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Spencer Levy
With a post-pandemic boom followed by a slowdown over the past year or so, the industrial and logistics sector has been a compelling and evolving area for the real estate business, not to mention the subject of numerous conversations on our show. Now we look at the sector from a new angle, from overseas, at a major industrial conference sponsored by CBRE. On this episode, a global perspective on what the Brits call sheds and insights into where current market conditions are creating opportunities.
Jack Cox
First half of last year was tough going, but it was really clear as we got into that second half we were gaining momentum, hand over fist.
Spencer Levy
That's Jack Cox, a CBRE Managing Director and Head of CBRE's EMEA Industrial and Logistics Capital Markets team. Based in London, Jack's been at CBRE for over 22 years and his primary focus is continental Europe, the UK and Ireland.
Robert Dobrzycki
I think we have a bit better fundamental situation in Europe and it's more about real estate in Europe.
Spencer Levy
And that's Robert Dobrzycki, the CEO and co-owner of Panattoni Europe, a partnership with the U.S.-based Panattoni Development Company. The venture, founded in 2005, formed what's now the largest development company in Europe, with business in Robert's native Poland and all across the continent, as well as more than 60 offices around the world. That also includes Canada and relatively recent expansion into India and Saudi Arabia. Coming up, crossing the Atlantic to visit CBRE's Power of Three industrial conference in Barcelona in a conversation about a sector that makes things move, industrial and logistics. I'm Spencer Levy and that's right now on The Weekly Take. Welcome to The Weekly Take being taped today in Barcelona at CBRE's Power of Three conference for our largest industrial owners. And we are privileged to have with us here today Robert Dobrzycki, the CEO and co-owner of Panattoni Europe. Robert, thanks for coming out today.
Robert Dobrzycki
Thank you for having me.
Spencer Levy
And our own Jack Cox, who is our host here today at the Power of Three.
Jack Cox
Thanks Spencer.
Spencer Levy
Great to have you both. So, Robert, I think it's fair to say we've seen a little bit of a slowdown recently in the United States, and I looked at some of the European statistics, maybe similar trends here, but why don't you tell us what's going on? Give us the big picture, what's going on in European industrial today.
Robert Dobrzycki
Well, in a few sentences, I think we are having the worst behind us. There was a slowdown. The slowdown was coming from trying to kind of kill inflation by interest rate, which feels like it's going away. We don't feel it's biting still. So, interest rate environment is improving, and investment and leasing environment is improving slowly. It could be faster, but it's improving. And probably Europe is a bit different than the U.S. We never had so much spec in Europe. Land was much harder to get in Europe, so there was no over-build. Spec finance was not so easy as in the U.S. as well, so there was less spec. So, I think we have a better fundamental situation in Europe. It's more about real estate in Europe, it was always a tighter market. Which became a bit less tight recently, it was easier to get pieces of what we do in terms of land, in terms of construction, but in the past it was extremely tight. So, there was not over-built. And we feel the market is slowly, slowly but surely improving.
Spencer Levy
I like what the phrase that you said there was more about real estate in Europe as opposed to what I would call financialization or capital markets or high trading market and that has to do with high barriers to entry. Is that a fair way to put it?
Robert Dobrzycki
Absolutely, absolutely. Obviously there is no one Europe. There's a lot of different countries with a lot of different situations and supply and demand situations, but overall I would say looking at the U.S. that from my cooperation with our U.S. teams and Europe, Europe was always tighter.
Spencer Levy
Jack, what's your point of view of where Europe logistics are today?
Jack Cox
I think we're well past the point of maximum uncertainty. I think that was probably right around 2023. And first half of last year was tough going, but it was really clear as we got into that second half, we were gaining momentum, hand over fist. I think what we lost in many senses in terms of rental growth, we replaced in really positive financing spreads and that was really helpful. It meant that investors, developers could provide a very fair bargain to their occupational clients. They could give them flexibility in lease-term in building typology. We ended the year right in line with 2019, which was our best ever year pre-pandemic in terms of investment volumes. And we're feeling pretty good about the occupier market. At the start of this year, we had some pretty well publicized volatility in the bond markets, which increased risk premia. But unfortunately things kind of came to a bit of a shuddering halt with the change at the top in the U.S., if we can put it that way. And right now, I completely agree with Robert, we've got an occupational client base that's really struggling to make long-term capital-intensive decisions, leases of big buildings and fit out. They're going to sit heavily on the balance sheet against the backdrop of 90 days to the next cliff edge. We're finding that a very challenging market in which to operate.
