Thursday 19th Oct 2017 - Logistics & Supply Chain

The big squeeze

Rent levels across Europe should be rising with growing demand for space both in big box locations and in urban centres but all is not what it seems. Liza Helps reports…

This article first appeared in Logistics & Supply Chain, December 2016.

Occupiers across Europe are finding securing space is difficult as there has been very little development in the past few years. Those looking to source large sheds for fulfilment are having an easier time than those looking to move into urban logistics.

JLL’s latest research sees take-up across Europe in the year–to-date at 12.8 million sq m, some two per cent ahead on the same period last year and while development itself has increased 25 per cent in the same period, because of the growth in demand for space, vacancy rates have actually reduced.

“Vacancy rates continue to edge down across Europe and the European aggregate is estimated at around six per cent at the end of Q3 and further trending downwards,” says Alexandra Tornow, associate director of EMEA research at JLL.

Machiel Wolters, head of CBRE industrial & logistics research, says: “While the development pipeline has gotten large almost everywhere is build-to-suit or else pre-let and there even a number of cases where a specialist project has been announced with a tenant found before a site is located – a product of tight market conditions.”

Rent levels across Europe should start to increase in these circumstances but all is not what it seems. “Vacancy rates are as low as can be remembered,” says Andrew Gulliford of logistics investor/developer SEGRO, “and availability remains tight across all logistics sectors.”

“And while there is rental growth in certain pockets, on the big box side it is limited because there is ability for a supply response.”

Wolters agrees: “Where it is easy to secure land for development there is no rental growth, whereas in markets where there is a land constraint making it more difficult to develop, we see rents going up making it a mixed picture across Europe.”

This is further confused by that fact that many developers are able to make a profit on a scheme without actually having to do anything because the investment market is driving up the capital values of logistics properties – all the developer has to do is get a tenant thus the developer can be very competitive on rents. These rents are frequently lower than those to be found on existing standing stock.

“This is making it cheaper for occupiers to sign for a new project than to stay in an existing one,” notes Wolters.

The reason for the increased investor interest is the fact that the drivers of logistics demand are changing the very nature of the supply chain and resulting in a sustained demand for more space which for the time being seems to be continuing unabated even though the economies in individual countries are barely growing. Investment in logistics property is seen as a safe bet.

According to Alexandra Tornow the continued demand for logistics space is the result of three major drivers; technology, right shoring – the placement of a business’ components and processes in localities and countries that provide the best combination of cost and efficiency – and urbanisation.

“To meet these needs, particularly those of technological innovations such as e-commerce, there has to be a lot of network realignment to make operations future-proof. That frequently involves the take up of new modern space.”

More than two fifths (44 per cent) of property-focussed institutional investors believe that the logistics sector will present the biggest European real estate investment opportunity over the next 12 months, according to new research by the real estate investment platform BrickVest.

Such sentiment was the main reason behind the biggest European real estate deal of the year with specialist pan-European owner, developer and manager of logistics properties P3 Logistics Parks being acquired by GIC, Singapore’s sovereign wealth fund, for €2.4 billion from TPG Real Estate and Ivanhoé Cambridge.

P3 has a 3.3 million sq m portfolio, which includes 163 high quality warehouses, in 62 locations, across nine countries and has a land bank representing up to 1.4 million sq m of development potential. At present it has 11 new sites under construction, with 300,000 sq m of approved development scheduled by the end of the year.

Lee Kok Sun, chief investment officer at GIC Real Estate says: “We believe P3’s strong growth will continue given its diversified, income-producing portfolio and substantial land bank. We are confident of the long-term potential of the European logistics sector, and look forward to expanding this attractive platform.”

City logistics

While rents therefore remain stable for larger build-to-suit fulfilment centres the same cannot be held true for city logistics. Peter Kunz, head of industrial & logistics Germany at Colliers International says: “The rapid growth of e-commerce in connection with the increasing demands customers are putting on delivery services is further enhancing the significance of downtown [urban] logistics. Current mega-trends such as same-day and same-hour delivery are posing new challenges to logistics and retail companies. As a result, these companies are optimising their delivery processes for even faster delivery to their customers.” The result is the acquisition and development of urban depots and delivery centres.

Just recently, e-commerce heavyweight Amazon launched its new fast-delivery service Prime Now in Berlin and Munich, for which it set up small distribution centres in downtown locations. In November 2015, Amazon opened a 7,500 sq m distribution centre in Olching near Munich to meet growing demand for next-day and same-day delivery. The new city warehouse is Amazon’s third logistics location in Greater Munich.

Courier, express and parcel service providers have also recognise the increased demand in Germany for logistics centres located near cities. For example, Deutsche Post DHL is currently building a 7,600 sq m mechanised distribution centre at SEGRO Business Park Düsseldorf-Süd to ensure quick delivery in Greater Düsseldorf and reduce delivery times.

The demand poses a problem; Gulliford explains: “Inner urban logistics development is very much a new phenomenon therefore it has to be development led. Basically there is not a lot of it and it takes a bit of time to grow.

“In the inner urban environment we have seen definite rental growth. About 18 months ago occupiers were looking at €5.90 per sq m now they are looking at €6.50 per sq m [in Germany].”

Guy Gueirard, director of EMEA Logistics & Industrial at JLL adds: “Getting space is challenging whatever the size required. But with smaller assets in urban environments, you are dealing with a more fragmented land-ownership as well as brownfield sites and refurbishment.”

Increasing delivery volumes combined with the goal of being able to offer customers even faster service will further exacerbate demand for logistics space and reduce the already limited supply of space in urban areas. New, modern downtown logistics properties are in very high demand but scarce. As a result, logistics tenants are increasingly focusing on stock properties, which is pushing up stock property prices.

The scarcity of available space calls for flexibility and creativity to effectively integrate small-scale logistics into large cities.

Wolters says “In today’s market deliveries are expected in a smaller time frame than ever before, and with increased competition, suppliers need to meet this demand at its accelerating pace to succeed. Building vertical storage offers the most efficient and cost effective solution and we anticipate this trend will continue across Europe.”

Kunz agrees: “This could result in demand for an entirely new type of logistics property. In Japan and Hong Kong, for example, logistics are carried out in multi-functional, multi-story logistics properties.”

Poland

Ozarow in Poland is one of a series of logistics sites acquired by CBRE Global Investors on behalf of its investors. The ‘Hillwood Portfolio’ consists of four standing logistics parks in Poland totalling 220,608 sq m. The vendor was Hillwood. Ozarow I is a 12,460 sq m warehouse some 15 km west of Warsaw. Ozarow II – a multi-let industrial asset with a rentable area of 29,713 sq m. CBRE Global Investors has also agreed to acquire from Hillwood a pipeline of projects currently under development. These consist of two new parks and two extensions in Poland totalling 134,165 sq m and two new developments in Germany totalling 71,684 sq m.

The Netherlands

Gramercy Property Europe has acquired two logistics sites, one in Tiel and one in Amsterdam, totalling some 30,000 sqm, for about €18 million. The 20,600 sqm Tiel warehouse is let to the Dutch subsidiary of the Swedish multinational clothing retail company H&M Hennes & Mauritz until 2040. The Amsterdam asset, let on an existing nine year lease to Hulshoff Group, totals some 9,000 sqm, with an additional 435 sqm of office space.

Get Weekly Logistics & Supply Chain News
Get Weekly Logistics & Supply Chain News
Thank you for your subscription