Research reveals nuanced European logistics market

Garbe Industrial Real Estate’s head of research Tobias Kassner discussed the latest edition of Garbe’s half-yearly Pyramid Map Research with Real Asset Insight’s Richard Betts and provided some insights and key takeaways.

The research examines in detail the logistics real estate market across Europe. “We’re in a really special situation because the market circumstances have changed quite a lot,” Kassner explained.

Investment volumes decreased for the second year a little over 50%. This can be compared to other asset classes where the fall was more extreme, such as offices where volumes fell by 60%.

Despite the dip, logistics’ share of aggregate investment has increased over the long term to about one fifth, and in some countries to a quarter of the total investment volume.

Even though the “heavy disturbance” of inflation and interest rates meant volumes were totally different to the preceding year, that was a record-breaking level so the reduction in volume can actually be considered more of a “normalisation”, Kassner explained.

There is a different pattern geographically too. “The pace of the countries is different in many situations where we have a crisis. The UK is leading the pace, and we already see a bottoming out there, followed soon after by countries like the Netherlands.”

Kassner said that looking at decompression of net initial yields, the last half year only saw a decrease of a few bps while in Germany the decompression was about 30 to 40 bps.

The market is expecting the ECB to reduce rates after the first half of 2024 but here too the UK and Netherlands are slightly leading the pace. “They will begin a little bit sooner with the increase of investment volumes,” Kassner added.

In contrast, rents have undergone a notable increase. Demand was huge until the last few months. Many markets have experienced historically low vacancy rates along with decreases in development, particularly spec development, as finance became more expensive, which has squeezed supply. This has led to “a huge increase in rent levels.” The Pyramid time series for the last five years has seen an increase of €2.5 per sq m in top markets and even €1.5 per sq m in some second-tier markets.

The markets are beginning to diverge and while Germany’s logistics markets had similar rent levels a few years ago, Munich is one example where rents have changed more markedly and the city’s place in the ranking has changed.

Geopolitical tension and uncertainty because of a threat of recession have started to lead to a more cautious approach from tenants, especially in second-tier markets. Even in the main markets, while there are still increases these have changed from the former double-digit growth to 4-5% pa.

There will be more caution this year. “2024 will be a year where it’s more step-by-step,” Kassner said. To the existing geopolitical uncertainties, the fact can be added that a huge part of the world is going to vote this year. “This could lead to a huge impact on the demand side, on supply chains.”

But Kassner added: “Generally everyone is quite sure that interest rates will drop in the US, in the Eurozone, in the UK. When it will happen depends on how fast inflation will decrease so we guess that the first half of 2024 will be more wait and see. The second half will be the start of the new cycle especially for investment.”

On the tenant side of the equation, e-commerce is expected to pick up again in many Eurozone countries because the e-commerce penetration in most markets is not as high as, for example, the UK. Kassner also expects new types of e-commerce to emerge, notably from social media companies like Tik Tok, and they will establish logistics networks in Europe.

Although many spec developments are currently being completed, the lack of new building activity will lead to lower output which when combined with increased demand will push rents higher, especially in 2025.