Jones Lang LaSalle EMEA Research Blog

Posted by: Alexandra Tornow
Industrial Research
Jones Lang LaSalle EMEA Research

This week, we have released our Q1 results on European logistics and industrial markets.

• Logistics and industrial investment showed a strong start to the year – volumes reached €3 billion, more than double that recorded in Q1 2012 and 5% above Q4 2012
• The logistics occupier market showed a more mixed picture – take-up amounted to 2.9 million sq m, the same volume than in Q1 2012 but 21% down on Q4 2012 due to increased occupier caution amid the economic outlook
• Prime rents and yields remained broadly stable over the quarter

You can find additional information on our Industrial Interface micro-site.

European Logistics and Industrial investment                     

European Logistics Take-up

Posted by: Alexandra Tornow
Industrial Research
Jones Lang LaSalle EMEA Research

Over the last two weeks my working days have been filled with conversations related to our latest white paper A new logistics real estate landscape – The impact of multi-channel retail on logistics. In particular developers and investors are keen to explore the opportunities – and understand the challenges – that arise with the evolution of e-commerce in the logistics real estate sector.

The five main reasons the European logistics real estate investment market will benefit from growing e-commerce:

1. The modern customer is driving the future of supply chains with information such as prices, quality and availability of products only a click away. The shift in logistics behind these evolving supply chains is becoming the backbone in delivering the best multi-channel customer service. As a result, logistics real estate will become increasingly attractive to a wider range of investors.
2. Occupier requirements for large fulfilment centres are now more prevalent in the mature markets – a trend that is not only driven by the pure online giants such as Amazon or Zalando (the German fashion e-tailer). Requirements are coming also from other retailers or 3PLs who are currently re-organising their supply chains to respond to an increase in e-commerce related contracts. The latest evidence arrives with news of the ground-breaking delivery of a 175,000 sq m logistics centre in Erfurt (Germany) for German bookseller KNV. The centre will be able to service around one quarter of the whole German market for KNV and will employ around one thousand permanent employees.  As online sales and multi-channel retailing is gathering pace and the pressure of short delivery times is increasing, requirements for logistics mega-centres will continue to grow.
3. Occupier demand is also significantly intensifying for parcel hubs and cross dock centres. These buildings facilitate the throughflow of parcels at close proximity to large urban areas, ports and airports. As such they have a high strategic importance in the e-commerce supply chain. These centres are smaller in size than e-fulfilment centres, generally between 10,000-20,000 sq m – thus providing an investment size that is appealing to investors.
4. Parcel hubs and sortation centres do not only provide a crucial support in online delivery they also benefit from the growing importance in city/urban logistics – another phenomenon currently driving floorspace demand for these facilities.
5. Changing building requirements and location strategies are driving development activity for this new type of building. This in turn is leading to increasing liquidity in the wider logistics real estate market.

Although occupier demand for dedicated e-commerce logistics space is still relatively small, rising online-sales will drive significant change in future logistics space requirements. It will be this change that will provide savvy developers and investors in logistics assets with plenty of new opportunities.

Posted by: Tessa English
Industrial Research
Jones Lang LaSalle EMEA Research

We have now finalised our 2012 numbers for the UK ‘Big Box’ market.  I think it is fair to say that the level of take-up over the year was disappointing and below the expectations we had at the start of the year.

This was largely because occupier activity got off to such a slow start.  Indeed, in the first six months of the year, when the economy contracted, just over 4 million sq ft of Grade A logistics space involving units of 100,000 sq ft and over was taken up. This was, the lowest half-yearly total recorded over the past six years (2007-2012).  Although demand picked up in the second half of the year, it was not enough to counteract this poor start. Over the year as a whole only 11.9 million sq ft was taken up, underperforming 2011 by 9%.    

However, although demand was subdued, available supply fell.  At the end of last year, supply was 15% lower than it was six months previously.  The amount of new floorspace involving units of 100,000 sq ft and over was at an all-time low, with just 8.3 million sq ft available. 

At the start of 2013, there are some signs that the market is starting to improve, albeit at a tentative pace. There are several big enquiries in the market, some at an advanced stage.  In addition, there are two units each totalling 166,000 sq ft that are speculatively under construction in the UK at Lancashire Business Park.  These are being built after a fire destroyed a unit totalling 450,000 sq ft on the estate in 2011.  These two units are the largest industrial/logistics units to be built in the UK since the onset of the recession.   Along with these, a few developers are considering building speculatively due to the lack of Grade A supply currently in the market.  But even with these intentions, it may not necessarily happen.  Recently there a have been a few examples where developers considered sites for speculative development but actually secured pre-lets before proceeding.  

We don’t expect 2013 to see a huge bounce back in demand, in part because the economy is expected to grow only modestly at best.  However,  with a good level of market activity recorded in January so far and a number of big retailers expected to take large units this year, towards the end of the year we can expect to see an upturn in demand and that, as a result, 2013 will see a higher level of take-up than 2012.

Posted by: Alexandra Tornow
Industrial Research
Jones Lang LaSalle EMEA Research

Within the real estate world, you are constantly reminded of the basic rule of success: ‘location, location, location.’ No matter what asset class – from offices, high-street shops, shopping centres to logistics units – it always comes down to the location.

