A year of opportunity ahead

With less capital in the market, evolving occupier requirements and repositioning potential, disciplined buyers can thrive in European logistics, say Verdion’s Simon Walter and Jonathan Harris

Logistics real estate has enjoyed a period of unprecedented growth. However, the sector is now facing a dramatically different economic landscape. European sector specialist Verdion sees a year of opportunity ahead for those prepared to drill down and find sites and assets where real value can be added. Simon Walter, executive director – investment management, and Jonathan Harris, executive director – capital markets at Verdion, sat down with PERE to discuss the opportunities in European logistics markets and the importance of selectivity and discipline in acquisitions.

Q: How has the European logistics landscape changed in the past 18 months?

Jonathan Harris: There has been significant repricing across the markets that we focus on in Northern Europe, principally Germany, Netherlands, Denmark and Sweden, as well as in adjacent markets. There are still constraints on the supply of both equity and, most obviously, debt. We are in a higher interest rate environment and faced with tougher economic conditions, yet the structural tailwinds for the logistics sector remain intact. For instance, take-up levels have moderated from the immediate post-covid period and are more like the market was in the middle of the last decade.

Simon Walter: Logistics occupier demand is still being driven by the same factors. E-commerce is still tremendously important and, even though that pandemic spike has passed, the expectation is still that online retail sales will continue to grow over the next few years, in line with how they were growing pre-covid. There is also demand as a consequence of occupiers reshoring or nearshoring – moving operations closer to the customer. Following the supply chain disruptions that we have seen in recent years, occupiers are holding more stock in their warehouses, so they are more resilient in the face of disruption. The depth of demand is still very much there

Q: What opportunities are opening up in this new market environment?

JH: Last cycle, we saw private equity investors regularly assembling portfolios and aggregating assets with high levels of gearing prior to selling on to institutional investors, but the economics and risks of that strategy are much changed. Furthermore, the supply of debt and equity capital is limited, particularly for repositioning and redevelopment opportunities, so that creates opportunity to invest well. There is a considerable amount of older logistics stock in Europe, much of which is 25 or more years old. Those buildings often offer interesting potential for repositioning or redevelopment because they are in sought-after locations, already integrated into the local economic and social infrastructure. These long-established locations often have a real depth of occupier demand and evidence of performance over the long term. That said, there are also select opportunities to acquire modern, well-located stock that needs some leasing work, so there is a spec1trum from lease-up to substantial rede1velopment.

SW: Looking at Germany, for example, while there is a substantial amount of relatively old logistics, the supply of modern logistics space is limited. There’s a huge amount of opportunity lying in existing sites which are close to population centers. And that proximity to the consumer is what occupiers want. As part of this, we are seeing accelerated obsolescence in many older buildings and a lot more potential to upgrade the environmental performance of assets, boosting energy efficiency and therefore reducing their occupational costs. That might mean rooftop solar PV, heat pumps or better insulation. Occupiers are also more concerned than ever about the working environment, which is important for them to attract and retain the workforce for those buildings. So, the quality of the office element and the amenity of the overall working environment is getting more attention from occupiers. They are also increasing automation and the use of technology, and we are engaging in discussions during the relatively early stages of leasing to help occupiers with these requirements.

Q: With a range of opportunities available, where do you see sweet spots for investment? Are there stressed or distressed opportunities?

JH: There is a range of opportunities, but you need to be selective, to understand the markets, the price, the risks and the capex requirements. From our point of view, long market experience and technical development expertise means taking on more involved projects where significant value can be added by optimizing sites and buildings.

SW: We have not yet seen a significant number of stressed or distressed sellers in the market. I expect that there will be more product coming to the market over the course of the next 12 to 24 months as refinancing falls due.

JH: Logistics has performed better as a sector and has been able to sustain and generate cashflow, so it has tended not to be logistics assets or logistics-rich structures which have come under stress so far. We are not generally looking for large portfolio trades, but for single assets or smaller portfolios where there is an identifiable opportunity to add value. There is also the option of buying from investors who have acquired portfolios and improved the capital structure but have not improved many of the underlying assets.

 Q: Which markets or market segments look most attractive?

SW: We have a Northern European focus, with two offices in in Germany, an office in Denmark and two in Sweden as well as our head office in the UK. There are differences between markets of course. For example, the upcoming supply of logistics around Copenhagen is less than for some of the German cities. However, in those countries we are looking at the individual cities, their growing urban populations and how the logistics works around them. It is about selectivity and a single asset focus. It is not just about saying, let’s buy in Berlin, it is about the specific opportunities in different parts of those markets.

JH: Cities with a mixed economy, with an industrial base, a vibrant retail economy and which are major transport nodes have a depth and range of occupational demand. National or even city vacancy rates are, at best, a rough guide to the reality on the ground. We then look through to the vacancy for modern, well specified stock in individual submarkets and identify existing assets and infill sites in those locations where we can add tangible value.

Q: What are the keys to succeeding in today’s market?

JH: It is important to know your market, your submarkets, and the assets themselves. That calls for deep specialism and in-house teams which are on the ground, and have the expertise to identify and appropriately price opportunities.

SW: We are trying to reposition or create differentiated buildings and to de-risk leasing exposure by creating high quality, sub-divisible space. For example, we redeveloped an existing 9,000 square-meter building to deliver a 22,000-square-meter (237,000-square-foot) asset in Nettetal, near the German-Dutch border, which is divisible into four separate buildings but was actually let as a whole. Such flexibility meant a greater likelihood of leasing tension, and at practical completion we had three different occupiers for that building. Flexible, future-proofed buildings, those which meet the latest ESG standards, will also be more attractive for investors on exit

Q: Where are the risks and how can investors avoid them?

SW: You must be selective and analytical. When we are looking at a new opportunity, we like to get all the team around the table to understand it. Then we can see the pros and cons from both a commercial and technical perspective, such as the previous use and how that has affected the site. You need to consider elements which pose a cost or time risk around delivery of the strategy for that asset. In parallel, it is often vital to consult with local municipalities, for instance on permitting and traffic issues, prior to acquisition.

JH: On the commercial side we might, for example, find the opportunity to create a very good-quality building, but just down the road we can see a wall of supply coming through. Even if that will be of inferior quality, it would compete with ours and risk impacting our lease-up and rent outcomes. We are excited by the opportunities ahead but very conscious of the need to buy selectively and to stay disciplined.

First published in PERE’s 2024 Logistics Feature.