For several years, logistics has been a very popular asset class for both managers and investors. There are now signs that what was a seriously hot sector is starting to cool off.
Since the start of 2018, PERE data shows multifamily is the only sector to have had more capital raised for it than industrial and logistics. While $98.4 billion has been raised for the former, industrial and logistics-focused funds saw $77 billion.
The likes of office and hospitality, by contrast, have raised $19.2 billion and $15.3 billion, respectively. Logistics remains a big beast in the real estate jungle.
While PERE’s figures show that, at $18.6 billion, less capital was raised for industrial and logistics funds in 2022 than had been raised in 2021 ($24.2 billion), it was at least $4 billion more than in any other year. There were 19 funds closed in 2022, the fewest since 2016, but those funds are getting larger – the average size last year was $980 million.
The total capital raised for funds specifically targeting the sector between 2018 and 2022 stands at just over $77 billion. Of that, $33.9 billion has been raised by US-based managers, with $30.2 billion raised by Singaporean managers such as GLP.
The most-favored strategy is value-add, with opportunistic and core-plus funds following. Core funds, by contrast, have raised around a quarter of what core-plus funds, the third-most popular, have raised from 2018-22.
Our 2022 figures have remained provisional and are being finalized. Investors are also updating their own assessments.
According to PERE’s Investor Perspectives 2023 Study, 60 percent of investors say their organizations are favoring last-mile logistics, with less than a third preferring large distribution centers and 10 percent opting first for manufacturing facilities.
Appetite for logistics clearly remains strong, even if it is not as strong as it once was – or not uniformly so, at least.
Easy does it
Enthusiasm for logistics has been particularly strong for the past few years and the structural drivers behind the sector remain compelling. However, it is hard to escape the conclusion that many strategies overstretched.
With cap rates at 3 or 3.5 percent but the cost of financing shooting up, a reckoning is unavoidable; for many, it will be a nervous wait to see whether underwritten rental growth stays on the right side of rising interest rates. That said, for those with new capital to deploy in the space, there are undoubtedly going to be opportunities to make new investments. So, has logistics peaked or has the asset class just hit a bump in the road?
“We will continue to see positive net absorption leasing activity”
Jason Tolliver
Cushman & Wakefield
Jason Tolliver, logistics and industrial co-lead for the Americas at broker Cushman & Wakefield, expects net growth of 237 million square feet of US logistics space in 2023, with a further 200 million next year. There was 460 million square feet added in 2022, which is down from 550 million the year before but otherwise comfortably ahead of any previous year.
“Although the rate of growth will likely be half those all-time historic highs, we will continue to see positive net absorption leasing activity,” he says.
In an environment where supply is increasing but demand is also staying high – Michael Neuman, head of industrial for the US and Latin America at investor Ivanhoé Cambridge, notes that some markets, such as California’s Inland Empire, have “almost no vacancy at all” – quality assets will continue to prosper.
“Now, more than ever, is the time to make sure you have the best-quality assets, because those will thrive in any market,” says Peter Ballon, global head of real estate at investor CPP Investments.
Some strong assets may become unexpectedly available. Developers could find themselves unable to deliver real estate that was first envisaged when financing costs were much lower. Refinancing costs will also affect properties which have previously flourished.
“Some situations will need to be refinanced in the next 18 months and won’t be able to solve their debt obligations. While they are not distressed as such, they will need to sell,” says Neuman.
The road ahead
The logistics sector may not hurtle forward at the same speed as it was achieving a year or two ago, but nor has it hit a dead end. Similarly, to aid the planet’s longevity, and our presence on it, logistics real estate is embracing sustainability – even if, again, it is not always with the same gusto as was seen in recent years.
This elevation of sustainability is no small task. Data is one challenge. Many tenants do not collect consumption data, for example, which makes it difficult for managers to monitor and disclose their assets’ emissions.
“Some situations will need to be refinanced in the next 18 months and won’t be able to solve their debt obligations”
Michael Neuman
Ivanhoé Cambridge
Another significant challenge is the way energy prices spiked in the wake of Russia’s ongoing invasion of Ukraine, which began in February 2022. One of the many lessons from the global financial crisis of 2007 was that corporate priorities shifted and sustainability slipped down the agenda.
There is reason to believe that we are living in times which are sufficiently different, however. “It is important to remember that sustainability is now playing a fundamentally different role in corporate strategy,” says Dragana Marina, sustainability research lead for continental Europe at CBRE. “It is so embedded into market practices that you can see it in all elements of the corporate strategy.”
Sustainability is a moral imperative, not just a financial one. The cost of giving up appears far more expensive today than it did a decade and a half ago. Sustainability, like logistics as an asset class, is too important to turn away from, even if 2022 has made it a little more difficult to race ahead at full speed.
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