On the minds of logistics real estate experts

What is the current appetite for logistics investment?

Brent Steele: We remain optimistic about the sector given the continued trends of on-shoring/near-shoring, e-commerce growth and legacy inventory obsolescence. Capital continues to re-allocate among the traditional CRE sector in favor of increasing exposure to logistics.

Alistair Calvert: Competition remains very subdued and, small pockets aside, sellers remain reluctant, reflecting where pricing currently is. That said, liquidity is returning in the best markets and end investors still have conviction that it will be the sector that offers long-term performance.

Adrian Ponsen: The appetite for investment remains enormous, especially with the weakened office market. Office investors are increasingly drawn to the logistics sector with favorable long-term leasing prospects thanks to shifts in e-commerce spending. The challenge today is finding sellers that will part with properties at prices buyers are willing to offer given today’s higher interest rates.

Christian Jamison: Relative to other asset classes, demand for logistics real estate remains strong. The structural occupier tailwinds remain – e-commerce continues to grow and mature, with consumers demanding ever shorter delivery times.

Joseph Chan: We continue to see strong appetite for logistics investment in markets with strong supply-demand fundamentals and positive gearing, with NOI yield higher than financing costs.

Karsten Kallevig: On the private investment side, we continue to see interest in high-quality portfolios. Prologis continues to deploy capital in a disciplined way. We are continually evaluating acquisition opportunities and developing new assets in-house.

How has the past year impacted logistics real estate?

BS: Logistics real estate, like all commercial real estate sectors, has experienced value erosion over the last year as a result of higher interest rates and increasing capitalization rates. However, the reduction in value for logistics real estate was less severe as compared to other major CRE sectors due to continued rent growth. We have also seen absorption slow slightly.

CJ: Over the past year there has been a significant re-pricing across the sector, with cap rates moving out by 20-30 percent in response to rising interest rates. This value decline has been partially offset by continued rental growth. The macro backdrop has also substantially reduced liquidity as reflected by transaction volumes hitting multi-year lows.

AC: The price correction that started in the first half of 2022 in Europe and at the end of 2021 in the UK continued through much of the year. The UK started offering value opportunities around the third quarter, Germany and the Netherlands got there by year end. The rest of Europe is getting close.

JC: Across Asia-Pacific logistics markets, there are significant divergences in fundamental value drivers, including supply-demand dynamics, construction costs, availability of bank financing and cost of financing.

AP: Most logistics properties remained nearly fully leased throughout 2023, but the past year has been challenging for property owners that need to secure tenants for vacant space, particularly in larger properties over 250,000 square feet. Developers have been adding record amounts of this large space over the past 12 months while tenant demand cooled significantly. This imbalance is most notable in Midwest and Southern US markets that have few constraints on development.

KK: The logistics real estate market is in the midst of a supply-driven “mini-cycle” characterized by a temporary influx of new supply, followed by a sharp pullback in deliveries beginning in the second half of 2024. This means vacancy will peak in mid-2024 before declining again as reduced new supply combines with accelerating demand, aided by an expected improved economic growth outlook.

How has this changed your outlook for investments in the sector?

BS: Vacancy rates will likely continue to increase in the short term as a record amount of development supply delivers. However, we anticipate the significant pullback in new construction in the past year due to financing challenges will return the market balance over the next three to four years. Logistics investors have now become much more selective in the markets and projects they invest in.

KK: We are confident in the growth trajectory of the logistics real estate industry as well as the relatively high investor attractiveness of the sector relative to other property types. Consumer behaviors and expectations, combined with the quality of our portfolio and the location of our markets near a high-density of consumers, make us very bullish on the future of the sector.

AC: Following a pause in investing, we are now risk-on in the UK, France, Netherlands and Germany. The same will come for the rest of Europe shortly. We are unlikely to see a return any time soon to the ultra-low interest rate regime post-GFC and therefore are more focused than ever on opportunities where we are able to drive income growth during this hold period to generate performance.

CJ: Falling inflation and greater clarity on interest rates will bring more confidence into the market. This year should provide interesting buying opportunities as the bid/offer spreads narrow, whilst there are likely to be more motivated sellers caused by refinancing pressures. I expect that several players that have sat on the sidelines in 2023 will return to the market in 2024.

