherlands, which accounted for 11% each.
The trend represented the swing of a double-edged sword: on one hand the values of investor’s retail property assets are under threat from the shift to online shopping; on the other hand, logistics yields have toppled as occupier and investor demand for the sector has made its assets so much more valuable.
‘There’s a strong argument that we’re only about halfway through the build-out of the European logistics platform. We’ve got a long way to run in this market.’
Alistair Calvert, Clarion Partners Europe
The logistics yield compression is itself desirable, but it is the expectation of the permanence of the move to e-commerce that will continue to drive growth. “There’s a very strong argument that we’re only about halfway through the build-out of the European logistics platform,” says Clarion Partners Europe CEO Alistair Calvert. “This is far from over, we’ve got a long way to run in this market.”
Calvert confirms that while the market for logistics assets was competitive before the pandemic, the intensity has increased. “There clearly are a huge number of new buyers coming to the market largely wanting the same thing: stabilised assets and very well recognised markets, and that is certainly a big influence on pricing,” he says.
The increasing competition for assets and development sites is forcing the more established developers and investors in the sector to be pragmatic in their approach. “The transactions that we do are more complicated than they used to be, we do more developments and we do more transactions where there are other problems to solve.”
He says this could be a matter of dealing with particular regulations that relate to a site, or obtaining planning permits in more restricted circumstances. “I guess most of our transactions now have some degree of complexity where perhaps they wouldn’t have done before. We’re more able to deal with that complexity than the newcomer to the market.”
Above: Prologis development at Muggensturm, Germany. Big-box buildings like these lend themselves to photovoltaic panels on roofs
Marco Simonetti, who heads Segro’s southern European operation – which includes France, Spain and Italy – said the increased competition has an impact on the price of land and makes sites more difficult to find.
“There is a lot of appetite at the moment in our sector and investors that historically invested in other asset classes want to invest in logistics as well. Luckily, we have been working in the sector for a long time and we have been able to secure a good pipeline in terms of land and options,” Simonetti says. “If someone arrives today in the market they have no other choice than to buy something very expensive,” he adds.
Buying the sector?
The apparent desperation to acquire assets among some newcomer investors to the sector has led to concerns that investment yields are being applied in a general way that does not account for the nuances of the real estate in question: that investors are “buying the sector”.
US developer Trammell Crow has established a new European unit to target logistics development. It is headed by Ian Worboys, who has worked in the sector for decades. “The knowledgeable funds and investors do know the difference between different areas and will pay accordingly,” he says. “They will not put a blanket yield across Europe, they will very much look at buildings’ locations.”
‘There is a lot of appetite at the moment in our sector and investors that historically invested in other asset classes want to invest in logistics as well. If someone arrives today in the market they have no other choice than to buy something very expensive.’
Marco Simonetti, Segro
However, he adds that for some the need to deploy capital means there is pressure to buy. “There are funds that are more interested in placing capital than actually what they’re looking at. I don’t mean they’re just throwing money at it, but they’re not as knowledgeable as some of the funds who have been around for 40 or 50 years in Europe and who know which part of which motorway is a great place.
“There are still huge differences [in yield] between Germany and France, between France and Czech Republic and between Czech Republic and Poland and the UK is going to be attractive because you get longer leases there than anywhere else.”
Savills research director Kevin Mofid says the situation is not unexpected. “History would tell us that in certain parts of the cycle people’s definitions of prime and secondary become stretched. That is typical of certain points in the cycle where you have more capital chasing more opportunities than exist.”
He adds that although normal in some respects, the situation is being amplified because there are fewer good-quality buildings available for purchase as nowadays the specialist logistics developers tend also to be investors and retain what they build for their own portfolios. “There are actually very few companies who develop warehouses to trade,” Mofid says.
The alternative is to buy existing income-producing assets – itself a scene of intense competition which might make some investors tempted by slightly older buildings, arguing that a not-quite-new building has virtually the same specification as one constructed today.
Suez affair endorses nearshoring trend
Logistics may have acquired more prominence due to its role in facilitating retail during the pandemic, but its role in the supply chain generally was also highlighted when the 200,000-tonne container ship Ever Given became lodged sideways across the Suez Canal in April.
The incident is likely to focus attention on the ‘nearshoring’ and ‘reshoring’ trends already evident as a manufacturers switch from just-in-time delivery models that require low inventory, to more secure models that include some redundancy. The change adds further grist to the logistics real estate market’s mill.
“People don’t want to rely on a single source of supply, as happened in the early days of the pandemic with some of the medication coming from China and India,” says Joseph Ghazal of Prologis.
