Ecommerce penetration accelerates and vacancy levels drop to historic lows

Leading global investors are strongly increasing their allocations to logistics real estate, drawn by the market’s robust fundamentals including accelerating ecommerce penetration during the Covid-19 pandemic, constrained warehouse supply and the enticing prospect of rental growth, over 500 participants heard panelists debate at Prologis’ first online European webinar:  ‘Acceleration… or a New Direction?’

Moderated by Dirk Sosef, Vice President of Research and Strategy at Prologis Europe, the panel brought together an impressive line-up of guest speakers from Tesco Pension Fund, UPS and leading international investment managers Norges Bank Investment Management, CBRE Global Investors as well as Almazara Real Assets Estate Advisory to discuss the implications of a reopening world and the risks and opportunities for logistics real estate.

Dirk Sosef kicked off the discussion with a presentation showing how the logistics customer base is growing and diversifying at a time that new supply is being delayed, exerting further downward pressure on vacancy levels. Occupancy rates are now 200 basis points higher than at the previous peak level in the market’s cycle in 2019, while new forecasts point to ecommerce penetration rising to 17.5% on average in Europe by 2024, from 11% in 2019. This is 250 basis points higher than the pre-Covid forecast.

Logistics is “most definitely” the sector of choice for many investors at this point of time, with the coronavirus crisis accelerating trends that were already underway and further highlighting its resiliency as an asset class, Achal Gandhi, CIO Global Indirect Real Estate Strategies at CBRE Global Investors said.

Ed Lerum, Portfolio Manager at Norges Bank Investment Management, noted that the sector has become much more institutionalized over the past decade due to logistics’ strong market fundamentals. “The US may serve as an indicator of where things might go in Europe,” Lerum predicted.

Judy McMahan, Portfolio Manager Real Estate, UPS, added the pandemic was also highlighting other drivers like clients’ need to have excess inventory, as a buffer against supply chain disruptions, and access to new or existing locations where it is possible to secure additional capacity. These trends are broadly the same in Asia, Europe and the US, she said.

Pension funds are increasing their allocations to logistics real estate partly because rental growth prospects are attractive compared with other real estate sectors and also because high occupancy rates are supporting relatively stable cashflows, Wietse de Vries, Partner at Almazara Real Assets Estate Advisory and Advisory Committee member for the Prologis European Logistics Fund (PELF), said.

Logistics is also the only commercial real estate sector where appraisers were prepared to withdraw a ‘material uncertainty clause’ in Q2 after they were introduced for virtually all markets and sectors at the end of March due to the Covid-19 pandemic. In March 2020, the “Material Uncertainty Clause” was introduced in order to address concerns that the real estate market could not be accurately valued while the sector was more or less at a standstill.

Jenny Buck, Deputy CIO, Tesco Pension Investment, highlighted the strong track record logistics real estate has had over the past 10 to 15 years, and noted that there were still good investment opportunities to develop more sustainable warehouses with ESG rising up the agenda.

An example for this is the carbon-neutral logistics facility for L'Oréal in Muggensturm, Germany. In March 2019 completed, the carbon-neutral logistics center offers around 101,000 square meters of logistics space. In order to achieve carbon neutral operation of this facility, the overall difference between emissions and carbon offsets must equal zero. This can be achieved by various measures such as photovoltaic systems, efficient lighting, and increased insulation

Ben Bannatyne, President of Prologis Europe, remarked that attracting labor was a major concern for many occupiers and that he was ‘extremely happy’ Prologis has the scale and critical mass to improve the quality of existing and new facilities in terms of both sustainability and wellness.

In close cooperation with the WELL Building Institute, Prologis adapted the WELL Building Standard to logistics real estate in 2019 to create a pleasant and healthy work environment for our customers' employees, thus raising the standard of our facilities. In accordance with the WELL Building Standard, Prologis developed logistics facilities in Tilburg Netherlands and Datteln, Germany.

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