Unlocking opportunities in european logistics

The European economy continues to expand at a steady pace and although market volatility persists, the environment remains supportive of logistics real estate investment. The sector is supported by strong fundamentals and continued rental growth and therefore remains a natural preference for investors. Despite this, new logistics supply is struggling to keep up with the pace of occupier demand. With positive demand side dynamics and less supply coming online, now is an opportune time to enter the logistics development market in Europe.

Although the economy is still in recovery mode, three key secular themes are expected to underpin demand for modern logistics space; i) The continuation of e-commerce tailwinds; ii) The reconfiguration of supply chains and UNLOCKING OPPORTUNITIES IN EUROPEAN LOGISTICS nearshoring; and iii) The need for operational efficiency and sustainability. These themes hold significant potential for driving demand for modern quality logistics stock which strongly favors a development[1]led strategy.

Future growth in e-commerce is expected to drive demand for logistics space. For each incremental $1 billion in growth in e-commerce sales, there needs to be an additional 1.25 million square feet of logistics space. On this basis, demand for over 460 million square feet of additional logistics space is predicted in Europe over the next 5 years.1

Demand is being catalyzed by the reconfiguration of supply chains. The holding of more inventory to protect against supply chain disruptions, continues to drive logistics demand. Related to this trend, is a move amongst some logistics users to nearshore activities in Europe. The rising costs of labor and transport, geopolitical factors, and social impact, amongst others, are driving businesses to examine their supply chain strategies. As a result, European businesses are increasingly considering nearshoring of production and supply.

Occupiers’ preferences also point toward modern stock. Modern, often larger facilities, are better equipped to integrate automation and robotics, resulting in superior operational efficiency. Tenant expectations and environmental regulations also necessitate a focus on newly developed logistics space.

RESILIENT MARKET FUNDAMENTALS

Logistics demand has returned to prepandemic activity levels. European logistics take-up totaled 21.2 million sqm over the 12 months through Q1 2024. While this was below the 2021 peak figure, it is still above the previous decade average. The moderation in leasing activity has only had a minor impact on the vacancy rate which increased to 4.3% in Q1 2024 (See Exhibit). Completions during the first three months of 2024 marked the lowest quarterly figure in over twelve quarters and space under construction decreased by over 25% year-over-year.2 With less supply coming online in 2024, this could be an opportune time to enter the market particularly with construction costs softening, rents continuing to grow, steady occupier demand, tenant incentives waning, and yields stabilizing.

Healthy occupancy levels, and a compelling spread between the cost of new development and the market value of stabilized assets, provide a compelling investment opportunity. Although the market has matured over the last decade, there is further to go with Europe providing one-third as much warehouse space per capita as North America. New, state-of-the[1]art logistics facilities that meet occupier requirements including higher clear heights, deeper truck courts, better site maneuverability, and a greater focus on sustainability and worker welfare, will have characteristics that improve second[1]generation renewal and re-letting probability. As ever, site selection is critical, but now is arguably a good time for development and the next wave will be a good vintage.

1 Affinius Capital Research and Statista. E-commerce Europe, Accessed June 24, 2024
2 CBRE, Q1 2024