CBRE has revealed six key Industrial and Logistics (I&L) trends to watch in 2014, with increased investment, consumer delivery demands from online retailing, supply chain efficiency, and the development of emerging markets all set to impact the sector.
The re-appearance of rental growth will have a major impact on the I&L sector in 2014. The recovery from 2013 is expected to continue with GDP and industrial production figures for the EU-28 forecasted to grow by 1.3 percent and 1.5 percent respectively. Growth is expected to emerge notably in the UK before moving to Germany, France and some parts of Central and Eastern Europe (CEE).
Investment focus shifted to the I&L sector last year and continued momentum is expected in 2014. Partnership arrangements between specialist investor-developers and third party equity capital from Sovereign Wealth Funds and overseas pension funds underpinned a proportion of last year’s turnover growth and this is expected to continue. Growing private equity interest is also evident.
This growth reflects wider acceptance of the investment rationale for the I&L sector for a range of investor types, beyond the conventional justification of a higher income return in a period of recovery. Pricing in the better locations will respond to the increase in investment activity and occupier demand levels will see some cyclical growth, adding further support to the investment case.
James Markby, Head of European Industrial & Logistics Investment, commented: “Investment in the I&L was the strongest of any sector last year increasing by 50 percent with further expansion expected in 2014. The partnership arrangements between specialist investor-developers and third party equity capital from sovereign wealth and overseas pension funds is similar to the US, where investment levels rose last year and cap rates are on a downward path; therefore, creating US interest in the European market.”
Growth in online retailing has underpinned over 40 percent of recent logistics leasing transactions in some markets and, with online retailing expected to post double-digit annual growth over the next five years, leasing transactions for e-tailing purposes will continue to increase.
Developing logistics systems to improve speed and reliability of delivery will address one of the main barriers in online retailing – consumer concern with the delivery experience. We expect more competition in the sector that will create opportunities to expand parcel volumes or acquire specific or local capabilities. Further innovation in parcel delivery systems due to the need for reliable, cost-effective systems is also expected. This will require the evolution of denser networks of high-throughput urban logistics facilities close to major population centres.
Some of the emerging markets of Eastern Europe and Africa are set to benefit from increased consumption by trading partners as a result of the economic recovery. Growth forecasts for these markets are some of the strongest in EMEA with the six largest markets in Africa expected to grow by 4.6 percent, eclipsing the 1.6 percent and 2.4 percent of Germany and the UK respectively.
Richard Holberton, Head of EMEA Industrial and Logistics Research, commented: “Firms are increasingly choosing Africa as an expansion destination in their growth plans. Combined with transport infrastructure improvements, this will generate significant growth in the contract logistics market over the coming years.”
In the search for supply chain efficiency, occupiers, retailers and 3PLs are still implementing rigorous cost-management programmes. However, in order to offer a service that is sufficiently broad and efficient they need to balance cost-management with investment objectives across various categories of spending, and also devote as much flexibility to these decisions as possible.
With improvements in connectivity between Western Europe and CEE, and the growth of industrial production and manufacturing, there will be greater outsourcing in 2014 to specialist logistics companies. The quest for efficiencies places a premium on highly-accessible facilities and high through-put urban sites. Centralisation of operations and inventory control are among the key advantages of XXL warehouses that saw significant growth in demand last year.
Richard Holberton added: “It is recognized by many occupiers and 3PLs that, in a relatively slow recovery, securing internal efficiencies will be a crucial way to build revenues and profitability. “Pooling” strategies with several occupiers operating from the same facility, capital investment by occupiers themselves, and more sale and leasebacks as manufacturers look to release capital – all are likely features of the market in 2014.”
Conditions are in place for a widespread resumption of development in 2014. Other than build-to-suit schemes, the I&L development pipeline has been very thin for some time. Improvements in the market and significantly increased investor interest have encouraged developers to begin bringing schemes forward in a number of locations.
Patrick Kurowski, Head of Industrial & Logistics at CBRE for Poland, said: “E-commerce and the growing importance of this channel may become one of the prospective growth engines of the logistics industry. Poland is becoming the leader of the region in terms of handling of this kind of consignments. On the one hand, we can offer the ever-improving road network; on the other, Poland is a promising, large and receptive market. The increasing specialization, which frequently leads to giving up control over logistics processes to specialised firms, is another factor, which drives the growth of the amount of space leased in modern logistics centres. Whereas the stability and predictability of the business environment directly translate into increased interest of investors in Poland, which is perceived as a trustworthy and reliable market.”