The continued growth in e-commerce is putting pressure on levels of demand. Can Europe cope? Liza Helps reports…
The picture across the European logistics warehouse markets is following a familiar trend says Logan Smith, head of logistics for BNP Paribas Real Estate’s International Investment Group: “Development is increasing but so is demand”.
And the main driver of that demand is e-commerce.
Despite copious discussion of the impact of online on the high street and logistics, it is estimated that currently only eight per cent of retail transactions take place online across Europe, although this is forecast to rise to 25 per cent of total retail by 2025.
The importance of e-commerce as a demand driver is greater than research figures might suggest because of knock-on effects on demand from logistics and express operators.
According to research by CBRE: “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 sqm mark for the first time, outperforming the previous mark of 19 million sqm in 2015.
“The UK, Germany, France, Spain and Italy all had record years in terms of take-up, significantly impacted by the rise in demand from the e-commerce and retail industries. In the United Kingdom, over 50 per cent of the 2.8 million sqm of take-up can be attributed to these two industries.”
That said, occupier demand across Europe remains broadly-based driven by business growth and on-going pressures to restructure physical distribution networks to reduce costs and make supply chains more efficient.
Frank Weber, JLL’s head of industrial agency in Germany, says: “As we predicted, 2016 ended with a new record for warehousing take-up in Germany. Sustaining this activity was a further rapid expansion in digital retail concepts, reflected in a notable increase in space taken-up by retail companies along with units specifically acquired for e-commerce services. This trend will continue in 2017 as we expect the same-day and same-hour sector, as well as online grocery, to grow even more. When this is combined with an economy forecast to grow in line with last year’s 1.7 per cent – driven mainly by an improving manufacturing sector – the robust demand for warehousing space is set to be prolonged.”
Indeed JLL colleague Bruno Montigny, lead director of industrial & logistics in France adds: “Demand [for warehouse space in France] was led by retail companies, which in 2016 took over half of the total space as growth in online retail and rising pressure on city logistics was maintained.”
Research from BNP Paribas Real Estate says that demand for space has been driven by distribution and retail – especially e-commerce – everywhere in Europe. It represented the largest share of the volume of warehouses taken up in 2016 in France (55 per cent), the UK (55 per cent) and in Germany (42 per cent). And nothing seems to have changed in 2017.
Recent deals have seen international real estate firm Hines let 17,000 sqm at its Bingen/Grosheim Logistics Centre in Germany to a regional logistics company on the back of confidence in strong growth potential in an economy driven by ever expanding globalisation and e-commerce, while in Spain, Amazon is taking space at SEGRO’s Martorelles Logistic Park near Barcelona.
The first phase has recently been completed and comprises 17,300 sqm. The second phase of this project, which comprises another 16,800 sqm, is currently under development and will be completed over the next 6 months. The complete installation of 34,100 sqm is expected to be operational by the autumn of 2017.
Amazon has also taken a 100,000 sqm facility in Vercelli, Italy through Logistics Capital Partners with funding from AEW’s Logistis fund.
The facility is situated just south of the Prime Northern A4 corridor between Turin and Milan, with easy access to Milan’s Malpensa airport to the east, and the port of Genoa to the south.
The building is pre-let to Amazon, and will accommodate a major new fulfilment centre, making it one of the largest logistics buildings to be developed in Italy. 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.
Dirk Sosef, director vice president of research & strategy at Prologis Europe, says: “Customers remain positive and continue to absorb logistics space with a result that there has been a further decline in vacancy levels down to the lowest we have seen in Europe ever: at 5.5 per cent.”
JLL research reports that immediately available space across the majority of European markets remains below total annual occupier demand (based on five-year average take-up).
BNP Paribas research concurs: supply is barely keeping pace with demand especially for large units. “Speculative projects remain limited and are not sufficient to offset demand for new warehouse space. As a result demand for owner occupied deals (build-to-suit) is high in most countries and the still favourable financing conditions and low interest rates are encouraging occupiers to consider this alternative solution.”
