Occupiers in the logistics sector face many challenges in today’s business environment.
Institutional organizations looking to re-engage with logistics real estate need a comprehensive understanding of the challenges these companies face. These include a lack of skilled labor, supply-chain issues, shipping costs, ESG concerns and a dearth of quality buildings that meet the needs of growing companies.
However, as urbanization and population growth continue, the availability of suitable land for developing logistics facilities becomes increasingly constrained. This scarcity impacts the entire logistics supply chain and has implications for investment strategies in the sector.
The global interconnectedness of supply chains makes them susceptible to disruptions, such as natural disasters, geopolitical tensions and ongoing pandemics. These disruptions can lead to delays, increased costs and a lack of predictability in the supply chain, posing substantial challenges for logistics occupiers.
“The wide base of occupiers that we work with globally have an extremely varied set of demands, but they can be distilled down to two key factors – location and operational profitability,” says Henry Giles, managing director, fund management at ARA Europe.
Rising transportation costs constitute another pressing challenge. As fuel prices escalate and demand for transportation services surges, logistics occupiers grapple with the need to optimize routes and find cost-effective solutions.
The balance between maintaining profitability and meeting customer expectations becomes increasingly delicate, leading to increased demand for urban logistics buildings located closer to the largest population centers.
Contrary to the overall growth in e-commerce during the past three years, declining demands in specific sectors pose unique challenges as well. Logistics occupiers are under increasing scrutiny to adopt sustainable practices, reduce carbon footprints and comply with stringent regulations, which necessitates substantial investments in eco-friendly technologies and practices. Likewise, automation and technology, while offering solutions, also present challenges.
Strategic investments that address these concerns and position assets to capitalize on emerging trends contribute to the success of private equity portfolios in this dynamic and evolving sector. Navigating these challenges requires a combination of strategic foresight, adaptability and proactive engagement with stakeholders. Investments that address occupier concerns, optimize land use and align with evolving demand drivers can position investors for success in the market. Three key opportunities are:
1 Development and refinancing
In the wake of significant repricing and economic shifts, logistics is facing a year of opportunity, according to developer and asset manager Verdion.
The logistics sector, which has witnessed unprecedented growth, now faces challenges amid constraints on both equity and debt supply.
The firm emphasizes the importance of selectivity and discipline in acquisitions, highlighting the evolving landscape of European logistics over the past 18 months. Despite a higher interest rate environment and tougher economic conditions, structural tailwinds for the logistics sector, such as e-commerce and reshoring trends, remain intact.
The potential in repositioning or redeveloping older logistics stock, particularly in sought after locations, could be an answer to the substantial amount of relatively old logistics space across Europe. The supply of modern logistics space is limited, creating opportunities in existing sites close to population centers. The scarcity of debt and equity capital, especially for repositioning opportunities, could create a niche for well-informed investments.
Investors must consider commercial and technical perspectives as well as consulting with local experts – not just at the country or market level, but down to the city and individual property.
Despite the absence of a significant number of stressed or distressed sellers in the market, opportunities should emerge over the coming years as the financing gap affecting the entire commercial real estate sector comes to bear.
Success in today’s market involves knowing the market thoroughly, maintaining discipline and repositioning or creating differentiated, future-proofed buildings that meet the latest ESG standards.
2 Improving property fundamentals
Global real estate markets are experiencing a shift in dynamics, with selective opportunities emerging in the private equity sector, according to Macquarie Asset Management. The upheaval in macro trends has led to increased rates and capital costs, impacting commercial property pricing. However, this has also created selective opportunities in private markets, notably in the logistics sector.
The logistics sector is predicted to remain a liquid asset class, presenting new investment opportunities. Higher rates, construction costs and tighter lending standards are impacting new development, leading to a reduction in supply. While this poses a short-term headwind for economic activity, it may support rental growth in the medium to long term. Beyond consumer behavior and rising online sales, businesses are diversifying supply chains and onshoring manufacturing. Government subsidies in the US are driving investment in electric vehicles and semiconductors, boosting demand for warehousing and logistics facilities in strategic locations.
As the real estate landscape undergoes transformation, strategic investments in logistics and an understanding of regional variations are key considerations for investors navigating the evolving market in 2024.
3 Specialty property types
The surge in global trade, e-commerce and technological advancements in transportation is driving a heightened demand for industrial outdoor storage properties, according to investment firm Realterm. These specialty logistics buildings are a key component of transportation assets and play a crucial role in optimizing the movement of goods, with a focus on efficiency rather than long-term storage.
The primary financial benefits these properties offer lie in avoiding higher costs elsewhere in the supply chain, resulting in rent growth for owners driven by the financial gains of occupiers.
Drayage yards, truckload drop lots and truck terminals benefit from proximity to warehouses and maintenance depots, which reduces fuel and labor costs, ensuring a higher turnover rate for consumer goods and minimizing stalled inventory.
The intersection between marine shipping and domestic trucking underscores the need for IOS properties, facilitating the swift transfer of goods. The rise of global e-commerce networks has also intensified the requirement for IOS properties to store last-mile delivery vehicles, with online retail sales witnessing significant annual growth.
Despite the recent downturn in fundamentals, the outlook for the logistics real estate sector remains optimistic. But careful and informed investment strategies are crucial in navigating the evolving market landscape.
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