Logistics real estate: thinking in terms of chances and cubic metres
February 17, 2023
At the start of 2022, the logistics investor market was in great shape. While the number of online purchases had already been increasing for years, it received an additional boost as a result of the coronavirus outbreak. Demand for new products – and consequently logistics real estate – was skyrocketing, and initial yields were at a historic low. This made it the leading asset class of the past few years. However, as the saying goes, ‘the bigger they are, the harder they fall’, and the sector’s high returns also meant it experienced the hardest knocks. As a result, the logistics real estate sector has looked a little different since last year, with rising interest rates are driving yields up, leading to a solid decline in prices. Despite this, demand continues undiminished.
Every metre counts
Logistics real estate is basically the shell encompassing the entire process from the manufacture to the storage of products. For users, the property represents around five percent of the total operational costs. The rest of the money goes towards staffing, the fleet and all the other associated costs. This means that the margins are narrow, which in turn means users want to maximise those margins in order to minimise risk. For this reason, logistics real estate – more so than in other sectors – has to be designed as efficiently as possible, or in other words: lean and mean. You have to make the best use possible of every square metre and minimise any unnecessary costs.
From advice to acquisition
We advise investors to look very critically at the location and operations of their logistics tenants. For example, locating a European distribution centre at the tip of Groningen is not a smart move, since carriers will have to drive extra costly kilometres. But we also advise them to consider the design of the building, especially with respect to sustainability. After all, investors and tenants will not be keen on premises that still run on gas. On top of that, building specifications must also align seamlessly with operations and be prepared for future automation developments. In short: investors are thinking twice before getting into logistics real estate.
The Netherlands as a distribution country
We’re doing what we do best in the Netherlands: business . However, sufficient processing and distribution locations are required to continue meeting the ever-growing demand. And that is the crux of the matter: the available commercial land is as good as gone. The development of new logistics real estate is also proving difficult. As well as having to deal with the discussion around the rise of ‘boxy’ buildings (verdozingsdiscussie), network congestion and nitrogen policy are obstructing development plans. As a result, demand is far outstripping supply, and posing a significant challenge when it comes to satisfying all of the market demands.
Think in solutions
Don't get me wrong: of course we shouldn't be building new logistics distribution centres willy-nilly . But if you take a critical look, both development and redevelopment provide an ample array of possibilities. In order to be able to continue meeting demand, we have to be creative with the limited space at our disposal. If we do not, we will lose our attractive position in the market, and consumers will have to get used to waiting not one, but four days for their parcels
As far as I'm concerned, the solution is to be found in cubic metres rather than square metres. While our industry still thinks too much in terms of floor space, logistics service providers think in terms of pallet spaces. By building up or down, you can create greater volume on the same amount of land. As a rule, logistics warehouses are often around 12 metres in height these days. But why shouldn’t they be up to 30 metres in height? That would mean you could double your storage without increasing your footprint. At the request of a number of users, we are already working on these types of ‘high-bay’ developments in a number of places. They are tremendously efficient and future-oriented. Another efficient solution is the clustering of building functions, just as healthcare real estate is already doing. For example, you could design the first floor of an office building to accommodate a logistics operation.
However, there is a caveat: the one big ‘but’ involved in all of these ideas is that municipalities have to be a lot more flexible when it comes to their zoning plans. Housing shortages mean that many SMEs are being pushed away from the city centre to the outskirts, but without any new land being allocated outside the city. What are you supposed to do then? If you don't meet their demand, rents will skyrocket, and the extra costs will be passed on to the consumer.
The rents for obsolete locations are still relatively high. This is understandable given the high demand, but I believe that a price differentiation should be implemented. If tenants are willing to pay more for future-proof properties, redevelopment immediately becomes a more interesting proposition for investors. The end result is a more sustainable portfolio that meets the funding criteria, along with a higher rental income. Let's face it, unsustainable buildings are a dying breed. As an investor, you'd rather pay a little extra for a future-proof building than take over an old barn for free that costs you an arm and a leg to keep running. And tenants benefit just as much from the lower energy costs.
On the whole, I have a positive feeling about 2023. Naturally the market is presenting us with challenges, but all in all, I firmly believe in this asset class, and there is still plenty of demand. We just need to give investors some space to find the balance between book value and selling price again. While many buyers do not want to get in until the depreciation bottoms out, transactions actually often take place either just before or after that. I expect us to reach the bottom during the summer. This means that investors are already preparing to take action in the second quarter.