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Investing in the real estate logistics sector has traditionally been an income play: decent yields, but little to excite in terms of rental growth. After all, warehouses have long been cheap to build, and the low barriers to entering the market ensured supply was able to keep up with the demand. Nowadays, the dynamic has shifted. As this week’s Chart Room shows, in the last three years, the pace of growth of rental income for European warehouses has accelerated far faster than either high-street retail units or offices.
Why are warehouse rents soaring? Part of the answer lies in the shift to online shopping - which is also partly to blame for the collapse in high street rents in recent years. Over the course of the pandemic, there was a far higher demand for logistics real estate as ecommerce activity soared. The lockdowns are now long over but this shift from offline to online continues. Within Europe, this is particularly true in the south of the continent, where the take-up of online shopping was traditionally far lower than in other markets such as the UK - and that’s continuing to drive the demand for warehouse space across the whole region.
Recent demand for warehouse space has also been boosted by reshoring, as companies shore up their supply chain resilience. This trend has picked up pace in the wake of disruptions to supply chains from the pandemic and accelerated further since Russia’s invasion of Ukraine in 2022. Firms are maintaining far higher inventory levels, transitioning to a ‘just-in-case' approach to stocking rather than ‘just-in-time', and that is lifting demand for logistics real estate.
But there’s yet another dynamic that could push rents in this sector up further over the next 12 to 18 months. We think there could be even further impetus for rental growth over the next 18-24 months as demand rises along with a pick-up in GDP growth, precisely at a point when new build supply tapers off from recent highs.
There are several reasons for the potential shortage in new assets: financing conditions have become tougher, building materials’ costs are rising, and developers have been delaying construction of new facilities until more clarity in the economic outlook is available. Moreover, there’s also more demand for sites and more complications around planning new warehouses, particularly in more densely populated countries such as the Netherlands, where land use can be more rigorously controlled or where there is not sufficient labour to staff new buildings.
All of this suggests that investors should consider European logistics as a sector that’s storing up some future rental growth for the years to come.