Spencer Levy
To put a finer point on that, you're seeing softness in large occupiers, but the capital markets have gotten a lot better, notwithstanding the current expansion of spreads. And the reason why the capital markets got better is because you got inflation under control. So your base rate here is much lower than it is in the United States because inflation is now at or below the 2% level which we all are trying to achieve. Where I don't want to go macroeconomic here, I think Europe is as concerned about deflation as inflation over the long term, which should lead to a much more favorable capital markets environment in the near term. You agree with that, Robert?
Robert Dobrzycki
Feels like that. Absolutely. I mean the interest rate environment in Europe is obviously – an inflation environment is different than in the U.S., and we always struggled with some places in Europe not to over push by interest rate. Feels like Europe is in good shape in terms of capital markets and well, feels like at the same time inflation pressures are not here, which probably are in U.S. right now.
Spencer Levy
Most of our listeners here are American, that we do have a global audience, and we certainly would like more global listeners. But when we say Europe, it's a big place. It's a lot of different countries. How do you look at Europe as an industrial leader, Jack? Do you look at a bunch of different countries as your unified force? Just give me how a European or a Brit looks at Europe.
Jack Cox
And you'd be quite careful here that I don't put some very good friends offside, but really the map of Europe from my perspective, like it's Ireland in the west, Romania in the east, Norway in the north, and Italy in the south. That's where the action is. Within those markets, the bigger ones are UK, Germany, France, and then honorable mentions for Poland, which is a big market and there's no accident that's where Panattoni Europe is growing out of. But there are a lot of markets, you know, the devil's always in the details. And when I'm talking to friends and colleagues state side, the difference is between the countries that comprise Europe is substantially more than the states that comprise the U.S. So, the devil is in the details. That's why it keeps my job as interesting as it is. But having said all of that, the similarities dramatically outweigh the differences. And it's those same fundamental principles in real estate that are the guiding principles, whether you're an investor, an occupier or developer.
Spencer Levy
Mhm. Now, we obviously have the European Union and then we have the U.K., which has its own relationship with the European Union. Are those countries – it's 27 countries, correct, within that? Are they more similar than different or are there massive differences within those 27?
Jack Cox
There are some significant differences, but for the purposes of our discussion today, I mean, the thing that's so cool about logistics is it's a borderless activity. And I think when companies like Panattoni do their best work, they're creating that commonality of supply chains across borders. Certainly how Seabury organizes its European business, we want to provide those same occupational capital solutions to our customers, be they landlord, developer, investor. We're ambivalent to that, but we want to help the flow of inventory be as smooth as possible. I think when we have that as our kind of central mission, then we're always on the right lines.
Spencer Levy
So, Robert, let's talk about logistics, industrial, and I love to call it sheds when I'm here because I know you do all the time. And in the United States, you have everything from the manufacturer to big box industrial to last mile to very small industrial. How do you look at the different types of industrial in the European markets and what are most attractive?
Robert Dobrzycki
Well, I don't think there's a different look in Europe than in the U.S. Obviously, what's probably a bit different is that you don't have the same uses country by country in Europe. It differs, and production is more focused on central European countries and probably Southern European, Spain, where you have much less production right now in France obviously coming. Big box logistics is everywhere, obviously. E-commerce is everywhere. Data centers are almost everywhere, with some exclusions. Some places are more consumption driven, some more production driven. And some of them are both, like Germany. I mean, it's kind of in the middle of Europe, you have infrastructure, ports, you have production, you have consumption. But places like Poland or Central Europe are currently more of a supply, production, rather than consumption, with a growing consumption over time. And there are different uses. I don't think there is a different view on different type of products that you have in U.S. and then we have in Europe. I guess they are quite similar. I don't see any differences.