AP: We expected the market to cool in 2023 and 2024. That slowdown set in more intensely than initially thought, but the more the market slows near-term, the more construction pulls back – a trend reinforced by rising interest rates. Construction starts for logistics projects, falling since mid-2023, are now at 10-year lows. By 2025, few new projects will be delivering, so even a small uptick in leasing would be enough to support a reacceleration in rent growth.

Where are the best opportunities for investing in logistics and why?

CJ: We continue to favor true urban locations for logistics real estate as this is where there is the most acute supply/demand imbalance, with vacancy rates in most of the European submarkets we are active in remaining below 5 percent, while most new development remains unviable.

AP: The market for smaller logistics spaces under 50,000 square feet is very tight in nearly every major US city. Developers are focused on building larger facilities for high-credit tenants, but less is being built for small, blue-collar businesses, leading to vacancy rates below 3 percent for smaller industrial properties. Many larger investors don’t have time to buy these smaller buildings one at a time and so are increasingly buying them in portfolios.

JC: We see interesting opportunities in the major logistics markets across the Asia-Pacific region. The best opportunities often arise when we are the early space provider to address the needs of fast-growing tenants.

AC: We favor best-in-class, new assets in the UK, the Netherlands, most of Germany and some of France – notably Paris, Lyon and Marseille. An ESG excellence approach is critical. With developments more difficult to stack up, it may be another year before new starts get anywhere near the levels we have seen in recent years.

KK: Location is critical. Highly populated markets with properties that are well-positioned to meet consumer needs will continue to be in high demand. It is critical to invest in properties that are built for the future, properties that meet new building standards and assist customers with sustainability goals, with features including solar-ready roofs, electric vehicle charging and LED lighting. It is also important to account for access to utilities and next-generation talent.

BS: Short term, the best opportunities are accessing distressed capital structures and creating business plans for legacy and newly completed assets that allow enough runway to maximize occupancy and establish stabilized cashflows. Long term, new development will continue to be necessary to accommodate evolving operating models for logistics utilization.

Which trends or sub-sectors are you most excited about in 2024?

JC: Secondary assets in prime infill locations, mixed-use industrial, logistics and self-storage complexes.

AP: I am excited to watch the demand drivers for logistics properties swing back into growth mode this year. Late last year, we started to see early signs of improvement in imports and business inventory levels, which spent most of 2023 either flat or declining. If this continues, more goods coming into the country will drive more demand for logistics space to store and sort these goods as they make their way through the supply chain.

CJ: The decarbonization of supply chains will continue to have a profound effect on logistics real estate, both from transport fleets moving towards zero emissions and the corresponding real estate requirements for charging, storage, as well as from enhanced energy efficiency requirements at the asset level.

KK: As consumer demands grow, real estate is almost more important than ever for supply chain planning. Retailers will need to increase their use of logistics space to compete and win in the future of retail, supporting increased levels of e-commerce, omnichannel fulfillment, product variety and resilience. Additionally, logistics facilities are using technology to increase efficiency and productivity, with tools ranging from AI to automation.

BS: We anticipate and continue to track the development and implementation of AI, particularly as it impacts the operations of our tenants, continued value creation through ESG-related measures, and on-shoring/near-shoring initiatives in and around the US.

AC: Given the amount of rental growth in recent years, there are a huge number of opportunities for buyers to implement active asset management plans. We are focusing on markets that remain at historic low vacancy rates and monitor economic and technology trends. It will be interesting to see if heightened geopolitical uncertainty will accelerate near-shoring, with large inward investments recently announced in Europe in strategic industries such as EVs and semiconductors.

Panel

Alistair Calvert, CEO, Clarion Partners Europe

Brent Steele, Chief investment officer, Logistics Property Co

Christian Jamison, Managing partner, Valor REP

Joseph Chan, Managing director, principal – investments, Gaw Capital Partners

Karsten Kallevig, Managing director, global strategic capital, Prologis

Adrian Ponsen, Director of US industrial analytics, CoStar Group