Logistics ‘back on the starting blocks’

Deals have largely ground to a halt in Germany in recent months but one asset class bucking the trend is logistics, according to the latest report from LIP Invest.

Around €900 million was invested in German logistics properties in the second quarter of 2023, according to LIP Invest. At €1.8 billion, the volume of transactions in the first half of the year is at its lowest level since 2015 but interest is picking up. In the first six months, hardly any large-scale portfolio transactions were concluded, which has a significant impact on the half-year result.

‘After the capital market changes of the past year, logistics properties are one of the first asset classes to be back on the starting blocks,’ said Bodo Hollung, partner and managing director of LIP Invest. ‘Suitable purchase objects are available, as is the demand from users of logistics properties. Now is the right time for investors who are happy to make decisions.’

The largest deal of the first half of 2023 was registered in the Leipzig/Halle region. This involved a well-known car manufacturer who leased around 87,000 sqm in Bitterfeld-Wolfen with the intention of operating its largest spare parts warehouse from there, according to JLL. A car manufacturer was also responsible for the second-largest deal: BMW leased around 80,000 sqm for its new distribution centre in Pilsting, Lower Bavaria, with the space scheduled for completion in the second quarter of 2024. The third-largest deal was concluded by Rhenus, a logistics service provider, which concluded a contract for more than 70,000 sqm in Sülzetal near Magdeburg.

Prime logistics has been European real estate’s star performer over the past 10 years, providing an annualised return of 15% since 2013, according to CBRE and is the asset class that has most benefitted from changes in the way we shop, affecting supply chain adaptation and last mile delivery. Vacancy rates are currently at a record low of 3.1%, according to Savills, with rental growth and yield compression occurring as a result.

‘The logistics boom that was created during the pandemic by e-commerce and buffer stocks has come to an end,’ said Rainer Koepke, head of Industrial & Logistics at CBRE. ‘Still, warehouses are well stocked, vacancies in prime locations are in the one-percent range and corporate inventories are larger than they were a few years ago.’ There will be no return to the perfectly connected supply chains of just-in-time in the foreseeable future, he added.

Consumer price index to rise by 5.8% this year

Other data suggests that logistics is improving. The IWIP index, the industrial and logistics real estate index from IW Cologne and IndustrialPort, shows an increase in rents for warehouse, logistics and production real estate in Germany of 2.6% this year. Particularly noteworthy is the strong development in the logistics sector - plus 7.2% - while production property rents show the weakest growth at 1.8%. This development illustrates the ongoing volatility of rent trends for production space. Taking into account the ifo Institute's forecast of a 5.8% increase in the consumer price index for 2023, the only positive rental growth is expected to be in the logistics property segment, according to those who track the market.

However, the asset class has not been immune from recent price corrections: average prime yields moved out by 62 basis points to 4.8% in the first six months of 2023, according to CBRE.

In the second quarter, around 70% of the new buildings on the market were mainly logistics properties used by logistics service providers, according to LIP Invest. Around 900,000 sqm of new logistics space was completed in the second quarter, taking the total for the year to around 1.6 million sqm. Subsequently, compared with previous years, the volume of new construction for 2023 as a whole is expected to be significantly lower, which is likely to further exacerbate the supply shortage, according to LIP Invest.

The gross initial yield for new buildings in top logistics locations remains constant at between 4.85% and 5.1%. However, owners are holding on to their properties for the time being due to the drop in prices and the spread of gross initial margins between new and existing construction is currently relatively low.

According to LIP Invest, the latest increase in the key interest rate by the ECB in July once again had an impact on the long-term interest rate, which rose by around 0.2%, which will exert further pressure on logistics prices. LIP Invest is forecasting initial gross margins of 4.95% to 5.20% ‘for high-quality modern logistics properties in good locations’ in the third quarter.

LIP Invest observed a slowdown in the transaction market in the first half of 2023. However, the property pipeline for the coming quarters is well filled - especially with new construction projects. The number of structured bidding processes also increased again in the second quarter of 2023.

Take up down almost 60% y-o-y

The German market for warehousing and logistics space recorded total take-up of around 2.05 million sqm in the first half of 2023, a drop of 58% on the same period last year (H1 2022: 4.83 million sqm), according to JLL. It also falls 46% short of the five-year average for the first six months and 41% short of the ten-year average.

Around 655,000 sqm of space was taken up in the Big 5 - Berlin, Düsseldorf, Frankfurt, Hamburg and Munich - in the first six months of 2023, the lowest level recorded over the past ten years, according to JLL. This was mainly due to the absence of deals for units larger than 20,000 sqm, with just three leases of this size concluded in the first six months compared to 14 in the same period last year.

With the exception of the Munich region, which recorded a slight plus of 8% and a take-up volume of 120,000 sqm, all other regions registered below-average letting performances in a y-o-y comparison. At around 173,000 sqm, the highest take-up was recorded in the Hamburg region, with 40% less space taken up here than in the first half of 2022. The Frankfurt region followed with around 138,000 sqm (-25%) and the Berlin region (119,000 sqm, -85%), marking its greatest y-o-y drop. Düsseldorf recorded the lowest take-up in the Big 5 with 105,000 sqm (-41%).

This low take-up result can be attributed to many factors. Full occupancy rates are being observed in many places and vacancy rates are very low in most regions. Given the shortage of space to rent and available land, this situation could deteriorate further. Even today, enquiries for high volumes of space are difficult to satisfy, so many tenants are shifting their focus to markets in other countries not previously considered, while others are exercising their lease options in an effort to secure their existing tenancies, according to JLL.

Another reason is the lack of new buildings and, in particular, the dearth of speculative properties. Developers are increasingly relying on sufficient pre-letting levels as they hedge against the continuing rise in financing costs and drop in capital value multipliers compared to previous years. Negative evaluations by some tenants of their own economic situation also play a role. This pessimism is currently shared by the important demand groups in the warehousing and logistics space segment, particularly manufacturing and retail.

Prime rents soar by up to 35%

However, prime rents are on the up. Prime rents for units in the 5,000 sqm plus size category have risen significantly y-o-y in the Big 5, largely due to the shortage of space and increased construction costs. By the mid-point of the year, the highest prime rent was being achieved in Munich. At €10.50/sqm per month, this was an increase of 35% y-o-y. Düsseldorf followed with €8.50/sqm per month (+31%) and Hamburg with €8.25/sqm per month (+10%), while prime rents reached €7.50/sqm per month in Berlin (+20%) and Frankfurt (+7%), according to JLL.

There are signs of a certain easing in new construction, as construction costs and financing interest rates have become somewhat more reliable again and represent a lower risk for project developers, according to Jan Linsin, head of research at CBRE.

‘We will not see a repeat of the large take-ups of six to eight million square meters in 2023,’ said Koepke. ‘It is more likely to be four to five million square meters. At the same time, we expect rents to slow their previously significant increase… there will be no major vacancies, supply will remain tight.’