As we enter the third year of the covid-19 pandemic, the demand for logistics space is greater than ever. According to JLL’s 2021 survey, The Future of Global Logistics Real Estate, 74 percent of respondents expect demand for logistics space to grow over the next three years, even when considering recent elevated levels.
The ascent has largely been driven by a rise in e-commerce, which increased significantly throughout the pandemic as people across the world were forced to stay inside. Strong growth for warehouses and distribution facilities is also forecasted. As a result, investors are realizing the significance of logistics now more than ever, with many prioritizing this sector going forward. In 2021, logistics accounted for 18.1 percent of all real estate funds raised, almost double the level in 2018. This is a trend that is not slowing.
With logistics on the rise, we highlight the key trends in the sector.
Demand exceeds supply
To keep up with rising consumer demand, developers need to build faster and more efficiently. However, at the moment, this is not proving to be feasible: “Supply [of new industrial assets in Europe] is already at record low levels and, at the moment, we simply cannot build warehouses fast enough,” says Kevin Mofid, head of UK & EMEA logistics research at Savills.
Mofid adds that the increase in demand is causing issues along the supply chain: “For developers, this is a problem because of the cost implications and construction delays; but for logistics investors, this is not a bad thing. It’s helping them increase the value of warehouses they own. Meanwhile, occupiers are competing for the best buildings and paying higher rents or committing to a longer lease.”
Tenants are desperate for space
Due to ongoing supply shortages, it is not unusual for tenants to be fighting for the same space. Jason Tolliver, Americas logistics and industrial investor lead at Cushman & Wakefield, says: “There are very few options in the market, so tenants do not have the luxury of taking their time. If you are going out and surveying the market, you are maybe lucky if you have five buildings.
“By the time you set up the tours, you may be down to three, and if you dilly-dally while you tour them, you are probably out of all of those options. It is being prepared and proactive instead of reactive.”
Ben Bannatyne, president of Prologis Europe, adds that ease of doing business is a major factor when deciding who gets the space. “You might have two of your good customers fighting for the same space; it comes down to someone signing first, timing, who is easiest to deal with,” he says.
The right asset is essential
Finding the right asset in the right location is key, whether a new build or repurposing old assets. Leslie Lanne, executive managing director at JLL, says logistics is becoming increasingly saturated, which can make it difficult for newer players: “There are so many new entrants and so much competition.”
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She says repositioning is a good way for investors to get in on the action: “Not all of them want to do ground-up development, but everyone can get their arms around a strategy to reposition an existing asset.”
Laurie Lagarde, head of European logistics at CBRE Investment Management, agrees: “They have no choice if they want to buy something in the logistics segment. There is too much capital in the market, and there are fewer off-market deals available because sellers can get better pricing from high competition on the market.”
Asian players are getting bigger
One market in which logistics has really taken off is in Asia – in 2021, fundraising for logistics in Asia-Pacific reached $4.7 billion, higher than in Europe ($3.3 billion) and North America ($2.1 billion).
Alex Tse, managing director at BPEA Real Estate, says: “The lockdowns and social distancing measures expedited the existing shift in consumer behavior and distribution channels, which really accelerated the development of Asia’s logistics market. We don’t expect this transition to slow down after covid-19.”
The players in this market have a desire to scale and position themselves for what they call the ‘new economy’ – life sciences and data centers. Investors are also attracted to APAC because of the region’s rapidly growing digital adoption rates.
“We believe institutional investors will continue to be interested in Asia’s logistics sector, particularly in South Korea, Australia, Japan and China in 2022,” says Steve Kim, head of South Korea at LaSalle Investment Management. “The continued growth of the e-commerce sector correlates with our investment strategy to both develop and acquire modern logistics facilities in these markets.”
ESG is making headway
ESG was one of the biggest talking points for all asset classes throughout 2021, with most developers looking into carbon-neutral or net-zero strategies. There is a huge opportunity for logistics to make a change, considering the sector does not have the best track record when it comes to environmental impact.
Repurposing buildings is one way investors can improve their carbon footprints: “If we are buying to continue to use a building, we really do look at sustainability,” says Prologis’s Bannatyne. “Upgrading a 20- or 30-year-old building can quickly become pretty uneconomical, and sustainability will become an even bigger issue with certain buildings effectively becoming obsolete unless you can upgrade them sufficiently.”
Logan Smith, head of European logistics at Hines, argues that older buildings offer both a challenge and an opportunity for meeting ESG objectives. “There are some advantages to reusing and repositioning buildings. When you think about embedded carbon in concrete and steel, there is real value to buying older buildings and investing the capex necessary to improve them, strictly from an environmental standpoint.”
Supply chain is adapting
Because of covid-19, the supply chain is moving from a ‘just in time’ to ‘just in case’ model, which means more warehouses are needed to store a greater stock of goods. This shift has been fueled by a desire to increase inventory and avoid shortages if the world faces a similar crisis in the future.
However, this has disrupted the supply chain: “Supply chain disruption is going to last probably another 18 to 24 months. This will put temporary pressure on the logistics space,” argues Alistair Calvert, chief executive of Clarion Partners Europe.
“While we don’t assume there’s going to be further yield compassion, we still think that logistics will be a relative outperformer for quite a long time yet, given the rental growth that we’re seeing and expecting.”
Expert musings on logistics
“We have a saturation of players looking to partake in the industrial arena”
Leslie Lanne, executive managing director, JLL
“Because cities have expanded, they tend to be closer into the urban area of conurbations”
Logan Smith, head of European logistics, Hines
“Occupiers are knocking on our door and saying, ‘Please, we need space’”
Laurie Lagarde, head of EMEA logistics, CBRE Investment Management
“It is a landlord-favorable market the whole world over”
Jason Tolliver, Americas logistics & industrial investor lead, Cushman & Wakefield
“One of the Modi government’s most significant achievements has been to move forward on transport and connectivity and to deliver infrastructure projects”
Rushabh Desai, chief executive, Asia-Pacific, Allianz Real Estate
“Because of lockdowns, there’s been a massive increase in demand for goods, but we have seen labor shortages”
José Pellicer, head of investment strategy, M&G Real Estate
“Many manufacturers with a European presence are looking to nearshore their supply chain and evaluate selected countries in Eastern Europe”
Adrian Karczewicz, head of divestments CEE, Skanska Commercial Development Europe