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European Logistics outlook: will the engine keep running?

by | Feb 22, 2018

All the main measures of European logistics property performance broke records in 2017. The combination of record-high construction volume and a record-low vacancy rate was the most striking element. Will the boom continue into 2018?

With the major drivers of logistics performance still in place, we are inclined to say yes. CBRE has identified three key factors that are driving occupier demand: economic growth, a shift to online shopping and a maturing (and increase in scale of) the logistics industry. The latter two are structural factors which are in their initial stages and are expected to generate further demand for distribution space. Economic growth is cyclical, but the current upturn in Europe still seems fresh, and, as explained in our outlook reports and house view, we expect the cycle not to turn before well into 2019.

2018, therefore, looks set to be another bumper year, but growing capacity constraints might throw a spanner in the works. With hardly any portfolios left on the market, investors will increasingly be facing a lack of real estate to buy, which might drive asset prices further up, and more rapidly than previously forecast. Simultaneously, occupiers and developers will be battling a lack of land and labour, and rapidly rising construction costs. The latter does not only apply to land prices, but also to material costs and constructor fees.

These rising costs are expected to put a brake on development and push rents up further. With an average annual growth of nearly 3%, prime logistics rents performed well in 2017, but a higher growth rate is expected for 2018. This is good news for investors and provides comfort as we head into a period of higher interest rates and, consequently, higher yields.

One side effect might be the emergence of new logistics hubs. As land and labour are becoming scarce, developers and occupiers will be compelled to look for nearby locations that are not yet profiled as logistics centres, but nonetheless have a good accessibility and a labour pool with the skills to manage a modern distribution operation. Brownfield redevelopment is another (albeit costly) solution.  But in urban environments with a strong need for new logistics space it’s increasingly feasible. New construction in Germany, for example, is already occurring on brownfield sites to a significant extent.

Retailers and logistics service providers will keep looking for ways to combine quick access to the customer with an efficient warehouse network. Demand for cross-dock types of city depots, and for existing urban industrial property, will grow further to respond to pressure on the ‘last mile’ resulting from growing sales volumes, growing cities, trimmed warehouse networks and shorter delivery times. We expect the first steps towards an integrated (re)development of distribution centres and other urban land uses– most importantly retail, but also office and residential – to be taken. For example in Dublin the opportunity is being taken to add higher valued functions to an industrial zoning.

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