Tight market should support industrial rents, despite weakening outlook

Growth in German prime industrial rents will be held back by a weakening economic environment, and occupiers prepared to look outside traditional industrial locations which offer better value for money, according to a new update from Capital Economics which crossed our desk at REFIRE recently.

But Hamish Smith, the author of the report, still concludes that tight industrial availability around Germany’s main urban areas should be supportive of positive rental growth.

The report points to recent survey data which suggest that the German economy has failed to re-gain momentum after narrowly avoiding a recession in the second half of last year. Indeed, with the March PMI falling to the lowest reading since mid-2013, the Q1 average was 52.1, slightly below the Q4 average. Of particular significance for industrial property, the manufacturing PMI has continued to deteriorate, falling from 51.5 at the end of last year, to just 44.1 in March. Moreover, it has been in contraction territory for the past three months.

However, despite the slowdown in the German economy, industrial take-up hit a record 7 million sqm last year. Furthermore, agents report that within this total, demand from manufacturing firms rose by 25%. That said, the rolling four-quarter average did see a pull-back in Q4, suggesting that the slowdown in the manufacturing sector has started to dampen occupier demand.

On the basis of the relationship between manufacturing new orders PMI and take-up, industrial leasing activity appears to be on the cusp of a sharp slowdown. With more than 80% of manufacturing-related take-up outside of Berlin, Frankfurt, Hamburg and Munich, the weakness in the sector will have a greater impact on take-up in the “rest of Germany”.

And while Munich is likely to be affected too given a relatively high dependence on manufacturing, total take-up there has fallen in each of the last two years. In fact, leasing activity in the other three cities also declined last year. While some of this weakness is likely to stem from the retail sector, agents report that limited availability is holding back take-up, implying still healthy demand. Yet with the exception of Berlin, rental growth has been fairly measured, albeit above the historical average.

This suggests that occupiers are prepared to look at alternative locations that offer better value, rather than pay higher rents in the larger urban areas. Indeed, agents report that high land prices mean that locations outsides of logistics hubs are increasingly attractive, particularly for large scale developments, such as Amazon’s 100,000 sqm Magdeburg distribution centre which is equidistant between Berlin and Hanover. This also tallies with the declining share of total take-up accounted for by the four cities to less than a quarter, from around one-third, over the last 7-8 years.

While the lacklustre outlook for the German economy can be expected to dampen take-up volumes, continued supply constraints around urban areas are likely to put some upward pressure on prime rents. But with occupiers likely to continue to look at alternative locations that offer better value, the Capital Economics researchers think that prime rental growth will be kept in check, with cumulative growth of 4-6% over the next three years.