Basic economics dictates that when demand outstrips supply, prices are likely to rise.

Alex Verbeek

This is, of course, not a hard and fast rule given the varying price elasticities of demand and the fact that economics is not an exact science. However, in the case of logistics, this basic rule very much applies to current market conditions.

For some 20 years, industrial and logistics property has, comparatively, been the proverbial ugly duckling of the real estate market, taking a back seat to the likes of prime office and retail. Rental and capital values have seen nominal growth over that period, so it is reasonable to expect a certain nonchalance from investors.

As everyone knows, the past few years have seen a remarkable renaissance. Institutional capital has flooded into the sector, as investors have begun to recognise that logistics property is shedding its old image and is fast becoming the golden goose of real estate.

Looking at the demand side of the equation (and in fear of making logistics market commentators sound like a broken record), ecommerce has dramatically altered occupier interest in the sector. Vacancy rates in retail property are still significantly above pre-crisis levels, not because retailers have reduced the amount they sell, but because they sell it in a different way.

This steady increase in demand shows no sign of wavering. Although the fortunes of the retail market may change, the ongoing growth of ecommerce as a proportion of retailers’ business models would comparatively mitigate the damage done by any noticeable decline in sales. This whole new pool of potential occupiers arriving over the past five to 10 years has meaningfully increased demand.

The nature of property is that while demand can change in an instant, the levels of supply aren’t quite as dynamic. A combination of a finite land supply and a protracted planning process has left a dearth of high-quality space, and delivering what the market requires simply takes time. We have, therefore, been left with a supply/demand imbalance that has positioned the logistics market in the sweet spot of its own cycle. Since that inflection point, capital values have continued to rise as demand has increased. However, with capital values now at unprecedented levels, the natural question would be: how long will this last?

The fact that retailers are continuing to increase their online activities as a proportion of overall sales indicates that there is room for further capital value growth. On top of that, there has been a strong demand-side growth in areas outside ecommerce that has helped to solidify the fundamentals.

History has taught us that growth on the scale that the logistics property market is seeing cannot be maintained, and that timing is key. As it stands, the market has some time. The demand is there from occupiers and institutional money, and companies, such as IDI Gazeley, which have a strong track record in development, are extremely well positioned to fill the gap over the coming years.

Alex Verbeek, SVP & Regional Managing Director UK, IDI Gazeley