What next for urban logistics?

Verdion CEO Michael Hughes looks ahead to the challenges and opportunities the sector presents as it continues its upwards trajectory.

As 2021 – a truly transformational year – draws to a close, it’s clear that confidence in the urban logistics sector is stronger than ever.

We are seeing predictions that online shopping will make up a quarter of all Europe’s retail sales by 2025, meaning that an extra €342 billion will be spent online over this period, creating an even bigger demand for logistics space.*

This is not the only factor driving logistics, however. This year, extraordinary events and trends have collided simultaneously, exposing significant weaknesses in the global supply chain and provoking debate about new ways of operating: for example onshoring of production.

For real estate, the key questions are, first, how can this demand be properly fulfilled in markets where supply is growing scarcer and competition from other uses continues? And after that, how can the logistics sector’s many investors secure attractive returns in this market?

Prime urban sites are already changing hands for figures above valuation levels with swaps and complex mechanisms to secure sites coming through (though the question remains how these sites will stack up financially longer term).

Attractive locations

We believe, however, that in these conditions, existing assets, brownfield sites and new hotspot locations are most attractive. With the right approach they offer significant potential for both transformation and above-average returns.

Edge-of-centre and urban infill locations that help meet the e-commerce sector’s last-mile requirements are particularly attractive, especially in Northern Europe, which already has the greatest market penetration for e-commerce. Germany and the Nordics are particularly appealing.

‘Edge-of-centre and urban infill locations that help meet the e-commerce sector’s last-mile requirements are particularly attractive.’

Michael Hughes, Verdion

Existing properties and single- or multi-let, logistics parks with long- or short-term leases in place could all offer potential for reconfiguration, modernisation and/or expansion. In its simplest form, this could mean extending buildings to create additional space on the same footprint.

Larger sites bring the opportunity to implement a new masterplan and either completely redevelop or offer new space for existing tenants before reconfiguring  the rest of the site or property to create more floorspace. Each site needs a clear, bespoke approach driven by local market conditions as well as global megatrends.

For us, urban logistics lot sizes are smaller – around €5 million to €25 million, although volumes of up to €80 million are possible in principle. This is a significant contrast to some of our much larger strategic parks which can stretch to €500 million of investment over a longer time frame, but it means we can be agile and transform sites quickly to give occupiers the speed to market they need, including speculative development.

The spectrum of potential occupiers is broad too, ranging from contract logistics companies to global consumer goods groups to agricultural marketing organisations. And we secure sites from a range of sources, regularly through off-market transactions, from private individuals, sometimes family offices, sometimes institutional investors.

But unlike simply transferring ownership to a similar occupier, our approach to transformation brings with it strong ESG credentials, with each opportunity for value-add being accompanied by sustainability improvements on the ground. More modern facilities on brownfield sites can support a greater intensity of space, with technologies to reduce energy consumption as well as offering operational improvements. Greener transport, landscaping and clean energy generation are all factored in too.

So as the market continues at pace, many may see this unrelenting growth as a challenge. For us it is an opportunity, a chance to test out our ingenuity when it comes to site selection, design concepts, technical innovation and delivery. With a growing team and commitment to attractive markets across Europe, 2022-2025 is looking very promising indeed.

*Forrester: https://www.savills.co.uk/research_articles/229130/318128-0