According to the latest research from Cushman & Wakefield, in France in the first quarter of 2017 two major mass market retailers Samada/Monoprix and Alinea did just that as they continued to review their supply chain organisation, moving from obsolete warehouses to new ones through pre-letting premises or turnkey.
Sosef says: “Speculative development starts have declined as a total volume to around 25 per cent against an average of 29 per cent in general. The real estate market is still, in terms of developer approach, cautious about speculative development following on from the crash in 2008/9 which saw too much speculative space in the market and an overhang that had an impact years after.”
He adds: “over all starts [in 2017] of 2 million sqm are lower than expected partly to do with the inherent developer caution and partly to do with scarcity of land available for development now that the market is accelerating”.
In addition there is a scarcity of contractors to actually build the space – effectively putting a brake on development.
According to Cushman & Wakefield, in many countries supply is hardly available on prime locations, as a result emerging locations continue to increase in popularity. In France there has been a marked shift towards regions outside the main logistics corridor (Lille-Paris-Lyon-Marseilles).
Bruno Montigny, JLL’s lead director of industrial & logistics, says: “While there was lower activity in 2016 year-on-year within the main French logistics corridor, overall occupier demand was still vigorous as the newly-observed shift into the regional markets continued.”
This has also been reflected in Germany and the Netherlands owing to the increased scarcity of land for development in and around the main hubs especially for the larger logistics facilities of 50,000 sqm plus.
With the market so constrained there is the inevitable movement in rent levels and land prices. Sosef says: “We are seeing rental growth not only apply for the UK in line with the improving market conditions and low vacancy levels, we see rent growth now spreading towards continent.
“In Q1 2017 we saw rent growth in Netherlands and saw a lot of activity in this market at the same time we saw vacancy at record low levels in Germany and extreme local vacancy below one per cent in Munich one cannot help but see rental growth there.”
“Looking to markets in Madrid, Barcelona and Budapest – those markets were hit hard [in the crash] but rental growth is coming back to previous levels; they are catching up.
Sosef goes on to add that there are there are two markets where rent levels are lagging: France and Poland. In France the economy is at present stifled and not conducive to rent growth while in Poland where there are lower barriers to development there is in effect plenty of stock available.
Spotlight on Germany
Germany, the single largest logistics market in Europe worth some €270 billion, has had a busy start to 2017. According to research by JLL the take-up volume (owner-occupiers and lettings) in the market for warehousing and logistic space in the first three months of 2017, again reached a high level of around 1.48 million sqm.
“Although this was 11 per cent lower than the result for the first quarter of 2016,” says Frank Weber, JLL’s head of industrial agency in Germany, “it exceeded the ten-year average by 20 per cent.
“Due to the sustained demand for space and positive economic forecasts,’ he adds, “we expect take-up to significantly exceed the six million sqm mark once again for the year as a whole.”
Germany recorded the highest take-up levels ever in 2016, with a yearly total of some 6.7 million sqm being leased or bought by tenants and owner-occupiers.
The big five conurbations (Berlin, Düsseldorf, Frankfurt, Hamburg and Munich), accounted for some 421,400 sqm considerably lower than in the same period last year – although exceeding the ten-year average by four per cent.
Weber says: “The individual regions have developed differently over the past 12 months.”
Most space in the big five was taken up in the Hamburg region with 158,000 sqm, – an increase of 13 per cent year-on-year. This was followed by Frankfurt with 103,000 sqm.
There were no lettings of premises greater than 20,000 sqm in the big five in the first quarter of the current year. Two of the three largest deals were concluded in the Hamburg region, where around 17,000 sqm will be constructed as the Hamburg Opera’s storage facility, and a further 15,000 sqm will be built for Transgourmet, Europe’s second-largest cash & carry and wholesale supplier for professional kitchens, as an owner-occupier.
The Düsseldorf region registered the second biggest letting, with the logistics service provider Expeditors International signing a contract for 18,900 sqm of office and storage space at developer SEGRO’s SEGRO Logistics Park Krefeld-Süd. The ten year lease will run from October 2017 and can be extended for a further five years.
