Posted by Macquarie Asset Management
This article was first published by PERE in October 2021 and is reproduced here with permission.
An increasing number of institutional investors are chasing logistics real estate as the pandemic and the use of technology accelerate e-commerce growth. With higher demand for warehouses and limited supply, logistics rents and pricing continue to be attractive, say Eric Wurtzebach, Head of the Americas, and Christian Goebel, Co-Head of Europe for Macquarie Asset Management’s real estate business.
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.
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.
Christian Goebel: There is a question mark with respect to very modern technologies such as autonomous trucks or drones. It is difficult to know when these technologies are really going to impact the way these logistics occupiers operate on a day-to-day basis. Occupiers right now are much more focused on warehouse robotics, warehouse management software or enhanced automated picking systems, spending a tremendous amount of money on those. The capex that large e-commerce companies invest into single assets is gigantic – and, in many cases, the consequence is that they are asking for very long-term leases. In general, long-term leases are preferred because it represents sticky cashflow.
Eric Wurtzebach: For me, the first obvious impact comes from the devices in our hands. This is really driving sales from brick and-mortar to online, as we can order anything online at any time. The other shift that goes with that is the consumer mindset that all online orders can be delivered in a day or less, so the faster consumers demand delivery, the more incremental industrial space is needed for each sale. Right now, some cities in the US offer one-to-two-hour delivery. Eventually, large e-commerce companies are going to be able to deliver everything to 80 per cent of the US population in under two hours. Current projections of industrial demand do not fully account for this shift yet – but it is clear even more industrial space will be needed.
Christian Goebel: We believe we will continue to see increasing allocations by institutional investors into logistics. Also, we expect that more and more institutional investors will be open to investing into logistics in emerging markets, such as Latin America.
Eric Wurtzebach: I do not expect the market to change much in 2022. Institutional demand is huge. The supply/demand outlook is very positive. And whether there is a downturn in the economy, or something happens that we do not foresee, like COVID-19, we expect the long-term structural tailwinds in the space to continue.
Christian is a Senior Managing Director and Co-Head of Real Estate, Europe, for Macquarie Asset Management. He has lived and worked in Europe, the United States and Latin America and has over 20 years of experience.
Eric is a Senior Managing Director and Head of Real Estate in the Americas for Macquarie Asset Management. He joined Macquarie in 2008 and has over 26 years of experience.
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