“Governments have realised this and want to take things into their own hands,” he adds. “And not relying on a single source of supply means more logistics and more warehouses.”
Calvert warns of another trend that could highlight crucial differences. “ESG is moving at lightning speed. Right now buildings aren’t differentiated in price according to sustainability,” he says. “You don’t want to be left with stock that is obsolete from a sustainability standpoint.” High sustainability standards will “pay you back handsomely in the near future”, he adds.
Prologis chief investment officer for Europe, Joseph Ghazal, says sustainability has been rising in importance for the last 10 years and is now more embedded in the industry, whereas during the Global Financial Crisis of 2008-2009 it was put in abeyance. “While Prologis’ efforts in ESG continued the market’s priorities were elsewhere at the time. Now it is front and centre, that is exactly right.”
The sustainability aspects of ESG in particular are affecting the design of both big-box distribution buildings in less central locations as well as last-mile logistics facilities. Big-box buildings lend themselves to photovoltaic panels on roofs, while smart meters and charging facilities are frequently installed where battery powered vehicles are anticipated.
The imperative for cleaner vehicles is even more acute in urban locations and has become a central issue for Segro in the development of the Les Gobelins last-mile logistics scheme in central Paris, part of a mixed-use joint development with Icade, where delivery vehicles are intended to be electric vans or cargo tricycles. “Clearly, sustainability is at the top of our agenda and that of our customers,” says Simonetti, adding that Segro plans to be a net zero carbon company by 2030.
Elsewhere in Paris, Segro has recently completed a multi-storey distribution building which has been let to furniture retailer Ikea, which will deliver some goods by boat. “It’s not faster but they do have certainty of the time of delivery and the last mile, or even the last 500 metres, can be done with an electric bike or electric van,” Simonetti adds.
‘People might think automation can remove the labour worry but automation is costly – costs are in the tens of millions.’
Joseph Ghazal, Prologis
ESG is not the only driver of change: automation and robotics in particular increasingly need to be accommodated. “There is much more automation so these buildings are more complex,” says Simonetti.
Ghazal says the pandemic has not accelerated trends in robotics. “It’s not like we’re suddenly seeing big demand for fully automated 50 megawatt warehouses with all robots. Let’s not forget that automation and robots cost a lot of money. People might think it can remove the labour worry but automation is costly – costs are in the tens of millions.”
But automation does not remove the need for staff. “The number of people who work in these buildings is very high, the two things go in parallel.” And this increasing level of employment means locker rooms and rest areas need to be provided, there is more investment in M&E due to the need for air-conditioning and often more mezzanine space has to be included.
The switch from traditional retail to logistics for investors may yet have a parallel in terms of employment.
Investors tune in to rising demand for Polish logistics
The pandemic changed the priorities of purchasers of industrial and logistics property in Poland, according to a recent report from JLL. While industrial investment transactions reached a record €2.7 billion, accounting for almost half of the total investment volume in the Polish real estate market, the amount of capital targeting logistics was 81% more than in 2019.
JLL Poland’s head of capital markets, Tomasz Puch, said the enormous level of demand, relatively low financing costs and the limited amount of prime space available suggests there will be downward pressure on yields this year. At the end of 2020, prime warehouse yields in Poland were 5.75% with exceptionally long leased assets trading at below 4.50%.
The dramatic increase in demand from logistics occupiers explains increased investor interest. Demand for warehouses reached a record 4.8 million sq m, according to JLL, while supply increased by more than 2 million sq m with almost 1.9 million sq m under construction.
More than 71% of this demand was attributable to new deals and expansions. A significant proportion of demand was concentrated in the two largest markets – Warsaw and Upper Silesia – which together accounted for more than 1.43 million sq m. The other three of the ‘big five’ markets – Central Poland, Poznań and Wrocław – all registered more than 300,000 sq m each. Strong results were also registered in Tri-City and Lubuskie, which both recorded 200,000 sq m.
The trends seem set to continue this year and, in a move that underlines the growing penetration of online retail businesses, Amazon has launched a dedicated service for Poland called Amazon.pl.
Amazon has operated in Poland since 2014 and its presence has had a major impact on the country’s logistics real estate sector, having procured nine fulfilment centres. These facilities, of which Panattoni Europe has developed at least seven on a built-to-suit basis, include facilities in Sady near Poznan, Sosnowiec, Kolbaskowo near Szczecin, Bielany Wroclawskie where there are two facilities, Pawlikowice near Lodz, in Lodz itself, at Okmiany near Boleslawiec and Gliwice.