2021 Global Logistics Outlook, Part 3 - Industry Outlook
This time we address arising opportunities and challenges for logistics real estate.
This is the third and final part in a series of three blog posts on Cushman & Wakefield’s 2021 Global Logistics Outlook report. Don’t hesitate to read Parts one and two if you have not yet.
The strength of structural drivers promises to fuel demand for space in every market for the foreseeable future, accelerated by both business and consumer reactions to the pandemic. The ability to create more supply in order to plug gaps in global and regional supply chains will prove crucial.
Indeed, the combination of strong demand and supply chain reconfigurations to enhance efficiencies puts a sharper focus on land availability for new development. This will be a fundamental issue that needs to be addressed for real estate to meet the future needs of the sector.
The investor outlook, therefore, is continued strong capital and income returns, with the latter likely to increase in contribution as logistics land values increase, implying faster growing rents.
Bart Vanderhoydonck, Head of Industrial Agency, Belgium: "With the current rise in land prices and in construction costs, rental growth is expected to be around 5- to 8 % in 2021-2022."
This week we examine EMEA and Belgian leasing market dynamics which both demonstrated exceptional resiliency in 2020.
Leasing market dynamics
The logical outcome of the keys drivers of growth affecting the logistics sector (outlined in our previous post below) has been strong global demand for warehousing in 2020.
One of the main differentiators from one region to another has been supply conditions, which are differentiating landlord- from tenant-favourable markets.
The EMEA logistics sector is grappling with supply constraints as the GFC resulted in a pullback from excessive speculative developments. Cautious by nature, Belgian developers have certainly provided a case in point. Indeed, post-GFC to this day, only 30% of all surfaces added to the Belgian stock have been developed speculatively, adding up to approximately 1.9 million square metres, against 4.5 million square metres of build-to-suit schemes.
Belgian logistics - Turnkey/prelet vs speculative deliveries post GFC (2009 - Q1 2021)
The challenge posed by the low level of speculative developments in the face of abundant demand has been further compounded by low and downward trending vacancy levels across most of EMEA. This trend very much applies to Belgium where the availability rate for logistics was in the region of 1.60% at the end of Q1 2021, leaving occupiers with very little choice – if any at all – when on the hunt for new spaces.
Bart Vanderhoydonck, Head of Industrial Agency, Belgium: "We are seeing a lot of letting transactions happen in both the Genk and the Ghent areas. Availability of land at an attractive price is one of the drivers behind this success. In the more traditional regions like Antwerp or Brussels, land has become very scarce and expensive and therefore hinders the further development of traditional logistic warehouses."
H2 resurgence in activity
The lockdowns experienced by many countries during the first half of 2020 impeded on transactional activity, and were followed by a record European-wide resurgence in activity during Q3 and/or Q4. Belgian take-up numbers underpinned this trend emphatically in Q4 2020, the top quarter for take-up over five years.
Belgian logistics - Quarterly take-up and number of deals (RHS)
The result was strong rental growth over the year. Unsurprisingly, this is where Belgium bucked the trend. Indeed, Belgium is notoriously stable/conservative as far as (prime-) rents are concerned. This is one of its USPs compared to its more expensive neighbours from an occupier’s point of view.
Outlook for rental growth
Markets (among which Belgium) where scarcity of land and supply is a constant challenge, see growing investor interest (as the below investment volumes chart attests to) which has compressed yields in recent years while office yields have held comparatively steady - more on yields per to asset classes in our post on COVID-19 and the Belgian Logistics Market.
Invested volumes (EUR m) and number of deals (RHS)
Prime Yield evolution
In markets where higher land values have reached breaking points, there is a greater likelihood that increases will be passed on to tenants in the form of increasing rents. Indeed, as land supply in Belgium wears thin, we note an upside on rental forecasts for the first time in years.
Prime rents and forecasts EUR/sq m/year
Having fully set the scene by looking at drivers and leasing market dynamics, the third and final part of this series of articles will examine arising opportunities for logistics real estate.
Make sure to check back in a couple of weeks!
This week we present our main takeaways in terms of key drivers of growth and their applications to the Belgian logistics sector.
The logistics sector is being propelled by a range of drivers which, although are global in nature, have differing levels of impact at the local market level. We examine some key takeaways from the report.
Demographics and urbanisation
In Europe, a key demographics issue revolves around shrinking working-age populations as a result of an ageing population. This is certainly the case in Belgium and threatens to exacerbate a complicated labour situation in the sector.
Bart Vanderhoydonck, Head of Industrial Agency Belgium: "The availability of a skilled and flexible workforce is a key element in the logistic sector. Flexibility around night picking in warehouses, which is extremely important for e-commerce retailers, is not yet fully authorised according to Belgian law and this is one of the main reasons why big players like Amazon of Zalando don’t have an XXL warehouse in Belgium yet."
Cities will continue to play an essential role in the economic fabric in all examined regions and will also therefore most often remain the final links in the supply chain. As a result, logistics solutions will search for more efficient ways to serve large population areas. More on increasing the efficiency of the final link in the supply chain, make sure to read Cushman & Wakefield’s Last Link report.
Addressing labour issues and ESG through technology
COVID-19 has demonstrated the use of technical innovations in the industrial sector such as automation in order to ensure productivity.
In Europe, ESG1 concerns are fast becoming paramount in the real estate sector which is reviewing its role in sustainability. In Belgium, several REITs have recently started to publish ESG reports.
Further to the above point on automation and labour issues, technology has a role to play as a direct result of ESG priorities, via smart buildings for instance. Automation can also be helpful where reshoring production is concerned, as well as improving employee safety and wellness.
1 Environmental, Social and corporate Governance, which include climate and carbon neutrality goals.
E-commerce expansion and growth
E-commerce has been an especially hot topic in the current logistics environment following a standout 2020 due to lockdown restrictions.
Consumers flocked towards the sector even in a traditionally more sceptical Belgium. Exponential growth in transport, logistics and warehousing sectors has ensued.
As far as the future is concerned, two key challenges are identified:
- Fast and efficient last mile delivery
- Managing increasing product returns
These challenges produce different real estate needs where building size, location, quality etc. are concerned.
Trade policy, connectivity through infrastructure and supply chain resilience
The flow of goods has been disrupted worldwide through a series of factors, including Brexit in the EU.
For some time now, the EU has been engaged in the TEN-T European regional infrastructure initiative which aims to reduce transportation-related carbon emissions and can help break down some disruptions as well as increase flow of goods efficiency.
Furthermore, we expect continued 3PL growth, as outsourcing to these operators affords enormous efficiencies and greater flexibility, a priority in unpredictable circumstances.
Indeed, many 3PLs have large enough geographic footprints to offer nimbleness to manoeuvre supply chains in a fast-moving global landscape. 3PLs’ increased standing has furthermore been boosted by recent trend of M&As in the sector.
The final part of this series of articles will examine opportunities for the commercial real estate sector which can result from these drivers. Beforehand though, we will set the scene by taking a look at recent market performance and dynamics.