With demand levels rising unabated, what is the outlook for occupiers seeking space in 2017? Liza Helps reports
Total take-up volumes for the nine core markets of the UK, Germany, France, Spain, Italy, Netherlands, Belgium, Poland and the Czech Republic reached the 21 million sq m mark for the first time, outperforming the previous mark of 19 million sq m in 2015 according to research by CBRE.
Take up in the ‘G32’ hubs, the largest and most important logistic hubs in Europe, also achieved a record 11.9 million sq m in 2016, surpassing the 2015 record of 11.75 million sq m.
Vice president research & strategy at Prologis, Dirk Sosef, notes: “The last quarter of 2016 was extraordinary we saw demand accelerate above expectations. We did not expect to see occupiers being so positive – there seemed to be a disconnect between what was happening on the macro economic scale and what was happening for our customers – they continued to grow and needed more space.
“Much of this growth can be put down to the continued demand from the e-commerce, retail and automotive industries.”
The UK, Germany, France, Spain and Italy all had record years in terms of take-up, significantly from these two sectors. In the UK, over 50 per cent of the 2.8 million sq m of take-up can be attributed to these two industries. Supply chain logistics are adapting accordingly to the occupier shift, which has further stimulated construction and manufacturing improvements to support growth and competitiveness.
Alexandra Tornow associate director EMEA Logistics & Industrial Research at JLL says: “Take-up was up 12 per cent year-on-year from 2015. A third of the take-up can be attributed to retailers while a further 11 per cent of the large space was dedicated to e-commerce.”
This is not a new phenomenon says Philippe Van Der Beeken managing director of Continental Europe for Goodman: “You can see a steady increase in take-up from 2012 onwards and we see that continuing in our enquiry pipeline.”
Pan-European logistics property investor developer P3 recently reported record performance during 2016 with leasing totalling 1.26 million sq m, up from 822,000 sq m in 2015. While Prologis also saw a record year with the company reporting that it signed new leases and renewals totalling 718,200 sq m in the fourth quarter of 2016 and 3.5 million sq m in the full year – an increase in volume of 54 per cent over 2015.
At quarter-end, the company owned or had investments in, on a wholly-owned basis or through co-investment ventures, properties and development projects totalling 17 million sq m in Europe.
“2016 was our strongest year yet for leasing, which contributed to our highest-ever occupancy in Europe,” says Ben Bannatyne, president, Prologis Europe. “In spite of political shocks, customers remain focused on the long term and sentiment remains positive. This has fuelled broad-based demand, led by the general retail and automotive sectors.”
On the supply side, says Van Der Beeken, “we are looking at 8 – 9 million sq m construction delivery in the next couple of months – most of which is build-to-suit – against a net take-up of 14 million sq m of which some will be in renewals of existing space. The market is fairly balanced broadly speaking over the next couple of months.”
However he notes there is a tension in the market place as vacancy levels have come down dramatically. “Around or below five per cent you hit the friction level.”
Sosef says: “Vacancy levels continue to decline and right now in the market, vacancy levels are roughly 5.7 per cent – the lowest point ever seen.”Across Prologis’s European portfolio, Sosef says the current vacancy level is a mere 3.3 per cent. He adds that in some hot spots vacancy levels can be even lower. In some regions in Germany there are vacancy levels below two per cent.
According to JLL the national average vacancy rate oscillated around just four per cent in The Czech Republic – the decade’s low and on e of the lowest indicators in the market history.
Tornow says: “Vacancy rates [across continental Europe]are sub six per cent and edging down further; there isn’t a lot of space around and much of it is older and smaller than required.”
Indeed Van Der Beeken notes that an occupier would find it hard to find a unit of 20,000 sq m or more available.
BNP Paribas Real Estate research noted that demand for large units faced a lack of available product and that occupiers turned to build-to-suit solutions – this is expected to continue throughout 2017.
Indeed Amazon has just signed two huge warehouse build-to-suits in as many months. It has secured a 1.2 million sq m regional distribution centre in Werne, Germany with specialist logistics developer and investor Verdion.
The scheme valued at around €100 million will provide the global retailer with a modern, state-of-the-art e-commerce facility in a prime location for access to major motorways and the major West German cities in the Rhine-Rhur area.
Construction has started, with sectional completion from September 2017 – in six parts.
It has also agreed a build-to-suit with pan European logistics specialist Logistics Capital Partners for a 1.14 million sq ft regional distribution centre in Vercelli, Northern Italy. The scheme will be funded by AEW’s Logistis.
Construction of the development is underway, and with the first columns raised into position. Completion of the construction phase is expected in the third quarter this year.
In 2016 logistics property investor developer P3 almost doubled its build-to-suit lettings from 93,000 sq m in 2015 to 213,000 sq m in 2016.
With a dearth in the amount of supply available one would think that rent levels would have increased significantly. However these have only increased gradually over the past year.
There are a number of reasons for this, primarily the barriers to new supply are low for countries such as Poland where land values are modest and planning relatively simple in comparison to the German heartlands or the UK.
