Over the last few months, it feels like every article written about real estate mentions logistics – ‘sheds’ is clearly no longer a dirty word. However, are storm clouds gathering in the previously clear skies of logistics players? We invited a group of German industry experts from investors, developers, tenants, lenders and advisors to a virtual roundtable to shine a light on the sustainability of this trend from different perspectives.
Logistics – hype or long-term trend?
When we asked our panellists whether logistics was just a temporary craze, they were united in their answer: “no”. Logistics has, for a while now, not been a specialist product – that big change happened four or five years ago: the record-breaking year of 2017 with a transaction volume of €8.7bn feels like the moment that the shift happened. Even despite the coronavirus crisis and the strong growth in e-commerce, last year’s €7.5bn transaction volume (according to a recent Colliers survey) did not surpass that.
Logistics has long since blossomed into a mainstream product and has proven its resilience to investors who used to neglect this asset class with its systemic relevance during the coronavirus crisis.
One participant noted that in comparison to office assets, which after 10 years are considered dated and are let out at a lower rent, tenants of logistics spaces stay ‘faithful’ to their property for a longer term and it is substantially easier to find new tenants than it is for other asset classes. This emphasis on the lower risk that logistics assets now offer means that the spectrum of investors in this asset class will continue to expand, especially when coronavirus-related travel restrictions for foreign investors are relaxed.
Availability of space and manpower – what makes for a good location?
There has also been a shift in thinking regarding the ideal location of a logistics asset. As one panellist from the operating side remarked, it is not only difficult to find available space in near the centre of key cities such as Munich and Frankfurt, but also enough suitable employees. They further commented that, bit by bit, locations far away from the main cities, for example in eastern Germany close to the Polish border, are being taken into account.
When it comes to the question of what makes a good location, connections to transport infrastructure or the closeness to the final customer are not the only important factors; the availability of a workforce who can effectively operate the asset is also essential. Whether these locations are on the wish list of investors is debatable. Equally questionable is whether the additional CO2 emissions associated with such assets match with increased investor focus on ESG topics.
Of course, you could, as one participant pointed out, ‘import’ a workforce from abroad, particularly when developing logistics parks, which require substantial manpower. In this case, however, it is important to plan for the accommodation of these employees, possibly by making the assets mixed use, which in turn would require adjustments to the planning permission.
Citizens’ approval and social impact
Whilst logistics developments and assets are considered jewels from an investor’s perspective, they are often viewed by communities as undesirable. Again and again, long-planned projects are being prevented by citizens’ initiatives. When online retail businesses such as Zalando or Amazon want to open up new centres, they are frequently having to fight against the belief that they are responsible for the demise of the high street. The argument that e-commerce is more damaging to the environment than traditional retail also arises repeatedly. These beliefs have, however, been at least partially refuted by several studies.
The panellists at our round table agreed that it is important to approach discussions with the local community more cautiously. Gone are the times in which local councils would roll out the red carpet for the big developers – here, more often than not, a generational shift has taken place; new local politicians think and act in a much more environmentally conscious way than their predecessors. In order to gain the approval of the local community, it is important that a logistics player brings significant added value whilst at the same time solving the problems that developing a logistics asset could bring for the local area. In this regard, the example of connecting a warehouse in the Wilhelmsburg area of Hamburg with a city hub in Altona through an underground tunnel was mentioned – this can save half a million journeys on transport and reduce CO2 emissions by several thousand tonnes. After the feasibility of this project was backed by a study, Hamburg’s city council supported the project in searching for suitable development plots.
The social aspect of ESG is also important. For example, one developer commented on how public parks, nurseries, care homes and much more are being developed to secure citizens’ approval for the actual project. When asked whether these measures would have been taken without an incentive, the honest answer was ‘probably not’. As another participant noted, there is a lot of hypocrisy in observing social criteria. It is often about box ticking and polishing up their image. Even if complying with ESG measures is not always driven by integrity, it does give local authorities clear advantages.
ESG – greenwashing or a real chance
This led us directly to our next topic, the ‘E’ in ESG. During this discussion, the name ‘Greta’ came up several times with one participating saying that, whether you like her or not, she isn’t completely wrong when she says that our house is on fire.
The younger generation are calling for a change of thinking in our approach to the problem of climate change, and stricter ESG regulations at a European level are adding pressure: the investors at our roundtable felt that they were under lots of pressure to recertify their portfolios – in one instance, more than 65 assets in the space of two years. As far as future investments are concerned, it is often only possible to buy what is already certified or can be verifiably recertified. Investors are willing to spend more on ESG-certified logistics properties – the long-term savings of energy efficient measures certainly pay off.
But developers also have to act in order to meet sustainability requirements. The term ‘cradle to cradle’ came up quite a lot when discussing this: the principle of using recyclable and environmentally friendly materials as much as possible, minimising the negative impact on the environment.
Tenants are also making their contribution to the topic of sustainability: firms are creating whole new departments to focus on bringing existing real estate up to scratch with environmental standards, and most online retailers have strict sustainability strategies and targets.
The consensus among our panel was that there is still a lot of room for improvement – logistics properties must be of a higher quality, be more innovative and also more ecological.
Storm clouds gathering on the logistics horizon
Our discussion was not a contented, virtual pat on the back to celebrate the success of the logistics sector and the increasing appetite of capital for this asset class. Rather, we focused on the challenges that range from the shortage of workers to improving the local image problems of logistics developments, to the pressure on the environment and the need for social responsibility. Nevertheless, our logistics experts are happy that the days of logistics being the ugly duckling have ended and that there is a much wide understanding of the systemic relevance of the sector.
We would like to thank the participants in this lively roundtable for their fascinating insights.