Spencer Levy
Let's talk about the type of occupier for just a moment in the U.S. And I just took a look at the European list that's not that different. And that 3PL, third-party logistics companies, tend to be a driving user or occupier in many of these. And you have some that are more active here than they are in the U.S. DHL, as an example, much more active in Europe than they are in the United States. But three PLs versus manufacturers. How would you break down the largest occupiers in the European market?
Jack Cox
Yeah, so, I guess there are some points of detail. So when we're talking about 3PL take-up, as opposed to, say, e-commerce, if a 3PL is taking a building and they're operating an e-commerce contract from that building, we call it 3PL. So e-commerce for us is pure play. The same thing for retailers. If a retailer places a contract with a 3PL, we call that 3PL has to be pure play. So we've got some –
Spencer Levy
So, just to clarify here, if you're a retailer that makes furniture, but you contract with DHL, that's 3PL to you, even if it's a furniture manufacturer.
Jack Cox
That's how we talk about it. So the consequence of that is that 3PL activity, I wouldn't say it's overstated in terms of its importance, but it's fully stated. We have had over really that period from 2016 onwards a good arm wrestle between pure plate e-commerce, taking those large formats, buildings with increasing amounts of automation, on longer leases with more capital intensive amortization requirements versus 3PLs who are back-to-backing short-term contracts with their lease terms. So, we've had that playing out. As we've entered more of a risk-off environment, we've seen the traditional e-commerce players and the manufacturers and the retailers laying off that risk to the 3PLs. It's, in many senses, a similar amount of economic activity, just with a different expression in terms of how we categorize it. But I think probably one of the factors, and Robert, I think you've probably seen it in your activities, has been a significant increase in manufacturing. Now, we can call that reshoring, near-shoring. We can observe China plus one strategies playing out in real time, but manufacturing has increased. I think it's something that we feel very warm towards, as a potential driver of economic growth in our region.
Robert Dobrzycki
I agree that manufacturing is playing a stronger role right now with the new shortening processes and trying to bring production closer to the consumption and less dependent on China, less dependent on Asia and other places around the globe. And obviously with the U.S. tariffs and push into a bit of isolation, there is a bit of isolation going on in Europe as well, or diversification and probably less dependence on the supply chains. That's felt, and after COVID, I guess, after overbuilt, a bit probably from the e-commerce standpoint of view, there is a bit of slowdown, e-commerce-wise, obviously, which the trend in the long term is there, but in the short run it's probably softer. So, obviously, the production and other type of users are more visible because of that, because when we were building a lot of e-commerce, I mean, there was always a bit about production, but it was less seen with the volumes of e-commerce coming, so that's clear. But e-commerce is gonna be around and is around. It's probably a bit softer right now. But, this production and diversification and near-shoring is a big thing right now.
Spencer Levy
The places we're seeing a lot of the manufacturing in the United States tend to cluster around places that have cheap energy, cheap water, ease of doing business. Are there any particular clusters of manufacturing in Europe?
Robert Dobrzycki
I guess labor is playing a key role. Availability of labor and cost of labor. So Central Europe from production point feels like the right place. And there is a lot of activity in Poland, Czech Republic, Slovakia, Hungary, Romania, which is production driven. We see a lot of activity production right now coming to places like Portugal or Spain. It's a bit direct competition to Central Europe right now. Cheap energy is playing a key roll but also proximity – well. Geopolitical kind of location towards what's going on right now, I guess, brings Spain and Portugal to the light. Labor is probably less available than in Central Europe, but geopolitics and cheap energy is there.
Spencer Levy
How are most goods shipped intra-Europe? Is it mostly rail? Is it mostly trucking?
Robert Dobrzycki
95% trucking, probably over 98% trucking. No rail, almost.
Spencer Levy
Mhm. And, so, when we're talking about capital, capital, what I often say is, your city is immobile, but capital and labor will go to where they have the best opportunity. So, we're here with the European CEO of Panattoni and Panattoni could put a dollar here, could put a dollar in the United States. So, Jack, why do you put a dollar here versus someplace else?