Or does it?

Well, in the world of big box logistics, it’s a definitely ‘yes, but’, because, what characterises a prime location for these units is not as simple as for other asset classes. What defines the ‘best’ logistics location is connectivity and cost.

Connectivity because if you want your supply chain to be responsive to customer demand, global links, as well as proximity to suppliers and customers, are a must.

Cost because your profit margin is normally tiny (if you are a third party logistics provider) and the need to keep costs to a minimum to maximise overall profits is extremely high as well (if you carry out your own logistics).

How do you combine these two extremes – the best location and the lowest cost? This was a question that was discussed at a recent industry event held at one of the best connected European logistics hubs – Amsterdam Schiphol Airport.

The debate centred around one particular question: are occupiers still prepared to pay a premium to be located within a major gateway hub? Or otherwise stated, is the pressure to save costs leading occupiers towards alternative, lower cost destinations across Europe that also offer excellent transport infrastructure?  

To me, the facts are clear. Just consider the latest trends in the sector, from the changes driven by multi-channel retail, to shifting manufacturing locations and demographics, to the latest rental movement across European logistics hubs. All recently-built large e-fulfilment centres are located in areas never regarded as logistics hubs before (just think of the new Amazon warehouses). They have been chosen for their access to transport infrastructure, existing workforce availability, because of grants (at least in some cases), and, in particular, because of lower land prices – and thus lower occupational costs.

On the other hand, we have seen limited leasing activity in those historic hubs where rental levels for modern properties are often significantly higher than is typical for European markets. In Amsterdam, for example, high asking rents are driving potential occupiers to lower-priced locations in the southern part of the Netherlands, keeping vacancy levels in Amsterdam stubbornly high.

One remark from a leading logistics developer at the event particularly struck me: “A logistics property is the least emotional building that exists”. There will always be occupiers that wish to be located in a state-of-the-art glossy city office building, or want to elevate their brand with a shopping centre that is architecturally daring. But the one thing that will make a logistics property appealing is the savings that can be achieved by its location!

Location, Location, Location? For the European big box logistics real estate market ‘Cost, Cost, Cost’ is the key to success.

Posted by: Alexandra Tornow
Industrial Research
Jones Lang LaSalle EMEA Research

A beautiful blue sky on Sunday morning clearly boosted my mood and after breakfast at home I was ready to kick-start preparations for this year’s Expo Real. My private wireless LAN worked surprisingly well (mostly, it does not) and the Lufthansa check-in page came up smoothly. That’s where my frustration started. Late Sunday morning was undeniably too late – all that remained was a middle seat in the flight to Munich. Next, I checked the weather forecast– rain and cool temperatures, instead of the warm and sunny days you normally can count on during Expo!  Nevertheless, after a crowed early Monday morning flight (seat B15!), we were greeted with the usual sunshine in Munich. This changed for the following two days, when cool and rainy weather meant attendees remained inside the exhibition halls with crowds moving in the corridors at snail’s pace and noise levels making any conversation a challenge.

Despite crowded halls, international attendance appeared to be weaker than in recent years, as delegates from the harder-hit Eurozone economies were mostly absent. Still, the general mood can be best reflected as “cautiously positive” with most attendees supporting the view that market fundamentals are still in a good shape and opportunities remain plentiful – although significant challenges persist. “Core” and “prime” were – unsurprisingly – the most used words.

Attendees normally come to Expo Real for networking, while interest in panel sessions and round tables has been rather limited in past years. This year however, there was another word that saw an unusual high number of attendees drawn to various conference panels: Change.

Kicking off a series of sessions about demographic change was Germany’s Federal Minister of Transport, Building and Urban Development, Dr. Peter Ramsauer. Unsurprisingly, he gave a rather political speech (in other words not providing real insight into the topic, let alone any conclusions).His presence nevertheless highlighted the rising awareness that effective collaboration between governments, local authorities and the real estate sector will be vital to successfully tackle the challenges of a changing environment.

Particularly strong emphasis was given to the evolving retail and logistics sectors. Panellists agreed that the future of retail will be multi-channel with growth in e-commerce remaining the main global theme for the coming years. High street shops and shopping centres are set to change in design and functionality, and retail brands must take demographic diversity and multi-culturalism more seriously. Ultimately, this will require a change in distribution networks, boosting activity in logistics real estate market. Panellists saw the potential in the logistics asset class – still in its infancy (is this true?)  – With strong fundamentals and the prospect of growth over the next decade

Last but not least, while investors in an uncertain environment have kept their focus on mature, liquid real estate markets, a frequently asked question was: where are the emerging markets? Russia made the race in panellist’s opinions – no surprise. I personally thought that Turkey was not given enough credit as an upcoming investment location, especially as all panellists agreed it has strong fundamentals, particularly in the thriving retail and distribution markets.

No doubt we will all be back in Munich this time next year. It will be interesting to see how predictions have worked out and compare thoughts about emerging locations again. Over a glass of beer and a pretzel, of course.

