Spotlight on the European Industrial and Logistics sector
According to Colliers’ Global Investor Outlook (GIO) survey results, published in November 2023, investment sentiment was beginning to gradually turn more positive in the final quarter of 2023. The 2024 GIO is the fourth annual edition that Colliers has published. GIO synthesizes the views of Colliers Capital Markets experts and the results of a survey from international investors. The findings and opinions featured in the report are shaped by their responses.
Focusing on the industrial and logistics (I&L) sector
GIO reported that the asset class was well primed to capitalise on the improving sentiment. Our GIO survey results and the rising market share of transactions depict how strongly favoured I&L is by a broad range of investors. This is with good reason. A significant re-pricing of I&L assets over the last 18 months, combined with strong market fundamentals supports a robust income and returns profile across multiple locations and asset types. GIO predicted that lower interest rates/costs of capital in H2 2024 will further support this and accelerate a solid uptick in transaction activity by the year-end of 2024.
The EMEA perspective on the industrial and logistics market
The European I&L market entered the cyclical correction from a position of strength with balanced underlying fundamentals. Global trends in trade and manufacturing including re-shoring and near-shoring to various parts of EMEA continue to drive demand for manufacturing and distribution facilities in addition to the main driver; e-commerce growth. The gradual shift to omnichannel shopping has continued to support the need for various forms of logistics space across EMEA. However, despite this underlying strength, recent quarters have witnessed a softening in market conditions for occupied space. This is not just due to reduced demand as occupiers take stock on the rate of their growth targets, but also due to the lack of modern suitable space to meet occupier needs, particularly around ESG. It is notable in many European markets particularly near densely populated centres in all size bands that supply is not able to keep pace in the medium term, and is one of the reasons why we saw 8.9% (y/y) headline rental growth for H2, down from 13% (y/y) for H1 2023.
The overall vacancy rate in EMEA’s industrial and logistics sector has increased from a cyclical low of 3.0% in 2022 to 4.4% in Q4 2023. This shift is however being counterbalanced by a general slowdown in development activity. As a result, Colliers projects a peak in vacancies in the upcoming quarters, which will lead to the predominantly landlord-favourable market being maintained.
Sustained appetite for I&L is leading to partnerships
The limited supply of good quality I&L products is providing a solid backdrop for values, leading to more investors to explore specialized sub-sectors connected to the evolution of e-commerce and supply chains, including cold and dark storage, light industrial and manufacturing. Additional protectionist industrial policies and the increasing cost of energy will encourage more onshoring and nearshoring of operations.
Many investors feel I&L assets provide greater stability and growth potential, given its strong underlying fundamentals and structural drivers. Faced with higher borrowing costs and the need to access limited product to purchase, we are seeing investors pool funds and form alliances and joint ventures with operating partners and developers who have the expertise to navigate specialist or sub-sector market strategies to satisfy their No1 requirement for I&L exposure.
Projections for the coming quarters of 2024
The relative rise in construction costs, and rising finance costs, together with yields moving out had meant many developments became unprofitable until recently – and the result was a pause or slowing in construction. As a result, Colliers EMEA anticipates a 12 to 18-month delay in new stock being completed in many markets once the existing pipeline is absorbed. This is against the backdrop of a potentially improving economic situation, with reducing interest rates, lower financing costs and more yield stability when the real estate fundamentals of the industrial and logistics sector still remain. When the economic tide turns it is not inconceivable for us to see some yield compression in key locations together with steady rising rents.
According to our latest I&L 12-month outlook, landlord-oriented conditions are expected across the majority of EMEA markets by mid-2024. As a result, city warehouses anticipate further rental growth in 65% of markets, while larger logistics and distribution spaces expect growth in 61% of markets, according to our latest research.
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