European Logistics Opportunities

Which markets are set to outperform this year?

With the current cycle of tightening monetary policy, seemingly coming to an end, investors are now left wondering, what next? ECB and BoE comments have softened in recent months, and the consensus of financial markets pointing to the first cuts to base rates in early Q2 2024. With no changes to interest rates in the first quarter of 2024, rental growth will likely become the key determinant in the trajectory of real estate valuation in the interim.

The markets that have demonstrated sustained positive rental growth in the post-pandemic era are likely to garner significant interest from investors. Robust rental growth throughout economic uncertainty is indicative of the tighter supply-side dynamics that have driven the investment case for Logistics over the last decade. Indeed, one trend that emerged in 2023 was a deep pool of capital in search of Grade A buildings with a low unexpired lease term to take advantage of existing rental growth and, thus, achieve tighter reversionary yields.

Looking at the year ahead, demand in 2024 looks likely to be catalysed by two key trends: stabilising growth amongst eCommerce operators and a continued trend towards onshoring amongst manufacturers.

In terms of onshoring, we maintain this will be a long-term trend over the next decade. While it could lead to a tangible boost in take-up over the period, we do not believe it will result in the same explosive growth that the proliferation of online shopping led to over the last decade. Data from an ECB survey points to an increasing number of firms expecting to increase their sourcing of production inputs from within the EU, compared to a declining number of firms sourcing their inputs externally.

The pull factors here are a perception of reduced risks to the supply chain, with a particular focus on China as becoming increasingly risky in light of rising geopolitical tensions. Push factors still exist and remain largely unchanged, with offshoring decisions largely being cost-driven. Indeed, as recent events in the Red Sea have shown, supply chain risks are a persistent issue in the context of increasing geopolitical instability.

A return to eCommerce growth would be a significant tailwind for occupier demand in the logistics sector. Increased demand from this retail channel would stabilise existing footprints, leading to a decline in grey space coming to the market and potentially igniting further growth amongst occupiers. The link between growth in online retail and logistics demand is well-known and evident in take-up data throughout the pandemic, with online retailers accounting for 26.7% of UK leasing activity between 2020 and 2022, of which Amazon accounted for 71%.

Indeed, as European eCommerce revenue has grown since 2017, there has been a clear upshift in average rents across Europe. eCommerce revenue increased by 77.7% in the five years to 2022, with average rents in Europe growing by 32.0%.

With eCommerce revenue forecasted to return to growth in 2023 and continue to expand out to 2028, growth in eCommerce and, by proxy, online sales will likely continue to drive demand in the logistics sector. The question then becomes, where will this growth take place?

Where are the opportunities in Europe?

To identify opportunities for investors in Europe we’ve analysed the market in terms of yield movements and rental growth, taking Q1 2022 as a starting point when the market’s trajectory shifted. In this regard, markets which have been more sensitive to shifts in interest rates are likely to see pricing tighten further when interest rates start to come down. Furthermore, markets that have seen greater rental growth over this period, should provide even greater value opportunities for investors as market conditions begin to improve this year.

In the graph below we’ve plotted rental growth on the x-axis and yield shifts on the y-axis. From this, we can see which markets provide the greatest value opportunities and are located towards the far right of the graph, with higher yield shifts on the y-axis potentially signalling the greater potential for yields to tighten. The key markets identified here are in France, the Netherlands and Hungary all of which have seen rental growth above 30% over the period.

As detailed above, strong eCommerce growth has driven rental growth across Europe. Research suggests that the warehouse requirements for online retail are three times as intensive as traditional brick-and-mortar retail. By expanding our analysis to include projected eCommerce growth between 2023 and 2028, we can identify markets where we expect structural growth as consumers shift towards more logistics-intensive retail channels. We’ve split our markets into Strong, Average and Weak eCommerce growth. We define these brackets as eCommerce growth of greater than 7.5 percentage points (pp), 7.5 - 6.5 pp and less than 6.5 pp, respectively.

Notably, the markets which are structurally appealing for potential investors in light of their projected eCommerce growth are typically in the middle of the road in terms of their rental growth and yield movements. Through this analysis, we can identify markets that present structural opportunities for growth.

