Even for one of private real estate’s most-favored sectors, market sentiment is far from clear cut.
In the second virtual PERE Global Passport event last week, attendees were asked to answer a poll question – which also doubled as the name of the webinar – “Has logistics peaked?” The question yielded mixed responses: 56 percent were unsure, 31 percent answered ‘yes’, while 13 percent said ‘no’.
Alistair Calvert, chief executive of pan-European manager Clarion Partners Europe, found the results to be “a little surprising,” since he believed sector values have peaked, at least in the near term.
“If you look at the correlation between interest rates and yields, unsurprisingly, they correlate very closely together and with a very high degree of certainty,” he observed. If rates have increased by 300 basis points, and yields have increased by 75bps to 100 bps, it was likely that both would continue to rise, Calvert said.
“I think it’s highly likely that values will come off more over the next few months,” he said. “I’m not so confident, though, that yields do trend to the long-term average spread, on the basis that I still think the occupier market is incredibly healthy. I think vacancy rates are still incredibly low.”
Charles Allen, UK head of Toronto-based firm Fiera Real Estate, concurred on capital market pricing. “One hundred percent, I think we’ve seen the peak,” he declared. “Logistics assets in particular got too hot. They were probably about 10 percent above where they probably should have been. And I think we’ve seen a further market fall on top of that. So, we’re probably down 20 percent to 30 percent in the UK. And there’ll be a continual decline of values between now and certainly the end of the year.”
Meanwhile, Brian Kieran, head of European fund management at Singapore-based logistics giant GLP, asserted that rental growth – driven by the underlying supply and demand imbalance in logistics – is offsetting yield expansion. “Specifically in the European market, we’re looking at record low levels of vacancy, very strong occupier demand and then structural changes, which are driving growth for more warehousing, which hasn’t changed and won’t slow down,” he said. He added that e-commerce penetration in the region is quite low and still “has a long way to go” relative to the US or Asia.
“I’m still a big believer in rent growth,” echoed Calvert. “I think that it could take us 12 months really to find the bottom of the market in terms of values. But I think rental growth strength could continue for many years. There’s lots and lots of data which suggests we’re only just starting out on the supply chain reconfiguration, and we don’t have anywhere near enough logistics space in Europe.”
However, Raimund Paetzmann, vice-president of logistics network expansion and real estate at German online retailer Zalando, said whether logistics has hit its peak is “probably in the eye of the beholder.” He noted his firm was pressing pause on its expansion plans because of the rising costs of development projects.
“For me, it’s not a healthy environment,” Paetzmann remarked. “From an occupier perspective, it has slowed down a bit. But we are planning on our further expansion for the future. The question is just when. Maybe by next autumn, everything will have settled down.”
He warned that there was a limit to how much rent occupiers would be willing or able to pay. “You have to be careful that it’s not overdone,” he said of rent increases, adding that for logistics tenants, rent is a cost in a low-margin business.
Although the nearshoring and reshoring trend will fuel demand in the near term, Paetzmann expected supply chains to stabilize in two or three years, in which time logistics tenants could go back to a just-in-time system that would require less space. “So, if there is an expectation that the occupier will pay anything, then it’s probably wrong because it could easily turn in the other direction,” he said.