Prime headline rents in the logistics and industrial sector across European markets remain robust but the rate of increase is showing signs of slowing following a period of exceptional growth, according to new research from real estate services firm Cushman & Wakefield.
Against a backdrop of high demand and constrained supply, rental levels reached record highs across many European markets. However, new data reveals that in the 12 months to Q2 2023, prime logistics rental growth averaged 13.8% across European markets, compared with 15.2% for the year to Q4 2022.
Nonetheless, the current rental growth of 13.8% sits markedly above the pre-pandemic five-year average rental growth of 2.5% per annum.
Take-up for European logistics and industrial space slowed to 33.3 million sq m in the rolling 12 months to the end of Q2 of this year, down by 27% from 45.9 million sq m for the 12 months to end of Q2 2022. Despite the slowdown in occupier activity, the market is still outperforming the pre-pandemic average annual take-up of 30 million sq m per year.
Tim Crighton, Head of Logistics & Industrial EMEA, Cushman & Wakefield, said: “Typically, rental growth is seen as the barometer of success for real estate asset owners, while tenants aspire to keep rents low and grow margins. This commercial tension has heightened as tenants battle with upward pressure from rising costs such as fuel, utilities, and labour. However, as inflation levels regulate, we would expect to see further scrutiny of rents.
“Looking forward, we have an increasing development pipeline, however in the short term, we would anticipate this to result in an increased vacancy rate. Of course, this will create more choice and competitive pricing for occupiers, but as a bigger picture it signifies a return to more balanced activity after experiencing a supply-constrained market for an extended period.
“It is this return to more balanced activity that we in turn see across the asset class, as whilst rental levels will soften it is still expected to not only grow, but outperform other real estate asset classes. This once again demonstrates the great resilience we have seen in the first half of 2023 with take-up and demand for logistics and industrial space continuing to outperform pre-pandemic levels.”
Sources of demand include businesses focused on nearshoring activities, notably in countries in Central & Eastern Europe (CEE) where take-up sits well above the pre-pandemic average.
In contrast, larger markets have been more affected by the slowdown in demand with Germany, Poland, France, the UK, and the Netherlands all reporting significantly lower take-up in the year to end of Q2 2023.
Investment volumes for the 12 months to end of Q2 2023 were 63% lower than the same period a year prior, sitting at €37.7 billion. The dramatic slowing of activity can be attributed to investors awaiting market stabilisation of pricing following outward movement in interest rates and financing costs. Nonetheless, there are some early signs of stabilisation in this regard, albeit activity will take some time to return to the market.
Sally Bruer, Head of EMEA Logistics & Industrial Research & Insight, said: “Business confidence will remain under pressure, with a challenging economic climate of financial instability and inflationary increases still looming over businesses and consumers alike. As we head towards year end, however, we anticipate that occupier take-up will rebalance at levels more akin to those seen pre-Covid. This slowdown in demand means that developers are considering their speculative development pipelines, which we believe will contribute to a continuation of constrained availability. Our view is that this, in turn, means ongoing rental growth – a testament to the sector’s strong fundamentals.”