In terms of eCommerce growth, Italian, Austrian, Irish, German and Spanish markets all perform well. Notably, amongst these markets Milan, Barcelona and Hamburg perform the best in terms of yields and rents out of the high eCommerce growth markets. Dublin has not seen a significant shift in prime yields but has seen strong rental growth and is likely to perform well. Markets like Madrid are well-positioned structurally but have not yet seen significant rental growth because of the market's high vacancy rates; the story is still positive here, suggesting it will absorb excess supply more swiftly.

We have noted a few outliers in our data. London’s logistics sector, which has seen substantial growth in the last decade and has typically led Europe in eCommerce growth and penetration, is forecast to experience weaker eCommerce growth relative to other sectors over the period. Crucially, London still experienced positive rental growth over the period and is likely to see yields tightening further than other markets as interest rates are lowered.

Stockholm similarly has struggled since Q1 2022. A high volume of speculative development completions, totalling just under 10% of total stock in 2023, has suppressed rental growth. This is a high level of development relative to market size, and developers are competing on headline rents to lease their stock.

Key Themes


While the market is set to improve in 2024, many challenges will remain. While borrowing costs will fall, they’re unlikely to return to 2019 levels, and stronger-than-average rental growth will be needed to justify investing and development decisions in many markets. Crucially, the logistics market remains well-positioned in terms of its fundamentals. While vacancy has risen across Europe in the last year, we believe that the worst of these increases in vacancy has passed, with speculative development pipelines contracting.

With more prime space now available on the market, we would expect sub-prime stock to struggle to attract tenants, leading to subpar rental growth in these units. Several factors are driving an increased focus on prime modern warehouses among occupiers, which were all highlighted by our European Logistics Census last year: Firstly, in the wake of the energy crisis in 2022, many occupiers have put a greater focus on more energy-efficient space. Secondly, modern warehouses are more suitable for implementing automation processes, with many older warehouses having specifications unsuitable for the machinery needed. Finally, they are more flexible and thoughtfully designed, built around integrating new supply chain management technologies like RFID.

As occupiers’ preferences shift towards modern stock, demand for older stock will inevitably decline, leading to weaker rental and capital value growth. We expect this trend to intensify in 2024 and beyond.

Investors are also likely to be more discerning about location this year. Markets where the vacancy rate has remained relatively low will likely garner more interest among investors. Belgium, Dublin, Oslo, the Czech Republic and the Netherlands continue to see acute shortages in supply, with the vacancy rate remaining well below historical trends. Other markets where increases in supply have been more pronounced may struggle throughout 2024 as excess supply is absorbed.

We’re already seeing this trend taking place in the UK. Since 2020, the spread between prime and secondary stock has doubled from £1.20 psf to £2.40 psf. Indeed, after declining in 2022 when supply remained near historical lows, the spread widened last year as secondary rental growth plateaued and prime rental growth accelerated. We expect his trend to continue in 2024, with a surplus of sub-standard secondary stock on the market and previously mentioned factors pushing occupiers towards prime stock.

Omnichannel retail to outperform

While eCommerce has been a key driver of logistics demand from real estate operators in recent years, the landscape has continued to evolve. Notably, 2023 has seen omnichannel retailers, who have blended online and physical offerings, performing more strongly while many pure-play e-tailers struggled.

With this in mind, overall retail sales growth will be a crucial performance metric, with Belgium, and Central Eastern Europe forecasted to outperform by this metric. That said, several of our structural and value-based picks (Germany, Italy and France) continue to account for the bulk of European retail sales, suggesting they will remain attractive.

Energy transition becoming centre stage

With the built environment accounting for roughly 40% of all global carbon emissions, the real estate sector is directly exposed to the challenges and opportunities in the energy transition towards net zero. As efforts to combat climate change intensify, logistics facilities will face significant pressure to reduce their carbon footprints and meet evolving sustainability standards.

Most existing warehousing stock will not meet these standards, and we expect retrofitting of facilities to climb the agenda of occupiers, landlords and clients sooner rather than later. Challenges around funding, competition for labour and building materials cost inflation could swiftly increase as deadlines loom.

Crucially, occupiers and landlords who move quickly on this could gain a competitive advantage through greater efficiencies and reduced operational costs from more sustainable and self-sufficient buildings. Similarly, as businesses look to reduce their Scope 3 emissions in their supply chains, 3PLs who have future-proofed their operations will benefit from a green premium as their services adapt to their clients' needs. Those who successfully integrate sustainability into their operations stand to gain not only in terms of environmental impact but also in positioning themselves for long-term success in an increasingly eco-conscious market.