Europe, Middle East, and Africa (EMEA)

Across Europe, over US$6.8 billion of logistics assets transacted in Q3. This represents a decline of around 55% on the year, bringing year-to-date investment down by a similar amount. Base effects continue to be important in providing some context to these numbers; investment volumes have fallen by a more modest 11% year-to-date in comparison with the same period in 2019 (the strong US dollar also makes this look worse than it is). But activity is nevertheless subdued, with the 1,500 transactions recorded by MSCI Real Capital Analytics so far this year, representing the lowest deal count since 2013.

From individual country perspectives, the Netherlands and France are weighing on the regional average, while the German and Spanish markets are showing more resilience so far this year. The UK, while down by around 50% year-to-date, is one of the few markets where investment is outperforming pre-Covid comparisons, and barring an exceptionally weak final quarter, total investment in 2023 should improve on 2019 (albeit that capital values are above 2019 levels, which somewhat flatters this comparison).

Cross border investors remain the dominant buyer type, accounting for nearly 60% of deal activity this year, not too dissimilar to the longer-term average. This is supported by non-European investors, and primarily US-headquartered institutions; Blackstone, in particular, has been an active buyer in the last twelve months. Singaporean and Canadian investors also remain active, with the former driven by a single investor, the Sovereign Wealth Fund GIC. By contrast, Chinese money has largely withdrawn from European real estate capital markets, as they have the US market.

Institutions have been net buyers through this year, but this is unlikely to continue. Major core investors are on hold as the definition of prime is squeezed – the limited pool of active buyers means they can be more fastidious on location, tenant, and building quality etc. – as well as a deteriorating occupational market. There will be disposals amongst open-ended funds, who face growing pressure from client redemption requests. When deciding which assets to sell, those with large office portfolios are likely to be attracted by the increased liquidity available in the logistics sector. Sector specialist REITs and developers will also need to sell in order to fund ongoing activity.

A lack of stock has been the principal constraint on pricing through this cycle, so more motivated sellers should help to bring forward the correction. Prime yields continued to move out this quarter in most markets, including Amsterdam (+10 bps), Cologne (+20 bps), Madrid, and London (both +25 bps), but all markets are expected to see further upward movement in the next twelve months.

From a wider perspective, however, investors continue to favour the sector. According to our latest regional sentiment survey, over 80% of respondents expressed an intention to invest in urban logistics (up from around 50% in 2022), and over 70% were interested in big box logistics (up from 55%) over the next twelve months¹. If inflation continues to follow the path of least resistance in Europe, the ECB may be encouraged to bring forward interest rate cuts in order to support the flailing economy. This may provide a catalyst for a more functioning market in 2024.

^{1 Savills EME Investor Sentiment Survey, based on pan-European investors representing over €500bn of Assets Under Management (AUM), with responses collected between 5–19th September 2023.}

North America

US deal activity experienced a significant slowdown in Q3, with investment volumes falling by 41% y/y to US$21 billion. Year-to-date, the US$64 billion in transactions represents a 46% decline on the same period last year. However, using 2022 as a benchmark for comparison is somewhat disingenuous given the state of investor fervour for logistics assets in recent years. Instead, year-to-date investment volumes are down by a more palatable 20% in comparison with the same period in 2019.

Nevertheless, the market is relatively quiet. Activity was supported by individual asset sales, with larger portfolio and entity-level deal volumes down sharply on the year, as larger institutions show more reticence when deploying capital. Indeed, on aggregate, institutions are net sellers this year for the first time since 2017. Average deal size in 2023 is down by around 18% y/y as a consequence, with private buyers capitalising on the reduced liquidity.

