By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Construction is booming but is the market losing its lustre?
Logistics construction is expected to hit a new high this year, according to the latest study published by bulwiengesa, "Logistics and Real Estate 2022", which has been published for the eighth time in a row in partnership with Berlin Hyp, BREMER, GARBE Industrial Real Estate and Savills.
Around 5.8 million square metres of new logistics space is expected to be completed this year, according to the study, marking an increase of 9.4% y-on-y. Top rents in the biggest German logistics locations have risen by 3.8% to 8.6%, or from €6.50 to €8.20 per square metre. Data from over 2,900 existing, under construction and planned logistics properties was evaluated for the study.
‘The figures should not hide the fact that this is a snapshot,’ warned Daniel Sopka, consultant in the industrial and logistics real estate division at bulwiengesa. ‘The market environment is uncertain and characterised by caution. Financing and construction costs are rising dynamically and the shortage of skilled workers remains acute. Higher energy costs are placing an immense burden on companies in industry and logistics and geopolitical distortions are weakening the economy. The risk of short to medium-term price corrections is increasing.’
During the onset of COVID in 2020, new space slumped to just 3.7 million square metres, down from 4.8 million square metres. However, the market bounced back in 2021, with 5.3 million square metres of new logistics space, according to the study.
Take-up lowest since 2018
However, take-up has started to slow, according to CBRE and at just over 1.5 million square metres, take-up in the third quarter of 2022 was the lowest recorded since the first quarter of 2018: ‘Although take-up in the German industrial and logistics real estate market in the year to date has been above the level of the record result achieved in the first three quarters of 2021, most recently - due to the lack of available space and the lack of deals above 100,000 square metres - market activity has been healthy but rather moderate,’ said Rainer Koepke, head of industrial & logistics at CBRE in Germany.
Greater Berlin takes the top spot among the major German logistics locations between 2017 and 2022, accounting for 2 million square metres of completions, according to the bulwiengesa study. The Rhine-Ruhr region takes second place with 1.7 million square metres. The Hannover/Braunschweig region overtook the Rhine-Main/Frankfurt region with around 1.5 million square metres, thanks to major developments such as Panattoni Park Niedersachsen and VGP Park Laatzen.
Berlin reached an all-time high with logistics take-up of 785,300 square metres in the first half of 2022, according to a report published by Realogis, a consultant for industrial and logistics properties and business parks in Germany. As such, take-up almost tripled year-on-year with growth of 172.3% (H1 2021: 288,400 square metres). The Tesla deal in the first quarter of the year for 327,000 square metres in Grünheide significantly contributed to the total, although even without it, the first half of the year would still be the strongest ever recorded at 458,300 square metres, which is 58.9% higher than in 2021.
The three most active logistics project developers in 2022/2023 are Panattoni (over 1.8 million square metres), followed by GARBE (over 1 million square metres) and Dietz (around 880,000 square metres). Interestingly, the Goodman Group, which was extremely active in previous years, has become less visible, as has the Amazon Group, which has not completed any new space in 2022.
Is logistics losing its lustre?
The logistics investment volume reached a new all-time high of €11.6bn in 2021, according to bulwiengesa. Investment in logistics properties accounted for the largest share with around €7 billion or 60%; in the first half of 2022, this figure was €2.7 billion. However, increased financing costs and growing economic uncertainties caused a slight dip in the transaction market starting in the second quarter of 2022. In the top logistics regions, this was reflected in the rise in prime yields by around 20 to 30 basis points. This primarily affects the core segment, where the previous purchase prices at annual rent factors of over 30 can no longer be financed in the current conditions.
And now, some investors are questioning whether logistics is losing its lustre. At Real Asset Media’s recent Logistics Global Trends briefing, some experts cited volatile markets, higher interest rates and harder to obtain financing as contributing to pushing asset prices down, not to mention a disconnect between what sellers want and what buyers are actually prepared to pay: ‘We’re already seeing lower prices and not just in big boxes,’ said Pieter Akkerman, co-head of real estate at Schroders in the Netherlands. ‘There will be interesting new transactions coming up at different price levels and, as an all-equity buyer, we will find good opportunities.’
Like in other sectors, ESG-compliant properties are more in demand because they are expected to retain their value, making them easier to sell. As a result, the gap between sustainable assets in good locations and other assets is expected to widen: ‘We’re witnessing a slowdown, but overall quality assets that are ESG-compliant are still stable in terms of cap rates,’ said Renata Osiecka, managing partner, AXI IMMO Group. ‘Sustainable products will always find buyers.’
Michael Dufhues, CEO of BREMER, agrees that in addition to higher crisis resilience, sustainability remains a defining theme: ‘New technical solutions, for example, in energy supply, are often much more expensive than standard construction,’ he said. ‘However, exploding energy prices and unwanted supply dependencies put the cost argument into perspective.’
How logistics companies have responded to supply chains disrupted by the COVID pandemic and the Ukraine war has also come under the microscope, with many companies currently increasing their crisis resilience by diversifying their supply chains and creating a fallback position by renting additional space reserves. Subsequently, offshoring, which is more crisis-prone during rising political conflict, is increasingly being replaced by re-shoring and near-shoring: ‘Markets with low wage and energy costs compared to Europe or rather unregulated labour markets are suitable for this,’ said Tobias Kassner, head of research at GARBE. ‘These advantages were originally sought in Asia, Southern and Eastern Europe, but also Turkey or the north of Africa can benefit from a re-organisation of logistics.’
With a share of around 60%, the majority of investors in the German logistics real estate market are domestic investors. Over the past five years, Berlin has been able to topple the Rhine-Main/Frankfurt region from first place to take the crown for the most popular investment destination, according to bulwiengesa. Around €2.5 billion was invested there in the last five years, particularly in 2021. This year, the transaction volume in Berlin has slowed due to fewer investment opportunities. The Rhine-Main/Frankfurt region witnessed around €2.2 billion in investment in the five year period, followed by Dortmund with just under €2.2 billion. According to Bulweingesa’s study, GARBE remains the front-runner among the most active logistics investors with almost €2.9 billion of AUM, followed by Frasers Property in second place with €1.7 billion, and then the increasingly active LIP Invest with just over €1.5 billion.