Jack Cox
Well, I guess firstly when you're saying that the real estate doesn't move, I mean the French word for real estate is immobilien. It does by definition, it's immobile. Why does capital flow towards Europe? Well, I think, on a risk-adjusted basis, the spreads look really attractive. When you pick a major market like Germany, you're going to be able to borrow 60% LTV at a margin of 150 over a swap of 220. And that's, so you'd be in for, let's say, three and three quarters. All in cost of debt, in round numbers, that'll be five-year bullet payment, and with that you can go and acquire a 10-year lease to a credit tenant at a yield of four and three quarters to five and a quarter percent.
Spencer Levy
So, 100 to 150 basis points spread over the debt.
Jack Cox
Yeah. So, with that spread at day one, you don't require that same amount of explosive year-on-year compound rental growth that you need in other markets. I mean, Robert's really the expert on this, given how much capital Panattoni has deployed. But when I think about the fundamentals of investing in logistics, I always think what are you getting for your buck? You're getting land, you're getting a building envelope, and you're getting a lease. When I'm stateside, I'm always struck is just the availability of land. I know it's getting tighter, and entitlements are getting harder and harder to come by. But we don't have urban sprawl in anything like the way you guys do stateside. We have natural barriers. We love our green fields in Europe. And, so, I think we have a greater opportunity for a balanced portfolio to be overly invested in land-constrained markets, where you can start to underwrite substantial amounts of value beyond the term certain of the lease, because land is in such short supply. Take Robert's earlier point where you've got a good building in a land-constrained environment and you've got the labor in that building. That's a highly risky scenario for an occupier to change, so we get a lot of tenant renewal, a disproportionately high relative to my understanding of the North American market.
Spencer Levy
The United States has a much less dense population. And yes, we have sprawl. And the sprawl creates risk. And some of the markets that we love in Texas, they have no zoning restrictions. So, you can just keep building and sometimes that's a challenge. Sometimes it's better to be in a dense urban environment. But we have more of those here in Europe. Is that a fair way to put it?
Robert Dobrzycki
Totally, totally. I mean, the land is constrained in Europe, and as Jack said, I mean there is obviously positive leverage, which you don't have probably in U.S. But generally, real estate is much tighter in Europe. And it's harder to build. It's harder to permit. It’s harder to zone land. In places like France, I mean, you almost can't build on greenfield. So that's a natural limitation of supply. And, somehow, European banks were – I mean, there are exceptions, and you have spec development in Europe, but compared to the U.S., I mean, historically, there was much less spec development here, so the supply is also limited by the capital structures.
Jack Cox
Maybe to put some numbers to it, I mean, broadly, population of Europe, population of the US, broadly the same. But I think there's a geographic component to this because the land mass in the US is so much bigger. So, as I understand it, you will need logistics facility on each seaboard and probably one in the middle. Whereas in Europe, it's not optimal, but you can get it done with X marks the spot in southern Belgium. Like if you have one building for the geographic center, I mean good luck getting land in southern Belgium. But hypothetically, you could run a hub-and-spoke model from one D.C. And then so layered over the top of that, and I think a direct expression of that is that in the U.S. they have around about three times the amount of square feet per consumer as we do in Europe. And partly that speaks to the challenge of dealing with a bigger land mass, but also it speaks to the real challenge of developing out land which is a much more highly prized commodity on our side of the pond.
Spencer Levy
And by the way, D.C. for our listeners is distribution center. And the reason why we are three times the amount of space in America is because I guess we just like to buy more stuff. Who knows? But there is definitely more living space per American than there are for the average European.
Jack Cox
Well, I think we can put some numbers to that, Spence. I mean, I think I'm right when I say that when we look at GDP in Europe, private consumption is around 50% of GDP. And I think I'm saying in the US, that's more like 65%.
Spencer Levy
Sticking with the types of industrial for just a moment, what about some of these other asset types within industrial? How are they doing? So, if you were to go beyond the pure play logistics warehouse distribution and last mile, if you were to talk about industrial outdoor storage, if you were to talk about cold storage, or if you were to talk about data centers, which is a category unto itself, how would you characterize the market? And to get to the bottom line, is data centers industrial?