The SEGRO Logistics Park Krefeld-Süd has a total area of some 210,000 sqm. Tenants include the global transport and logistics service provider DSV, the sporting goods manufacturer Asics and the logistics company UPS. JLL advised SEGRO on the deal.
The vast majority of take-up so far this year has been outside the big five. In the first three months of 2017 take-up of space exceeded 1 million sqm.
One of the biggest lettings here was settlement of the Daimler AG logistics centre in Duisburg, where a total of around 50,000 sqm will be built in two phases. The next two largest deals also related to new buildings: a logistics company built around 34,000 sqm for its own use in Dortmund and Amazon is taking 30,000 sqm, in the “Garbe Logistikpark” in Westfalenhütte in Dortmund.
In total, 81 per cent of take-up outside the big five was accounted for by new buildings/project developments.
It is important to note that current first quarter take-up is ten per cent lower year-on-year, but matches the five-year average and even exceeds the ten-year average for first quarters by 27 per cent. Around 57 per cent of the take-up was generated by lettings, five per cent more than twelve months ago, while take-up by owner-occupiers fell by 25 per cent.
Demand is on the up in Germany with Andreas Fleischer developer SEGRO’s business unit director responsible for Northern Europe, saying: “We have seen demand increase on light industrial and last mile delivery and at the same time we have seen the number and size of pure logistics warehouses, especially build-to-suit getting bigger and bigger – this is against a backdrop of increasing scarcity of immediately available space and the land on which to build it.”
The reduction of take-up recorded by JLL in the Berlin (-7 per cent) and Munich (-11 per cent), regions has been attributed mostly due to limited supply.
And despite there being some 850,000 sqm of warehousing space currently under construction in the big five, just 19 per cent of this is still available on the market.
Weber says: “In certain regions we are in danger of running out [of suitable warehouse space].”
Indeed, Dirk Sosef of Prologis says: “We are seeing extreme local vacancy rate levels with Munich recording below one per cent.”
Fleischer says: “Logistics development is more and more challenging in Germany due to the scarcity of land in the right places with the right permits; this is particularly difficult in the urban areas.”
Not surprisingly the biggest driver of demand has been e-commerce and in particular the last mile delivery, which has fuelled the increase in parcels logistics over the past few years. A report by analyst McKinsey entitled Parcel Delivery: the future last mile, noted that Germany’s parcel delivery would double to 5 billion parcels a year by 2025.
“Finding suitable sites,” says Fleischer, “in Munich, Frankfurt and Stuttgart these days is nearly impossible.”
Despite that SEGRO is building a new logistics centre on 2.3 hectares at Munich Airport. Known as SEGRO Logistics Centre the facility will total 12,800 sqm of warehouse, office and mezzanine area. JLL is advising.
Sites to the north of the country are easier to locate but as companies seek larger and larger units to take advantage of economies of scale, land which once could have accommodated a number of occupiers is increasingly being taken by just one.
Developer investor Verdion reports that it is constructing a 104,000 sqm regional distribution centre for Amazon in Werne while Goodman is constructing a 235,000 sq m facility for supermarket group Metro in Marl in the Ruhr region.
Unsurprisingly, rent levels in Germany reflect the scarcity of space and land with areas where vacancy rates are low seeing the highest rents paid.
According to JLL research prime rents for warehouses of more than 5,000 sqm remained stable in all regions in the first three months of 2017.
At €6.75/sqm/month, the highest rents were paid in Munich. This was followed by the Frankfurt (€6.00/sqm/month), Hamburg (€5.60/ sqm/month), Düsseldorf (€5.40/sqm/month) and Berlin (€5.00/sqm/month) regions.
Fleischer says: “Rents in Hamburg and Berlin are stable but in Munich, Stuttgart and Frankfurt these are hotter – in the south of Germany you will have to pay a bit more and take space while you can.”