What is driving investor appetite for logistics strategies?
Christian Goebel: For many years, European investors did not consider logistics an institutional asset class like, for instance, office or retail. It has only been recently that the majority of these investors really accepted logistics as an institutional asset class. Investors have been able to move away from their biased ‘logistics is basically just four walls in the middle of nowhere’ view. They now really understand the mission-critical aspect of well-located logistics properties for occupiers. That has obviously fuelled the investment demand for logistics. The pandemic accelerated those trends. Coupled with the significant growth of e-commerce and the existing undersupply of logistics properties in Europe, we believe we will continue to see the asset class growing significantly.
Eric Wurtzebach: There are four main drivers making investors focused on the space. First, traditional demand drivers like GDP and consumption remain positive. Second, millennials are in their prime earning years and prefer online shopping versus the brick-and-mortar experience. Third, there has been a rapid rise in e-commerce as a percentage of total retail sales. By 2030, it is projected that 30 per cent of sales will occur online. That takes us to the last point, which in my mind is the most important demand driver – the fact that an e-commerce sale requires more than three times the logistics/industrial space of a traditional brick-and-mortar sale. Then it becomes simple math – given e-commerce growth rates, the US could require a further 1 billion square feet of logistics space by 2025.
How is demand affecting the market? Have asset prices peaked?
Eric Wurtzebach: Strong institutional demand has led to substantial gains in asset values and record low compression of cap rates for the sector. As of June 2021, industrial asset values were up 19 per cent since August 2020 and around 21 per cent above pre-COVID levels. Having said that, even though we have extremely low cap rates, we don’t think pricing has reached its peak, because of the structural tailwinds we talked about, which don’t appear to be slowing down. COVID-19 has accelerated those trends and tenant demand continues to be very strong. At the same time, new supply is tempered by access to land and cumbersome entitlement processes. We are seeing some markets in the US currently experiencing 15 to 20 per cent annual rent growth for modern logistics facilities. With that type of rent growth and the lack of supply in the most critical markets, I don’t think logistics has reached peak pricing.
Christian Goebel: In Europe, some of the supply/demand statistics are even more dramatic. In the US, for instance, there is three times more logistics space per capita than in Europe. In addition, a lot of European countries are lagging countries such as the US and South Korea in terms of e-commerce penetration. Consequently, Europe will need to catch up. The tremendous amount of demand for last-mile logistics space, coupled with huge difficulties in gaining access to land and permits, means the supply is expected to continue to lag significantly behind demand, the consequence being rental growth.