Jack Cox
The way we talk about it at CBRE, we recognize it as a very specific set of skills that go into operating that successfully, but it's an adjacency to INL and it overlaps happily. Clearly if one can get entitlement or planning permission for data center, you're talking about epic uplift in value. But I think in many senses, the logistics sector, our sheds, they're competing for power. Power is super tight. But I guess Spence. IOS, cold storage, data centers, even the heavily automated multi-level e-commerce facilities. For me, Robert, that's on the zeitgeist of our asset class, the logistics asset class becoming increasingly operational. And I think to have a true understanding of our marketplace, you really need to embrace the complexity of what's going on inside these buildings and how the locational decision making, and how the design of the building envelope itself is continually iterating in order the developer investor community can provide the best solution to its customer base.
Spencer Levy
Well, the other thing I want to talk about is operational. It used to be the case, maybe I was too simplistic about it. I used to say that the big four asset classes, office, industrial, multifamily, and retail, were like boxes of bonds. You create a long-term lease and move on to the next one. Now it's changing. So, Robert, in your experience, how much more operational is industrial today versus what it was, say, 10 years ago?
Robert Dobrzycki
Well, it's interesting because of what you say, but we are quite traditional and we try to stay away from the operational side. I mean, as much as we can. Obviously, I understand that the world is forcing you to go there, but I'm really trying to stay away from that. I'm trying to stick with real estate. So, that's our idea. That's our strategy. We prefer to do more outside, and do somewhere else, because that's not our expertise. And our operators, which are obviously much better in operation than we are, and I guess this community is growing, and operational community, you can see that, and it's growing, but we as Panattoni try to stay away from it.
Spencer Levy
So, let's push that a little bit here. So, maybe, you try to stay away from operation. It makes complete sense because it's much more efficient to have a long-term lease with a triple net lease with a tenant that takes care of everything. But at the same time, you may have more multi-story industrial here. You may have industrial here that's in a denser urban environment than you might have in the United States. These things require operational expertise even from the landlord side. Jack, what do you think?
Jack Cox
I think there's pros and cons of this, when we're advising investors and we're helping them where they're underwriting. We love it when the occupier has as much invested inside the building as our developer investor client has tied up in the land on the building envelope. That's obviously a great mitigant of risk. And, so, I think you really end up with these two bookends, and it becomes a pretty interesting discussion. What is the greatest risk? A 20-year single credit lease, with a huge amount of capital tied up inside the building, you're in a low probability, high volatility underwrite there. The probability is that they don't leave, but if they do, you've got a big building to reposition. So, that's one bookend, and on the other end of it, there's the older building, maybe inferior in specification, but maybe it's superior in location. It's closer to those dense centers of population where the building has been depreciated just by the passage of time. But potentially the land it sits upon has appreciated. And there you're playing for shorter leases, probably a basket of SMEs, Small Medium Enterprises, and you've got high rollover opportunities to mark the rents up. So, really, you can surf or ski in terms of this. I think there's a place for both in a portfolio, but clearly when interest rates were super low, real assets and the logistics sector in particular, which are sectors that really should provide alpha. We're providing beta and that's changed now. It fundamentally comes down to what is the most efficient way for an occupier to capitalize their business? Do they go to their bank and get a loan for the fit out? Or do they have Panattoni price it for them? And they're going to find that one is more cost-effective than the other.
Spencer Levy
Before we talk about our future outlook, Robert, if you don't mind for a moment, since you cover not just Europe but you cover the Middle East, tell us about the similarities or differences between the logistics in the Middle East versus what you see in Europe.
Robert Dobrzycki
Well, obviously, the Middle East or Asia, like India, that we operate. I mean, Europe is mature, it's established, where the Middle East is totally fresh. So, we are maybe the only one player which is currently very active in the Middle East and it's a lot of owner-occupier type of operations. And this type of development that we do is not a lot of people are doing. And, so, we are kind of a bit, inventing or starting the development process. And the main issue we face is because there is not a lot of competition, there is not a lot of providers, suppliers. It's what to build. What makes sense to the market? I mean, you just can't go and build what you built in Europe. Because it might be too good, or too bad, or too square, too rectangular. I mean the issue is what exact specification you should build not to over-spec. So, you are really exposed to this kind of a thought process. And where in Europe, going country by country, you don't have that situation. You exactly know what to build. You see it around, you go around, and what's leasing, what's not, and you can figure out in a second. In Middle East or in India, you have to build what's needed, and it's hard to figure out what's here.