Pricing remains mostly interest-rate-driven in the US. Benchmark yields moved out by another 25 bps across all four markets covered in this report, and now sit between 5–6%. Any hope of stabilisation in Q2 was quickly dismissed following a recent rout in bond markets, with US Treasury yields rising by 80 bps in the quarter. While the US Fed is almost certainly done raising rates in this cycle, market interest rates have continued to push higher, in part a result of investors pushing back their expectations for a policy pivot. This dynamic will continue to put upward pressure on property yields, especially given the negative spread to borrowing costs.

Notably, there is however minimal distress in the sector, and there is little evidence to suggest delinquencies will rise much. While yields have shifted outwards, continued rental growth has supported capital values throughout the current cycle, which, in aggregate, remain stable since peaking in mid-2022 even while other sectors have seen prices fall. This makes the arithmetic a little more palatable for those investors needing to refinance existing debt.

Looking ahead, rental growth is slowing as new supply onboarding outpaces net absorption – a legacy of a two-year construction boom that came to an abrupt end earlier this year. Southern California has experienced a mild correction in rents, with Los Angeles the only major market to see negative net absorption over the last twelve months.

However, the national vacancy rate is low enough at 5.4% to absorb more supply in the short term without major disruptions (although with some vulnerability showing in Sun Belt markets), and with construction starts now at a five-year low, vacancy will soon stabilise. Overall, rents should hold steady through this cycle (although landlords have become somewhat more flexible, offering concessions where none were previously available). And any small decline should be benchmarked against a 64% rise in average rents across the US since 2019.

Asia Pacific

Investment volumes across the Asia Pacific region experienced a more modest decline in comparison with Europe and North America, falling by 25% y/y to US$9.7 billion in Q3. The year-to-date decline in investment was broadly in line with Q3, similar to the trend apparent in other regions. Notably, with investment in regional offices falling by nearly 50% year-to-date, the logistics sector attracted more capital than offices in both Q2 and Q3 of this year for the first time on record (spanning a period of nearly 17 years).

While risk aversion has induced many larger global investors to be more circumspect this year, private investors have stepped into the void. This is a common theme playing out across all regions and sectors, however, it is very pronounced in the Asia Pacific logistics market. Private investors are the only net buyers this year, accounting for nearly 40% of transaction volumes, more than double the long-term average.

Two contrasting trends are emerging in cross-border capital flows: Global investors are scaling back their activity in the region, with investment volumes originating from investors headquartered in Europe and North America down 70% year-to-date. By contrast, regional investors remain relatively active and have increased their presence as a consequence, with Singaporean investors at the forefront of this trend, accounting for around 10% of regional investment this year (with GIC leading the charge).

The high interest rate environment is yet to significantly influence pricing in key Asia Pacific industrial markets. But it is feeding into activity levels; those markets that have seen policy rates rise significantly over the last 18 months, including Hong Kong, New Zealand, South Korea, and Australia, have also experienced the sharpest slowdown in investment volumes.

In Australia, the prime yield for Sydney rose by 25 bps to 5.25% this quarter. However, valuations are more sticky when benchmarked to markets in Europe, and REITs are generally reporting only modest yield expansion and small declines in capital values, relative to the change in interest rates and funding costs. In Seoul, the stability in yields is more a function of the limited transactional evidence rather than anything else, with investors reluctant to explore new opportunities while the cost of borrowing is squeezing cash-on-cash returns. In both markets, we expect yields to rise over the next twelve months.

Shanghai and Tokyo, of course, do not face the same pressure of rising interest rates, albeit that the Bank of Japan has recently taken tentative steps to relax its grip on bond yields. But neither market is totally immune to a wider shift in investor sentiment. In Japan, while investors are yet to be undeterred by rising vacancy rates, we have lowered the benchmark LTV this quarter following a notable shift in the risk appetite of domestic lenders. In Shanghai, investor demand is tempered by the uncertain occupational outlook, where a sustained period of elevated supply is weighing on rental growth, pushing the vacancy rate to 16.3% in Q3, up from less than 6% this time last year.

_{Read the articles within Taking Stock: Capital Markets Quarterly – Q3 2023 below.}