Logistics: Strong Fundamentals, Soaring Demand & Resistant Repricing

Panels at this year’s Europe GRI 2023 discuss Logistics growth and strategies surrounding the scarcity of prime location supply

October 10, 2023Real Estate

Written by Helen Richards

Macroeconomic Scenario

Discussions at the Logistics & Light Industrial panel during Europe GRI 2023 stemmed from a comparative analysis of 2016 and the present day, revealing significant geopolitical and economic challenges that have left a mark on the logistics real estate market.

In 2016, Europe grappled with uncertainty following events such as the Brexit vote, which cast shadows of potential disruption over the Eurozone. The continent also faced the burden of high debt levels, particularly at the precipice of the Euro's stability.

This prevailing uncertainty had far-reaching consequences, affecting economic liquidity and investment decisions. Interest rates in 2016 hovered between 0 to 0.5%, government bonds were at 15 basis points, inflation at 0.2%, and overall GDP growth across Europe was at around 1%. The landscape was marked by caution and fragility.

Fast forward to the present, and we find the logistics and light industrial real estate market contending with a new set of challenges. The ongoing Ukraine conflict, persistently high government debt levels demanding public support, unresolved infrastructure issues, and persistent social concerns, particularly in education and immigration, compound the sector's difficulties.

However, the most formidable adversary in today's economic landscape is inflation, driven by a complex interplay of factors including population growth, GDP expansion, massive money printing, substantial savings, and COVID-19-induced price hikes. However, predictions point to the possibility that inflation will ease with the coming of a potential recession.

In addition to this, European banks and real estate markets are under significant stress, creating a unique window of opportunity for new entrants in the debt market, as traditional real estate lending institutions grapple with persistent challenges.

As we navigate this landscape of uncertainty and evolving dynamics, a pressing question emerges: How can opportunities be forged in an environment with both historically elevated interest rates and construction costs?

These challenges being faced by stakeholders in both the logistics sector and the wider real estate market call for a deep understanding of economic nuances and an ability to adapt swiftly to the ever-changing tides.

Europe GRI 2023 saw a number of panels discussing the Logistics asset class (Image: GRI Club)

Logistics Growth

Over the past decade, the logistics sector has experienced remarkable growth, reaching a summit that few could have anticipated. This sector, once considered niche, has now become an integral part of the overall real estate strategy for industry players.

This transformation can be attributed to several key factors. The surge in e-commerce following the COVID pandemic has been a significant driver of value in logistics. As more consumers turned to online shopping, the demand for efficient and strategically located distribution centres skyrocketed. Steady population growth has only intensified this demand.

Considering this, vacancy rates are comfortably low. Despite experiencing a slightly upwards trend in 2023, they generally remain at a low level, and it is suggested that most markets still remain below their natural vacancy rate.

However, caution was advised regarding the phenomenon of ‘invisible vacancy’, where tenants may not fully utilise the entire space they occupy. This discrepancy has become more pronounced recently, following a high take up of space with the expectation of a post-pandemic boom which is yet to materialise due to the cost-of-living crisis. As meeting attendees warned, this is something to be aware of over the next two years.

E-commerce has unquestionably been a driver of logistics value in the last two years, but underlying value is also coming from the imbalance between demand for more space and scarcity of land and supply. 

Although it is driving up the value of logistics assets, it is also a challenge that must be faced as the sector struggles to keep pace with the growing demand. The sector must adapt, prioritising efficient use of space to address supply-demand discrepancies, particularly in prime locations.

Location, Location, Location

Prime locations in the logistics sector have become paramount for businesses, often surpassing the pursuit of lower rental costs. The significance of prime locations lies in their proximity to customers, which can significantly reduce transportation expenses and delivery times. They are also generally closer to major transportation hubs and urban centres, providing easier access to critical resources, resulting in smoother supply chain operations. Moreover, these locations are characterised by the efficient utilisation of space and the availability of essential services, making them highly attractive to logistics operators.

Prime locations which were once considered a luxury are now widely procured. However, the demand for such prime locations, combined with other broader factors, has driven up costs, forcing logistics companies to weigh the benefits against the higher price tags associated with these sought-after areas.

Despite the notable trend of rising rental costs that has been garnering attention, tenants in the logistics industry appear to be able to absorb the increased rental costs with more ease than other sectors. For many businesses, rental costs represent only a small fraction of their overall operational expenses. In this context, logistics tenants are often willing to accommodate these cost increases, recognising the value of prime locations, and efficient supply chain and distribution networks.

