The industrial and logistics sector continues to dominate global investment demand amid the rise of e-commerce and restrictions on new supply. Institutional investors, including sovereign wealth funds, pension funds and others are gravitating to the strong fundamentals, reliable returns and steady rental rate growth.
More Discipline Around Supply
In earlier cycles, high occupancy levels would trigger a wave of speculative development. Today, improved market data is driving more discipline among debt and equity investment committees, who require more stringent underwriting backed by market fundamentals. That has meant less capital funneling into spec warehouses, and higher occupancy rates — including nine straight years of positive absorption. Speculative projects that do get the green light are leasing well ahead of development pro forma.
Industrial and logistics real estate is quickly moving into a new phase of globalization, adding to its desirability. For every $1 billion in additional e-commerce sales, businesses require 1 million square feet of warehousing. As robust consumer demand continues to drive e-commerce, investors are looking to Europe, where penetration rates are still relatively low compared to the U.S.
Global Opportunities at Scale
Whereas small deals dominated in the past, the industrial and logistics sector now provides opportunities for investors to place from $1 billion to $13 billion Euros in a single transaction ($1.09B to $14.2B US). The asset class is also favored by pension plans and sovereign wealth funds from an actuarial perspective, who like the predictable and strong cash-on-cash returns, and lower operating costs than other asset classes.
With occupiers’ location preferences getting more complex, expect logistics rental growth to continue in key logistics hubs across both the U.S. and Europe. Higher rental growth will be found in good secondary locations; those which have access to available skilled labor force, population density, and key transport corridors. Small- and mid-box rental growth will outperform as e-commerce retailers and service providers seek facilities to deliver the last mile and keep battling the erosion of industrial land to other land use.