As companies have restructured to squeeze costs out of the supply chain, their focus has inevitably turned to how best to balance costs of labour, transportation, communication and process management. The development of third-party logistics providers has brought a new professionalism to the sector and driven companies to reconsider their logistics strategies.
The result has been a revolution in logistics provision, with rapid development of new models of distribution, including hub-and-spoke regional distribution models and centralized coordination rather than physical centralization. Most important, there has been a dramatic increase in new facilities, albeit faced with a shortage of suitable sites, as corporates reconfigure their logistics models.
Jones Lang LaSalles European logistics report published at the beginning of October showed that occupier demand for European distribution warehousing remained buoyant during the first half of 2008 (the period covered by the report). Indeed, occupier demand was 10% higher than in the first half of 2007 and just 6% short of the record volume recorded in the second half of 2007.
Figures from CB Richard Ellis show a similar relative resilience for the logistics market compared with other parts of European real estate. The commercial real estate adviser notes that against a background of generally weaker activity in European property investment, turnover in the industrial market in continental Europe was only 3% lower in the first half of 2008 than in the same period last year.
CBRE also notes that industrial rents in Europe are relatively stable compared with other real estate sectors. The advisers EU-15 industrial prime rent index fell by 1% in the third quarter of 2008 the second successive quarterly reduction although the year-on-year growth rate still remains positive at 0.4%. Its EU-10 industrial rent index, covering central and eastern Europe, remained stable in the third quarter, up 7.3% year on year. Reflecting the trend seen across other European property sectors, industrial yields rose further in the third quarter, with the EU-15 industrial yield index up by more than 20 basis points to 7.1%.
Behind the stability of the logistics sector are several long-term themes. "The continuing strength of the logistics and warehousing sector is being driven by requests to reduce logistics costs," explains Alexandra Tornow, head of European industrial research at Jones Lang LaSalle. "As a consequence, major relocations of warehousing capacity are occurring and there is increasing outsourcing creating higher demand."
Large retail chains are creating new decentralized distribution models and internet and discounting companies are growing, further increasing demand. Inevitably, many western European markets have had a head start on this trend and are consequently mature. "The strongest growth in demand for logistics and warehousing is in central and eastern Europe as retail and industrial warehousing infrastructure is being modernized," says Tornow. "A similar trend, though on a lesser scale, continues to occur in southern European countries, such as Italy."
Although Jones Lang LaSalles report only covers the first half of the year, there is plenty of anecdotal evidence that occupier activity slowed substantially in the third quarter as weakening economic growth leads to deteriorating market sentiment and increasing uncertainty among occupiers, according to Tornow. "We expect trade volumes to decline further," she notes. "The occupier market will not disappear because of underlying structural trends."
Speculative activity dries up
Although there are strong structural reasons why occupier demand for logistics and warehousing real estate will continue to grow, total direct investment in warehousing property was 38% lower in the first half of 2008 than in the same period in 2007. However, that sharp fall should be seen in the context of a 44% decline recorded across investment in all commercial property sectors.
The picture across Europe is far from uniform. The UK, which recorded 940 million of industrial investment activity during the first half of the year, lost its number one spot as the most active European industrial investment market. Germany which had the highest volume of logistics investment activity at 1.1 billion and third-placed Spain both achieved increasing investment volumes during the first half of the year, along with some smaller markets such as Finland and Italy. Spains volume of just under 600 million was nearly three times more than a year earlier and has already exceeded Spains highest annual volume.
One big change in the logistics and warehousing sector in recent months has been a sharp decline in speculative activity. "In the current market conditions the majority of developers will now only start on a pre-let basis," says Tornow. "Speculative construction will remain limited to those markets where persistent strong occupier activity is expected, in particular in the CEE. In western Europe, Germany is experiencing some speculative development because of recent tight supply levels and strong demand."
The decline in speculative development has resulted from the difficult financing environment and concerns about demand, according to Tornow. "It is difficult to obtain funds for real estate investment," she says. "The only developers able to build new capacity are those companies that can use equity rather than debt."
The macro picture
Nico Tates, fund manager for Aberdeen European Balanced Property Fund which has 242 million of committed equity and a placing power of 484 million says the outlook for warehousing and logistics is inevitably dependent on the macroeconomic picture in each market across Europe.
"Logistics is closely correlated to consumer spending as the distribution of goods is essentially a reflection of spending power in an economy," he says. With that in mind, the position for the UK and Spain looks uncertain while such countries as Belgium, Finland and the Netherlands appear to have a more stable outlook.
Tates says that potential investors in the logistics sector also need to consider specific industry factors. For example, logistics and warehousing linked to the auto industry in Germany is likely to have a tough time while the food sector tends to be less adversely affected by falling economic growth. "Everyone always needs food," he notes. "And that is reflected in the behaviour of the logistics market associated with it."
"Everyone always needs food. And that is reflected in the behaviour of the logistics market associated with it"
Nico Tates, Aberdeen
"The economic growth outlook for Finland is relatively good by European standards, with expected growth of 0.5% in 2009 compared with a decline for much of the rest of Europe," explains Tates. "The country always has a surplus on its trading balance, has strong industrial sectors such as paper, and innovative industry leaders, such as Nokia. In addition, private consumption is expected to outpace growth, with a 1.6% increase in 2009."
The specifics of the logistics sector in Finland are also attractive. It has a vacancy rate of just 2% to 3% compared with a typical vacancy rate of up to 20% in office property in a city such as Amsterdam.
"Such a low level is described as less than friction that is, below the level naturally expected by corporates moving the location of facilities," says Tates.The Helsinki-Vantaa site was especially attractive to the fund because of its location and key tenant Suomen Logistiikkatalo, Finlands leading logistics company and a subsidiary of Swedish Posten Logistik, an international logistics company owned by the state-owned Swedish Post as well as strong covenants and prime nature.