In the past, rents have been held down by competition between developers and landholders keen to secure tenants for their schemes. If that were not enough investor interest in logistics property as an asset class has strengthened meaning that while there has been modest rent growth, capital growth has been strong making up the total return.
Is this scenario likely to hold? The consensus sees a soft or gradual increase in rents in some markets where space is scarce.
Sosef is thinking a roughly three per cent year-on-year increase for the Southern Netherlands while Van Der Beeken expects net effective rents levels to move up as incentives come down. “What historically was ten per cent probably moving toward 5 per cent or less in supply constrained markets such as Hamburg.”
The fact that there is on going strong demand across the sector has made it and will continue to make it attractive to investors and will for the time being keep rent increases modest.
Amaury Gariel, managing director of EMEA Industrial & Logistics at CBRE, says: “Logistics has become the fastest-growing sector in real estate across Europe, and is perceived as the least politically sensitive asset class.”
Investment in European industrial property witnessed its strongest year yet, with volumes reaching a record high of €24.5 billion in 2016, according to CBRE. Germany, Norway, Spain and CEE all reported record trading activity for the year meaning 2016 volumes were four per cent higher than in 2015.
According to Colliers International, the German industrial and logistics real estate market alone generated a total transaction volume of €4.6 billion. Investments of more than €1.4bn in the fourth quarter alone drove the market and led to an impressive end-of-year result.
The Colliers International report states: “As the trend of the past five years clearly shows, industrial and logistics assets are in very high demand. In 2011, the market posted an end-of-year result of only €1.2bn, an amount that is now being invested in one quarter.
“The main driver behind this favourable development is the e-commerce business, which is boosting demand for industrial and logistics properties and encouraging new project developments. Growing customer expectations for same-day and same- hour delivery are forcing an increasing number of CEP service providers (courier, express and parcel) like Hermes and DHL to build smaller logistics centres of up to 10,000 sq m in the cities. New asset types like downtown warehouses and distribution centres are therefore becoming increasingly attractive to investors, providing an alternative to traditional big box stores.”
It is no wonder Gariel adds that, “the sector took the title of best performing asset class and [it]continues to attract significant investor interest and capital. Institutional funds remain attracted by stability in Germany and Norway, while the favourable economic outlook for Spain and CEE provides solid fundamentals for future growth.”
P3 with the backing of its new owner Singaporean sovereign wealth fund GIC, which paid €2.4 billion for the privilege, is set on a major expansion which will see the company extend its 3.3 million sq m portfolio through new development and acquisitions in new markets. It has 500,000 sq m of development in the pipeline split roughly 50/50 between CEE and Western Europe. Some 124,000 sq m is already under construction in eight buildings across five parks in four countries. It has another 1.4 million sq m of development land.
Other keen investors include AEW’s Logistis fund which is looking to grow the Logistis platform across European markets with the objective to reach a portfolio size of more than €3 bn.
CBRE Global Investors’ head of transactions EMEA, John Mulqueen, says: “We have over €1bn of capital to invest in CEE and Germany over the next 12 months.”
CBRE Global Investors recently acquired the ‘Hillwood Portfolio’ consisting of four standing logistics parks in Poland totalling 220,608 sq m. as well as agreeing to acquire a pipeline of projects currently under development. These consist of two new parks and two extensions in Poland totalling 134,165 sq m and two new developments in Germany totalling 71,684 sq m.
As Sosef notes: “More investors understand the positive aspects of logistics real estate. Just five years ago it was regarded as the ugly duckling of the real estate market now we are moving slowly toward the beautiful swan.”
This has to be good news for occupiers as it will help keep rent levels stable, in addition there is likely to be an increase in speculative development even if only modest.
Van Der Beeken notes: “There is a general increase in speculative activity but it is still balanced as professional developers, banks and equity investors are mindful what happened only a few years ago.”
Speculative construction is on the rise due to healthy occupier demand. In the third quarter of 2016 there was about 12 million sq m of space under construction and about 3.4 million sq m was speculative, reflecting 29 per cent of total space. The largest speculative construction exists in Russia (75 per cent) and CEE (34 per cent) followed by the UK (25 per cent) and Western Europe (17 per cent).
In the last quarter of 2016 Prologis Europe started 13 developments in the Czech Republic, Germany, France, Hungary, Italy, Poland, Slovakia, Spain and the UK totalling 309,000 sq m, 65 per cent of which was build-to-suit and 35 per cent of which was speculative.
However such is demand that speculative space is taken up very quickly. Prologis started on site with an 11,400 sq m facility at Prologis Park Wrocław V in Poland. Scheduled for completion in the second quarter of 2017, the building is already 100 per cent pre-leased, just one month after the start of construction.
Prologis Park Wrocław V comprises six facilities totalling 136,000 sq m. It is located in Nowa Wieś Wrocławska, three kilometres southwest of the Bielański Junction at the interchange of the A4 motorway (Berlin-Wrocław-Kraków-Ukraine) with the SB/E67 Expressway, near the Wrocław Motorway Ring Road.