This article is sponsored by Panattoni
While European economies have sickened under the miasma of the coronavirus, logistics property has not only proved resilient, but has thrived as consumption transfers to online channels. Robert Dobrzycki, chief executive officer at Panattoni, ponders how developers and investors can overcome the barriers to entry and collaborate to deploy capital more efficiently in an increasingly crowded market characterized by low supply.
How has covid-19 reshaped the European logistics market over the past year?
After the initial uncertainty, which impacted all types of real estate, it became clear that tenant demand across most of the logistics market was still strong, and perhaps stronger than before. The positive effects of a big push from the e-commerce and data center sectors more than offset the softening of sentiment among traditional retailers and in the automotive sector.
It looks like 2020 was the strongest year ever for us in terms of tenant take-up, which tells a story. Demand in Western European markets was already high because of the ongoing modernization of supply chains, but the further boost that covid has given to e-commerce has made them amazingly attractive.
Physical retailers took less space, and some sought rental discounts on existing buildings while they were figuring out how to shift more business online. But the overall effect on income from logistics property was limited.
Warehouses are frequently strategically vital for retail chains, often the proportion of the space used for e-commerce was still functioning, and we have not seen a lot of outright bankruptcies. Meanwhile, the pandemic has also increased the need for data capacity and storage, so there is increased scope for opportunities in the data center sector.
Another effect of the pandemic has been a mindset adjustment around supply chains. Until recently, there was a sharp focus on driving efficiencies. That will remain to a degree, but resilience and risk of supply have become more important factors in occupier decision-making.
They are trying to shorten their supply chains and to have more spare stock, to be less dependent on one source, or on cross-border supply. To continue to operate through long national lockdowns and travel bans, they need local warehouses.
The pandemic will not last forever, but that mindset will persist because covid has provided a reminder of the risks associated with long, cross-border supply chains. The need to establish warehouses to provide security of supply in each country has created an immediate demand for space. Customers will want to keep that space in the long run to reduce future risks.
There are still pan-European plays going on. But on top of that there is a second layer of demand generated by the country-by-country approach, which probably means customers need 5 to 10 percent more warehouse space overall.
How has the pandemic influenced investor perspectives on the sector?
Any investor looking at real estate right now probably starts with our asset class. That trend was visible already, but covid has accelerated it to an amazing degree.
It became pretty clear early on that industrial and logistics would be the winners in terms of tenant demand, so that would be where capital would be allocated going forward. A wide range of investors were already active in our market. But we are now seeing a new wave of investors, some of them very experienced in other sectors, that did not previously allocate to logistics – or invested very little.
Nobody is very active in retail right now, and it is still unclear how the office sector will shake out, but it is pretty clear what will happen to industrial. A lot more capital has been allocated to other sectors in the past than to logistics, so even a small reallocation creates a lot of additional investor demand.
The issues facing those investors might be regarded as positive ones because they are all associated with high demand and low supply: shortage of space and of land, the difficulties of permitting and of servicing tenant demand quickly. There is much more appetite than there is product around.
Some investors that were very retail-driven are now quickly trying to hedge their position by acquiring logistics. But because they have been buying retail for so many years it is difficult to do that overnight.
What will the investment market landscape look like as Europe recovers from the pandemic?
The trends in terms of tenant demand are so clear that we will see a rush on the asset class, with many more players investing. For the whole market, that situation will represent a steep learning curve.
The managers of logistics platforms like ours will have to think hard about how to be more efficient in harnessing and deploying that additional capital while serving tenants’ needs for international expansion. At the same time, investors new to the asset class will be trying to learn the business while allocating lots of money quickly.
Logistics transactions are not as big as office towers – there are a lot of smaller deals to be done – so capital providers need an efficient way to execute in order to invest. For a few years, the volume and efficiency of the market will be stretched.
“The trends in terms of tenant demand are so clear that we will see a rush on the asset class, with many more players investing”
Development is one of the ways to access the market, but it is hard to create volume quickly, and while tenant demand indicates there should probably be more speculative building, lenders’ limited appetite for that kind of risk will continue to curb development. The formation of strategic partnerships with logistics platform operators and fund vehicles – whether that is a development partnership or a take-out partnership for completed assets, which give aligned and co-investing managers some discretion – are the most likely way forward.
It will be difficult for investors to retain tight control while deploying a substantial amount of money quickly. We also see some investors seeking to acquire seed portfolios, create a management team around them, and then develop and acquire selectively to improve the quality and yield profile of the portfolio.
Have we seen an increased focus on ESG and sustainability in the sector?
There is pressure from several different angles to place much stronger emphasis on ESG considerations. That trend has been evident for two years and the virus has done nothing to slow it down.
Both big customers and investors are demanding ESG and environmentally friendly solutions, so there is a pricing discount attached to any asset that does not take that into account. When you start to hear the biggest global investors say they will not invest in anything which is not environmentally friendly, that has a direct impact on platforms like ours.
Tenant demand for more sustainable solutions has been there for some time, but there is no longer any discussion over who will pay for them. They have to be there because tenant demand, and therefore liquidity, depend on them. ESG is the difference between letting and not letting a building; between selling and not selling it.
All of the major logistics developers are certifying buildings, and we have recently pledged to achieve at least a BREEAM “very good” standard for all the buildings we develop in Europe. Health and welfare factors are also becoming more important, especially for labor-intensive e-commerce businesses.
If a tenant is concerned about being able to access labor, then it is difficult to lease a building. Therefore, developers need to ensure that the location, specification and features of their buildings are attractive to workers.
Panattoni recently marked 15 years in Europe, and you were the company’s first non-American recruit in the region. How has the market evolved over that period?
The shift in the perception of the asset class is amazing. Then, it was last on the list in terms of the asset classes investors were excited about. Now it is first. The understanding of the asset class and its significance is deeper, the market is larger in all the geographies that we operate in and the scale of the individual assets is incomparable.
Today, a 2 million-plus-square-foot e-commerce facility with three mezzanine levels is a €200 million investment. In 2005, we were dealing with transactions a tenth of that size. Meanwhile, there has been convergence between the various European markets.
Whereas before there were a few specialists in each country, today there are quite a lot of big pan-European players in development, investment and brokerage that have a deep understanding of all the major national markets. However, the differences between European countries are still much more pronounced than they are between US states.
That means it is still not easy to roll out a pan-European platform. But if operators and investors can do so, they can benefit from the greater diversification and the exciting variety of different investment plays that the region offers.
Brexit effect: Large Amazon Swindon warehouse to compensate for job losses
Swindon is set to lose around 7,000 automotive-related jobs when Japanese carmaker Honda closes its plant in July. However, that grim prospect was offset somewhat when it was revealed last September that Panattoni would construct a 2.3 million-square-foot distribution center for Amazon in the southern English town.
The development, which has been pre-sold to pension fund manager Legal & General Investment Management for over £200 million ($270 million; €222 million), represents the largest-ever single-asset logistics letting and funding deal in the UK. It has a footprint of 625,000 square feet and will include three further internal structural floors. Completion of the BREEAM Excellent-rated facility is expected in the fourth quarter of 2021.
“The future of the UK industrial market is not manufacturing, but e-commerce-related consumption,” says Dobrzycki. “New production lines for manufactured goods sold in Europe, and also in the UK, are being set up in more cost-efficient locations in central Europe. Brexit has only accelerated that process, but the labor is needed for e-commerce anyway. We are working proactively to acquire sites in other UK locations where manufacturers are shutting down operations, and which have access to a pool of labor.”