Capital, occupancy, rental growth – the market climate in Europe is strong. This is the resounding conclusion following a very active 2017. Promisingly, the year ahead looks set to follow suit. The question is: what does this mean for the logistics sector as a whole?
There is plenty to get excited about. What stood out to me in 2017 (and continues to now) is just how upbeat the messages are from across the industry. From extraordinary capital availability to the quest for the ideal logistics real estate, 2017 was a bumper year.
Despite uncertainty around Brexit, the UK continued to perform well after recording double-digit rental growth for the last couple of years. While this is now normalising, we are starting to see this confidence translate across other core European markets.
Record-high demand on the continent occurred across all major markets, although France still lags. Vacancy levels again dropped to another new all-time low. However, the real turning point came in the form of consumer confidence reaching an all-time high.
In fact, it is at its strongest reading since April 2001, merrily driving up the expansion need with ecommerce leading the way.
Although development activity in the UK has slowed, we saw plenty of construction across the main continental markets, with a healthy balance of build-to-suit and speculative development.
With construction costs on the rise and a lack of available labour in some places, customers are even more focused on location requirements like workforce availability and power grid capabilities. These trends, together with the current market climate, indicate a disciplined robustness that should offer plenty of interesting opportunities in 2018.
To me, this means a few things for the logistics sector. Land constraint and positive customer sentiment will become factors in fuelling demand. Ecommerce and quickly changing consumer habits will intrinsically link real estate to supply chains, with those locations close to large population centres increasingly desirable and asset quality and flexibility ever more important.
Building on momentum
This brings me to my central thought: land scarcity already acts as a limit to new supply in many core markets. With demand expected to outpace new supply in an environment of rising replacement costs and slowing cap rate compression, we have the perfect ingredients for rental growth across many markets.
Indeed, we saw this happen in a handful of markets toward the back end of 2017.
Consolidation and platform deals were the hot topics of 2017, but perhaps rental growth may become more of a focus in 2018. Growth is not likely to be even across all markets, but we do expect to see a significant decrease in incentives and strong headline rental growth in the tighter markets.
“Land scarcity already acts as a limit to new supply in many core markets”
We also anticipate a lengthening of average lease terms as customers try to lock in rental rates.
I’m looking forward to this year. All of the momentum built in 2017 looks set to continue.
Demand for key logistics space will take on a new urgency, economic expansion will further enhance operating fundamentals and supply chain reconfiguration will continue to drive growth. So here’s to a new year filled with many exciting possibilities.
2018 preview: wise men of property
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2018 preview: European logistics set for another bumper year