Rental costs are expected to continue their upward trajectory, with meeting attendees indicating an anticipated 50% increase in the next five years. It was noted that these increasing rental costs are incentivising logistics tenants to stay put and extend their leases, further adding to the attractiveness of the asset class for investors.

Surprisingly, this dynamic contrasts with the trend observed in the office sector, where rising costs have prompted many businesses to reconsider their office space needs and, in some cases, downsize or move to more cost-effective alternatives.

Leading real estate players gathered for the Logistics & Light Industrial panel (image: GRI Club)

Supply & Demand

The scarcity of available land in prime locations presents a substantial challenge. To address this issue, according to attendees at the meeting, the main strategies appear to include repurposing brownfield sites and developing multi-level buildings in urban areas.

Attendees also presented multi-tenant REMs as a suitable solution, and even discussed the possibility of allowing building permits for multi-story warehouses in industrial zones to avoid encroaching upon greenland.

In the face of limited land supply, the logistics sector is actively seeking ways to adapt and thrive, even if it means challenging traditional building permit regulations to make efficient use of existing space in prime locations.


Investment in the logistics sector calls for caution among investors. Unlike the residential market, which has undergone repricing in recent times, the logistics sector is lacking in that regard. This has led to a divergence in perspectives.

While some investors believe that the present situation is less than ideal for making new acquisitions, others disagree, pointing out that deals cannot continue to be evaluated based on what the cost of capital was in the past - today’s cost must be accepted.

Regardless, bridging the gap between seller and buyer expectations has proven to be a challenge, resulting in relatively low transaction volumes within the sector.

Strategies are evolving in the asset class depending on the investors’ viewpoint on the asset and the tenant's likelihood to retain the lease over a longer term. Furthermore, understanding the market conditions is imperative to success in the sector. 

With yields in the logistics sector remaining relatively low, acquisition prices have become increasingly significant. While visibility on the debt side of investments remains relatively stable, finding sufficient dry powder on the equity side has proven to be more challenging.

Compared to two years ago, when there was a strong demand for new logistics assets, the current landscape sees more investment flowing into second-hand Last-Mile Logistics (LML) assets with the potential for substantial rental growth over the next five years.

Another key factor being evaluated by investors concerns elevated construction costs. Many attendees immediately reassured that construction costs are decreasing rapidly, with potential cost reductions of up to 50%, which brought a sense of optimism to investors and developers alike. 

Nevertheless, the ability to efficiently manage construction expenses was a pivotal concern in discussions, particularly given the lengthy timelines associated with logistics construction projects.

From a development perspective, logistics remains highly speculative, with some industry experts suggesting that the market will experience an upturn in the next two years. This has prompted a belief that the current period could present an opportune moment to position oneself to capture the potential upcycle in 2025.

The overall economic perspective remains bearish, with the possibility of further challenges before improvements become evident. Nevertheless, the general sentiment is bullish regarding investment, as financing costs constrain development, tenants gradually return, and rental growth begins to materialise.

ESG Compliance

ESG and EU directives are changing the market, however there remains a lack of clarity regarding the costs of non-compliance with ESG standards. Additionally, tools such as CRREM (Carbon Risk Real Estate Monitor) primarily focus on offices, and although CRREM Logistics exists, it is a long way from defining solid compliance standards.

Despite these challenges, there is an increasing level of mutual understanding and collaboration between stakeholders in the logistics sector on how to make an asset more green. The advantages of ESG compliance can be recognised throughout the investment process: ease of financing, day to day operations, and ease of exit.

There is undeniably a growing trend towards exclusively ESG-compliant assets in the sector, albeit substantially more so in Europe than in the US. ESG drivers include not only cost savings but also the growing awareness of societal issues and a genuine desire to preserve the planet for future generations.

However, attendees made sure to emphasise that there are still investors who do not prioritise ESG compliance as a deal-making criterion.


Automation has huge potential in the logistics sector, however, during the meeting there was a clear consensus among attendees that the costly implementation of automation can limit the feasibility to assets with a secure future and longer leases.

Attention was brought to the advantage of automation in the logistics sector in reducing reliance on human labour, which can be particularly crucial during labour shortages.

Nevertheless, a deeper evaluation is required to determine the viability of automation for this asset class.


GRI Club Members will be gathering to further discuss the compelling Logistics asset class at the upcoming GRI Light Industrial & Logistics Europe 2023 on November 8-9 in Amsterdam. Find out more and register here.