Logistics

After a period of unprecedented logistics demand during the pandemic, 2023 was a tougher year. 2024 begins with the same challenges, but with expectations that the economic outlook will improve and the sector’s strong fundamentals will continue to be apparent, albeit at more normalised levels.

Key Takeaways

1. The logistics sector has seen lower take-up, due to economic uncertainty and the end of the rapid expansion of online retail. Grocery and discount retailers, and manufacturers of sustainable equipment and renewable energy are expected to increase their take-up shares in 2024. 
2. Developers are reacting to slower demand and the supply pipeline is thinning. Vacancy rates are expected to increase during H1 2024, before they start stabilising during the second half of the year, in most cases, at levels far below the historical norm.
3. Prime rents will continue to increase, although at a more moderate rate. However, the market could become two-tiered, with an expanding gap in rents between new prime units and older second-hand buildings.

Demand to remain subdued, new stock delivery to slow down significantly

Take-up to stabilise, reflecting the macroeconomic backdrop

There are several reasons for the significant drop in logistics take-up compared to pandemic-era levels, including ongoing economic uncertainty. However, the most important factor is the end of the extraordinary growth in logistics space needs coming from online retailers. During the pandemic, these retailers were forced to expand rapidly, occupying in a few months space it would normally take them years to acquire.

While e-commerce will keep growing, 2024 will not see a return to these sorts of growth rates. More traditional logistics sectors will see their appetite for expansion affected by the weak economic outlook. Still, we anticipate outperformance in sectors such as manufacturing, particularly from sustainability-related producers such as electric vehicle battery companies, as well as grocery and discount retailing. Outsourcing and restructuring of supply chains – including near-shoring strategies– should continue to benefit third party logistics players and boost their space requirements. However, they are now becoming much more conservative in their real estate expansion plans.

New supply rapidly decreasing but older warehouses more challenged

While the shift has not been immediate, developers have reacted to lower demand levels by reducing construction activity. They are also facing difficult conditions, due to increases in construction and lending costs and due to the prime yields demanded by investors rising to levels that are often uneconomic for developers of new-build units. We expect the development pipeline to continue to fall. Vacancy rates have increased from the extremely low levels reached in 2022, and are expected to increase even more, but will remain significantly lower than historical averages.

An important trend to watch during 2024 will be the change in the composition of vacant stock. Older units coming back to the market could struggle to be leased unless they undergo refurbishment, to offer occupiers operational efficiencies, including new ESG features. We anticipate the rental gap between new prime units and older units to widen, effectively creating a two-tier market.

Figure 10: Q1-Q3 Logistics Take-up and Average Logistics Vacancy

Source: CBRE Research (Q1-Q3 average take-up 2015-2019 / 2020-2022 / 2023 vs vacancy rate at the end of each period)

Figure 11: Logistics Space Under Construction at the End of Q4 2022 vs End of Q3 2023

Source: CBRE Research

Note: Benelux includes Belgium and the Netherlands; CEE includes Czechia, Poland, Romania and Slovakia; Iberia includes Portugal and Spain.

Prime rents still expected to grow

Rental growth anticipated for the prime segment

Although moderating from the double-digit growth seen in 2022, prime rents are forecasted to continue to increase by around 4% at an aggregate European level, driven by occupiers looking to maximise efficiency and comply with sustainability goals. The strongest rental growth is expected in Italy, Germany and Spain.

With inflation easing, this moderate prime rental growth in 2024 should still represent an increase in real terms, something not common for the sector before the pandemic. Nevertheless, occupiers are undertaking cost-saving measures and reviewing their real estate strategies accordingly. However, they will still need to keep the wider supply chain strategy in mind, avoiding decisions that could damage their service levels and reduce their market share.

Given this background, lease incentives in the sector are expected to increase in 2024 with the magnitude of these rises closely related to the level of vacancy rates in each market.

Occupier ownership strategies

We anticipate another wave of sale-and-leaseback activity, particularly from cash-constrained occupiers, which should be well received by the investor market.

At the same time, more cash-rich occupiers could benefit from lower pricing and muted competition from developers, to secure sites and even self-develop their future warehouse needs.

Figure 12: European Annual Prime Logistics Rental Changes

Source: CBRE Research. Weighted annual average in nominal terms of the 39 prime logistics markets that CBRE forecasts in Europe