Logistics real estate has been experiencing an upturn for several years. New solutions are needed for city logistics space
The market for logistics real estate has developed extremely dynamically in recent years. Cushman & Wakefield Research & Insight forecasts annual growth rates of 1.6 percent for prime rents in European logistics markets to 2022. Due to its location and size, but also due to its infrastructure quality and logistics technology, Germany is considered the most important market in Europe. Around one quarter of the total logistics turnover in Europe, amounting to 1,050 billion euros, is attributable to Germany. The demand for state-of-the-art logistics and storage space is correspondingly high: in the first six months of 2018, nationwide take-up of space, at 3.43 million square metres, was 14 percent up on the previous year. This not only exceeded the 3 million-square-metre mark for the third successive time, but also set a new record. The buoyant economy and ongoing supply chain restructuring in manufacturing and retail could result in more than six million square metres of lettings by the end of the year for the third consecutive year.
Construction activity is also at a high level. For example, online retailer Amazon has purchased a total of around 280,300 square metres of newly-constructed logistics space in Germany over the last eighteen months, with another 174,000 square metres currently under construction. The logistics company Hermes has moved into 43,800 square metres of new space in the same period and a further 98,100 square metres due for completion by the end of 2019. The DHL Group currently has more than 85,000 square metres under construction.
The boom is also pleasing investors. In the first half of 2018, industrial and logistics real estate accounted for twelve per cent of the total commercial real estate investment market nationwide, at just over € 3.1 billion, making it one of the three most popular asset classes. Around 80 percent of this came from foreign investors. The logistics sector is thus currently the most international of the commercial real estate markets. But the dwindling product availability, especially in the large area segment in major logistics hubs, also comes at a price. Measured in terms of prime yield, the German logistics market is currently one of the most expensive in Europe, at 4.5 percent.
Online trade provides growth – Millennials are driving development
The boom in logistics real estate is driven by a variety of factors. In particular, the rapid growth in online trading is driving demand. According to the Federal Association of e-commerce and mail order (BEVH), the gross sales of e-commerce traders rose to over 30 billion euros in the first half of 2018. An increase of 11.1 percent on the previous year. Millennials in particular are driving this development: According to the consumer research body Gesellschaft für Konsumforschung, those born between 1982 and 1996 are now the largest consumer segment, accounting for around 15 percent of all private households in Germany. By 2020, their share is expected to rise to over 20 percent. The image of logistics real estate has also changed with online trading. For a long time, the segment received little attention. With the Internet and the associated cross-border trade in goods, logistics and its space requirements are becoming increasingly important.
Technological progress has massively changed logistics work. Today, distribution centres and warehouses only require a minimum of staff. The proportion of office and social space in the buildings therefore continues to decline. Modern logistics properties are not lifeless halls of stone and steel, but highly intelligent high-tech buildings. The buildings are equipped with RFID technology that enables IT-based supply chain management. Industry 4.0, whose production processes are completely digitized, demands highly networked and automated structures, not only regarding transport but also buildings.
Future segment city logistics
In addition to the large distribution centres, which serve entire regions centrally, there is an increasing demand for much smaller, decentralized units for inner-city local supply. “city logistics” is currently regarded as a future segment, but also poses many new challenges for the industry. Ever more vendors are offering their customers “same-day delivery” or even “same-hour delivery services” to gain a competitive edge in mature markets. Only within a closely-meshed network of locations for warehousing and distribution can ever shorter delivery times be achieved.
Especially in the area of food retailing, where there is massive investment online trade, the demands on the providers and operators of real estate are increasing. Spaces must be created that meet high hygiene requirements and ensure cooling chains are uninterrupted. For inner-city delivery traffic, logistics companies are increasingly looking for innovative transport systems. Large providers such as Deutsche Post have developed concepts based on electromobility. The real estate must provide an infrastructure with charging stations and power generation from renewable energy. Other vendors are experimenting with cargo bikes or even drones. Due to the enormous logistical challenges, food distribution will remain predominantly a big city phenomenon in the coming years. The effort and associated costs is too great in more rural areas. So far, just over one percent of food and daily necessities are sold online in Germany. Among millennials, however, the proportion of FMCG online shopping is already 25 percent higher.
Studies suggest that online and offline commerce will have to complement one another in the future: for example, 59 percent of millennials said in a survey that they preferred online brands and retailers who also have brick-and-mortar stores.
New concepts needed
The market for city logistics is still at the “pioneering stage” due to the variety of new requirements. At present, the major obstacle to growth is the lack of space in the inner cities. Investors in new construction prefer office and residential developments. Opportunities therefore arise in the reuse of vacant parking garages, offices, commercial space or underground garages. In future logistics space will increasingly settle in former retail areas which have fallen into disuse due to online shopping. Some experts even believe in a “renaissance of the business park”, where logistics providers from various areas jointly build and use resources.
The situation in the market for logistics real estate generally offers good reason for optimism due to the good market data. However, the segment is very heterogeneous. The range of properties encompasses everything from small-scale units in peripheral and city centre locations up to areas of multiple tens-of-thousands square metres. The “fight for the last mile” is far from over and requires a lot of work on new, tailor-made concepts and intelligent cooperation from the space providers.
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By Stephan Haegele, Partner, Investment Advisory Industrial & Logistics, Capital Markets Group at Cushman & Wakefield
Stephan Haegele joined Cushman & Wakefield´s Industrial & Logistics Services team in August 2013. He is leading the Industrial & Logistics activity in Germany. His tasks include: Brokerage of Industrial & Logistics space across Germany, including lease, sales and investment transactions, build-to-suit developments, disposals, contract and profile analyses and optimization, development of marketing strategies, steering of negotiations as well as providing recommendations for tenants and landlords.