It has been a truly remarkable 12 months. The logistics market has been riding a wave like no other for over ten years in Europe, driven by structural changes and the rise of e-commerce. Initially, Covid was a catalyst for this growth as remote work and disrupted supply chains underpinned surging demand for logistics space. Investors followed suit and demand reached unprecedented levels. Issues in other sectors, namely offices, only compounded this sense of fervour. Yields compressed fast to historic lows, against a backdrop of cheap credit.

However, Covid has given way to other unforeseen disruptions, which have had the opposite effect. Occupier demand has returned to pre-pandemic levels more quickly than expected, leading to increased vacancy rates in certain markets. Rapidly rising inflation and interest rate hikes have further impacted the market. The Ukrainian crisis exacerbated the situation by increasing construction costs and reducing liquidity. It was described as a perfect storm.

The biggest impact on capital markets through the past year has been the rapid increase in interest rates. Yields had been pushed to such low levels that the numbers simply didn’t work in this new environment. But the market adjusted quickly – asset values dropped by up to 30% in some geographies – driven by a real acceptance of the shift in the macro environment. It could also be argued that there was an overreaction to the first negative news to impact the logistics market for a long time. As a result, we have seen sentiment bounce back to its highest point in 12 months.

Looking ahead, as inflation peaks and rates stabilise, this should filter through into pricing on the upside. Focus is shifting towards the occupational markets, which are experiencing a slowdown from record highs. Vacancy rates are rising and will continue to do so, although we have reduced supply coming through the pipeline. And the impact of nearshoring and increased demand in other segments beyond e-commerce is becoming evident. Stock selection is more critical than ever, and consideration of ESG factors is crucial.

We cannot escape the uncertainty that has crept into all markets and the negative impact this has on confidence. As the industry navigates the inflationary environment, there may be a challenging period ahead for investors. However, the strong underlying fundamentals that have underpinned the market over the past decade remain intact and will continue to do so for a long time.

Key transactions

Methodology

Net initial yields are estimated by local Savills experts to represent the achievable yield, including transaction and non-recoverable costs, on a hypothetical Grade A building big-box logistics facility located in a prime location, fully let to a single good profile tenant on a 10–15-year open market lease. The typical LTV and cost of debt represent the anticipated competitive lending terms available in each market. Cash-on-cash returns illustrate the initial yield on equity, assuming the aforementioned LTV and debt costs. The risk premium is calculated by subtracting the end-of-period domestic ten-year government bond yield (as a proxy for the relevant risk-free rate of return) from the net initial yield. Data is end-of-quarter values.

_{Read the articles within Taking Stock: Capital Markets Quarterly – Q1 2023 below.}