Ask private real estate professionals about the prospects for logistics and most will rave about the growth outlook in a market buoyed by the e-commerce boom.
However, some are sounding a note of caution. While investors continue to pile into logistics, with lenders eager to follow them, there are suggestions values look over-inflated in pockets of the market.
Only this week, PERE was told of a €400 million portfolio of logistics assets in Europe that was close to trading only for the seller to pull out at the eleventh hour because it was convinced it could improve on the 4.5 percent yield it was offered by 50 basis points.
According to CBRE, prime logistics yields in Europe reached 5.3 percent in the first quarter of the year, compressed significantly from the 7.91 percent figure the property services giant recorded in the fourth quarter of 2009. Globally, the firm has seen logistics yields compress from 7.47 percent to 4.99 percent in the same time frame. Already 80 basis points better off than the European prime level, the seller of the €400 million portfolio is after an improvement of 130 basis points.
No other asset class has seen yields compress as much during that time period. Globally, CBRE has seen prime retail yields compress from 5.53 percent to 3.76 percent and prime offices compress from 6.29 percent to 4.2 percent since 2009.
In keeping, investment volumes on a relative basis have been staggering. European investment volumes, for instance, which last year reached €41.3 billion, were up 80 percent compared with 2016, according to CBRE’s rival JLL.
The data is starting to spook investors. Lenders too. At last week’s PERE Europe event, one lender recounted a recent approach to finance a logistics development at an eye-watering 90 percent loan-to-cost ratio. Voicing concern about the leverage, he was met with the argument that it would eventually translate to a 57 percent loan-to-value ratio. “I am not really getting it,” he remarked.
However, uncharted territory statistically is not always a precursor to a bubble market. Sticking with Europe, the region’s logistics vacancy rate was below the 5 percent mark in Q4 2017, down from 6 percent in the previous year, according to JLL data. Further, speculative development accounted for only 24 percent of the 132 million square feet under construction last year – which is down by 1 percent compared with 2016. This year, new speculative supply delivered to the market is expected to slow down, due in part to a scarcity of development land in many markets.
We’ve come to accept that e-commerce represents a sea-change in the retail economy and logistics is a clear beneficiary. Facilities are no longer simply ‘sheds’. They are high-tech elements of complicated supply chains and are, as such, high-value properties.
At PERE Europe, panellists also argued the case for sustainable growth. One said he is not seeing a greater risk premium for industrial logistics, despite this market being in a late cycle. “Bubbles occur when there is not real foundation to demand,” he said.
The credit markets too remain evidently keen to continue backing logistics portfolios. So far this year, investment banks have even launched a couple of logistics securitizations in Europe’s CMBS market, with the most recent deal, issued by Bank of America Merrill Lynch and Morgan Stanley, securitizing a €357 million loan backed by a portfolio of UK logistics properties sponsored by private real estate heavyweight Blackstone.
With historically low yields and high investment volumes, the market is right to ponder the specter of a bubble. But, for now, it remains important to look beyond that and recognize the structural shift in the way goods are stored and transported has pushed the asset class to more of a level pegging with real estate’s traditional prime types. Until a supply-demand imbalance materializes, fearing a bubble in logistics lacks foundation.
Contact the authors: firstname.lastname@example.org and email@example.com