Posted by: Jon Sleeman
Industrial & Logistics Research
Jones Lang LaSalle EMEA Research

There is increasing interest in logistics property as an asset class, as evidenced by the launch last week of a new Pan-European Logistics Property Index by Investment Property Databank. To understand how logistics property markets across the EMEA region may evolve we need to look beyond basic market statistics at the underlying drivers of change.  Here are our top five. 

First, world trade and seaports. Long-term forecasts suggest that world trade growth will exceed world GDP growth, and about 90% of world trade is handled by sea ports. This will generate growth in container traffic, and with container ships getting bigger some ports will be better placed than others to win the competition for freight. These ports will develop as hubs and encourage a rise in ‘portcentric’ logistics, including large logistics facilities at ports and / or at intermodal inland ports.

Second, internet retail is growing rapidly and this will be an increasing source of demand for both large and smaller logistics units. For example, Amazon has taken a number of very large facilities over recent years, notably in the UK and Germany, and it now has additional requirements for smaller facilities to provide same day delivery to many UK cities.

Third, manufacturing. The rising costs and risks associated with extended global supply chains, are encouraging companies to look at more local suppliers, or at bringing some manufacturing closer to the market it serves. Proximity to market also increases supply chain ‘agility’, enabling companies to respond more quickly to volatile demand.  These trends will create more demand for industrial and associated logistics facilities in Europe as some manufacturing moves closer to market.  Parts of North Africa may also be good ‘near shore’ locations to service European markets.

Fourth, city logistics. Nearly three-quarters (73%) of Europe’s population lives in urban areas and this proportion is rising. Cities are engines of economic growth, but have distinctive logistics issues due to the pressure on land from competing uses, congestion and the fact that they are often subject to more regulations effecting transport and warehouse operations than other areas. As cities grow in terms of their populations and economic activity, and as pressures increase to find more sustainable logistics solutions to supply them, we will see increasing demand for logistics facilities in and around cities, including shared user facilities operated by logistics companies.

Lastly, but by no means least, demographics. Population has always been a key factor influencing logistics markets, particularly the location of distribution centres servicing retail stores. Long-term, differential rates of demographic growth and ageing, and associated changes in incomes and spending, will have a dramatic impact on global supply chains.  For many companies, this will drive significant change in their current logistics networks.

That Turkey has become the next emerging logistics location was another outcome of our recent survey of European supply chain professionals. It was in the top three nominations of more than one quarter of all respondents – ahead of Poland and Romania.

Contemplating the results, this is not too surprising. First of all, Poland and Romania are already established logistics markets, not emerging locations.  Without doubt, their logistics will continue to grow and evolve. But supply chain professionals looking to identify emerging markets are seeking  “new” opportunities. Those markets are required to have three key attributes according to our survey: a favourable geographic location; strong economic growth; and political stability.

This is why so many would rank Turkey as their logical choice. The country offers all the required attributes. Its location bridging Europe, the Middle East, Asia and Africa is ideal for an international logistics hub. Its economy is growing strongly based on a stable political framework. There have been significant investments in infrastructure with more planned. A large and relatively young population offers a huge labour pool which is increasingly well trained. Domestic consumer spending is on the rise and foreign direct investment has picked up over recent years. Strong growth in container traffic in the main seaports around Istanbul (Ambarli, Mersin, Izmir and Haydarpasa) is another driver for the Turkish logistics market.

There is no doubt that demand for modern logistics units, in particular around Istanbul and a number of other large cities, will significantly increase over the next few years. There is also no doubt that the modern logistics stock must grow significantly to accommodate this demand. Today, this market segment is underdeveloped – so this provides an opportunity to benefit from first mover advantage for international third party logistics providers, developers and investors.

For more information on our survey, please click here.

Posted by: Alexandra Tornow
Industrial Research
Jones Lang LaSalle EMEA Research

Recently, I attended the CSCMP European annual conference in Frankfurt, using the occasion to exchange views and best practice about the latest trends in supply chain management. A topic I found particularly interesting and which was addressed on several occasions was home delivery.

While not new, the importance of efficient, sustainable and timely home delivery is moving increasingly into the focus of the logistics sector. Significant shift in consumer behaviour in recent years, driven by social media and the ability to purchase on-line at any time, is putting increasing pressure on on-time home delivery. Retailers in particular need to align their supply chains to ensure short delivery times (with next-day delivery increasingly seen as a competitive advantage).

Concerns are also arising about the sustainability of this distribution mode. In the past, cities have developed without much thought to distribution. But increased urban traffic has led to severe congestion issues in most – if not all – large conurbations. The situation calls for a sustainable solution, which will require strong collaboration between the logistics sector, local municipalities and governments.

Increasing calls to reduce CO₂ emissions are also putting more pressure on the sector. The significant growth of e-commerce and home delivery are often seen as a threat to a more sustainable supply chain. On the other hand, they might also help reduce traffic to shopping centres and supermarkets and CO₂ emissions by private car use. But this is likely to be a longer term effect, as long as customers continue to enjoy the “store experience”.

Weather the rise in home delivery increases or reduces overall traffic in urban areas remains to be seen. But whatever the outcome, it is clear that further measures to reduce congestion and emissions need to be taken soon.