Where next for the logistics sector, given the rapidly changing economic backdrop? What are the implications of trends around nearshoring and online retail for logistics in the medium term? And how are developers, investors, and occupiers across the European continent responding to these challenges?

Presenters:

• Oliver Salmon, Director, World Research
• Kevin Mofid, Head of EMEA Logistics Research

This year, our annual Impacts programme explores the role of real estate in helping people and businesses to ‘reconnect’ following the pandemic. For the logistics sector, facilitating connections is literally the modus operandi. And while the importance of the sector to the smooth functioning of the global economy has often been overlooked in the past, this all changed during and since the Covid-19 pandemic.

But the well-documented tailwinds that have propelled the logistics sector forward in the last few years are beginning to fade, replaced instead by a series of growing macroeconomic headwinds; including high inflation, rising interest rates, and weaker consumer demand. In this webinar, we look at the implications of this rapidly changing economic environment for logistics real estate. First, Oliver Salmon, Director in World Research, begins with a summary of the outlook and key drivers of demand for logistics. Then, Kevin Mofid, Head of EMEA Logistics Research, presents a deeper dive into the current outlook for Europe.

Encouragingly, the overarching conclusion is that the logistics sector is facing these headwinds from a position of strength. Record take-up in 2021 across Europe has pushed the average vacancy rate for the region down to just 2.9%. This provides a significant buffer against any future weakness in occupier demand. According to Kevin Mofid, “it would take a huge amount of development or secondary supply to come to the market to get us anywhere near a double digit vacancy rate,” which based on analysis in the UK, would be consistent with falling rents. Indeed the feed-through of higher inflation to construction costs will weigh on speculative development moving forward, helping to insulate vacancy rates from “over-development that we would ordinarily expect when occupier demand is at the elevated levels we’ve seen over the last two years.”

Over the longer term, the fundamentals are also supportive for the region’s logistics sector. Emerging from the pandemic, the buzzword for supply chain managers was resilience. Subsequent events, including war in Ukraine, and disruptions linked to climate change, have only reinforced this trend. In the short term, businesses have built this resilience through restocking inventories, reverting to a ‘just-in-case’ inventory management philosophy, supporting an increase in demand for more space globally.

In the long term, firms are increasingly looking at relocating production activities closer to home markets, a trend often referred to as ‘nearshoring,’ as a way of reducing the impact of disruption related to geopolitics, environment, or transportation networks. The evidence for nearshoring is still primarily anecdotal in nature, but according to Kevin, the phenomenon is already driving deals in the European logistics sector. And a more concerted movement towards nearshoring production will be beneficial to the European logistics sector. As outlined by Oliver, nearshoring will benefit “high-income, developed economies, with good environmental protection standards and strong business operating environments.”

Finally, while Oliver highlights that aggregate ecommerce penetration rates have returned to pre-pandemic trends, in line with the removal of public-health restrictions on peoples movements, there remains some persistence across sectors more suited to online retail, such as electronics and clothing. And demographic change will support growing ecommerce penetration in the future, which will continue to drive increased requirements across Europe for warehousing space.