Spencer Levy
And when you build what's needed, so when you say you build quite a bit or some spec here in Europe, you build less spec there, mostly build-to-suits?
Robert Dobrzycki
No, we build spec as well there.
Spencer Levy
Ok.
Robert Dobrzycki
So that's the challenge, what to build, is you don't talk to the client when you build spec.
Spencer Levy
I'm going to put on everybody's crystal ball now. Robert, how do you see the next several years of European logistics?
Robert Dobrzycki
My view is it's very hard to predict where it goes. I mean, you wake up one day and there is a government change, which is kind of changing the whole thing, upside down, left and right. So, it's hard to project, but what we do in terms of, I mean there will be a change, and there'll be a constant adjustment. And I think that's the opportunity, always opportunity to create value, to make money and be valuable. And I don't know, I don't think you can predict anything. That's my view. I mean, who would invent the trade war in a way that is now, or who would predict that, that it would, I mean, it's hard to predict the consequences as well. One day there is a trade war, the second day there's no, there is kind of a settlement. I'm not bothered by the political noise. I think the supply demand would figure it out, but there will be a kind of change and adjustment, and I would watch it, but I would not be over-concerned about geopolitical situation. Over time, it is gonna be settled. But when it's clear, it's going to be constant adjustment and change, and you need to be agile, flexible to adjust, and I don't spend time thinking about it. I mean, it makes, in my opinion, no sense. I mean I can't change it, I can’t influence it, so why be bothered? I wake up and see what's going on and I try to adjust to that.
Spencer Levy
Jack, how do you see the next couple of years in European logistics?
Jack Cox
I think my crystal ball is about as murky as Robert's and it certainly feels that way. But when we're trying to advise our clients, we're not paid to speculate in what might or might not change. But what we can do is take a step back and have a really hard analytical look at the fundamentals and from that we can discern what won't change. So, populations, growth is pretty stable in Europe. People aren't as footloose as they are in the US. Is land going to become more or less abundant over time? It's a one-way bet, less abundant. Are populations going to move dramatically? No, they're not. And, so, population as a source of labor, as a source of consumption, those correlate well with high land values. So, fundamentally, I see a two-tier market emerging between the best and the rest in terms of, yeah, investors and developers of real estate, and they'll be able to attract better credit tenants with the stronger operational businesses, and that virtuous circle will bestow the rewards on maybe a lesser number of protagonists, but we also have really low vacancy rates, even though they've been heavily stress-tested. We're talking 5% give or take on average. So, that's not to say that only the best buildings will be, and the best markets will be the winners. I think we'll just see a higher income component of total return from those assets even if they started a higher capital value per square foot per square meter and the game will be played more for income in those second tier markets. I mean I feel really positive about the medium and long term, the maths does always win and it's just incumbent upon all of us in the market just to try to look through this noise and just keep a laser focus on those fundamentals because the fundamentals and the maths never lies.
Spencer Levy
On behalf of The Weekly Take, what a great discussion today with Robert Dobrzycki, the CEO and co-owner of Panattoni Europe. Robert, great job. Thank you for coming out.
Robert Dobrzycki
Thanks very much. Thank you.
Spencer Levy
And one of my oldest friends in the business, Jack Cox, now the leader of CBRE's Industrial and Logistics Practice Europe. Great job, Jack.
Jack Cox
Cheers, Spence.
Spencer Levy
We'll have more cheers from across the pond coming soon: conversations we recorded in London and deeper discussions of real estate investing with a European flavor. For now, we hope you'll share this conversation with all the folks in your corner of the world. You can send them a link to the episode from your favorite podcast platform, and then subscribe, rate, and review us wherever you listen. You can also share the show and find related content on our website, CBRE.com/TheWeeklyTake. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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