Currently we can talk about Europe's industrial market using some extraordinary numbers. Vacancy rates are at 4.6 per cent - a record low - and take-up has risen 63 per cent above its half-year average. There's also an unprecedented amount of capital targeting the sector: €22.5 billion was invested over the first half of 2021; with year to date volumes already at 64 per cent of the record volume of deals registered for the whole of last year. This weight of capital has helped push yields in prime markets below 4 per cent.

Given this, it is legitimate to wonder what happens next: does this appetite for logistics represent a structural shift based on a reliable, long-term pipeline of investor and occupier demand, or is it a bubble?

It was inevitable that the sector would get to this point given the growth of online retail, but the pandemic accelerated that journey, creating the kind of growth that would have otherwise taken place over a longer period.

But it is our view that the astonishing statistics we are witnessing are the continuation of the structural growth story that has been over a decade in the making and not a reaction to Covid-19, and the worldwide shockwaves this sent through the consumer base and supply chains. The shift in consumer spending towards online, combined with other supply chain considerations such as on-shoring and increased manufacturing, is the driver of investor demand.

There is a lot of capital that has found itself in the sector after being redirected from asset classes that are currently underperforming. However, the current enthusiasm for logistics does not alter the basic fact that this sector has rapidly matured into a stable, long-term investment option.

Headline rents grew by 2 per cent in the last year, and further rental growth is expected due to low vacancy levels. It's this dynamic that makes yields of around 3 per cent defensible in today's market. Meanwhile, the barriers to greater supply - which include difficulty obtaining permission for new buildings and problems sourcing construction materials - are not likely to be quickly overcome. In short, warehouses in Europe cannot be built quick enough.

This isn't to say the sector doesn't face challenges. The acute lack of product - both for occupiers and investors - was identified by our recent European Logistics Property Census 2021. Occupiers are struggling to find space, which in turn means there are fewer assets for investors to deploy capital in to. With such constraints, it's tough to gain access to the market and, historically, this can blur the lines between primary and secondary markets.

Our view is that the sensible strategy is to be bullish for prime assets rather than settling for secondary buildings or locations. Modern buildings have the benefit of having the right technical specifications but crucially the right ESG credentials too, meaning that they are future-proofed for changing occupier requirements.

Growing levels of urbanisation will continue to ensure rising demand for smaller urban last mile facilities and there are a plethora of opportunities for those which have the expertise to repurpose spaces from other asset classes into logistics buildings. Some developers are already innovating by bringing forward the development of multi-storey warehouses. Logistics, as it were, is heading skywards.


Further information

Contact Marcus de Minckwitz

Contact Kevin Mofid

Real Estate Insights Podcast: long-term boom or bubble: where next for the logistics market?

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Savills plc published this content on 20 October 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 October 2021 10:00:06 UTC.