Prior to the collapse in the global financial markets, securing new logistics space in EMEA was much simpler. Developers were building speculatively ahead of need and investors were eager to provide the necessary capital and debt finance. The market was delivering good quality product in the right locations on competitive terms. Following the collapse in the global financial markets, many logistics providers had their own vacancy problems to address and if external additional space was required, this could be secured on highly favourable and flexible terms, as developers and investors were desperate to secure income from the space constructed as a result of the speculative boom. In short, securing space simply wasn’t an issue as supply continued to exceed demand.
Fast forward and it is a very different story today: there is now an acute shortage of good quality space as most of the supply from the speculative boom has been taken; the lack of available funding has put paid to almost all speculative builds; and lease terms are now becoming more onerous for new builds. “The real estate industry is at a crossroads”, says Paul Graham, Senior Vice President of Corporate Real Estate EMEA at DHL, who feels that when a surge in demand occurs, the lack of good quality supply, combined with the inability of the real estate markets to deliver new builds, will adversely impact on the business plans of logistics operators. “The real estate markets are simply not agile and rather like an oil tanker, unable to change course rapidly when it needs to. There are conflicting forces at work. Customers are driving down margins and seeking shorter contracts, whilst the real estate investment markets are demanding longer leases with upward pressure on rents for new quality space”.
Research from global external real estate consultants supports this view. Jones Lang LaSalle reveals that whilst there is still volatility in the logistics markets “prime rents remained stable” across Europe due to the lack of supply and “shrinking development activity” driven by the difficulties in sourcing funding and lease lengths of “at least 7-10 years and in a prime location”. The CBRE reports that “in some of the stronger markets, supply constraints could place upward pressure on prime rents when the economy improves,” as the market establishes it’s equilibrium through this transitional period.
Graham is concerned that a two-tier market has now emerged between existing and in general inferior quality supply and new development. “There is now clear blue water between these two categories. In short, highly flexible shorter term deals can be struck on existing supply, whereas longer leases, at higher rents, are now the norm for new builds across the region.”
For logistics providers, location is not the only key factor. Best in class design and specification is also paramount to deliver optimum operational efficiency, as well as lowest full-life cost. Many first generation logistics facilities are becoming increasingly obsolete and do not meet today’s more rigorous standards, in particular, those around sustainability and energy efficiency. The Investment Property Databank Pan-European Logistics Performance Report Published October 2012 reported that “many older warehouse/distribution facilities lack the necessary features for modern ‘logistics’ activities. Because retrofitting is rarely feasible, these facilities are often relegated to smaller scale local tenants, if not rendered totally obsolete.” Graham believes the replacement of stock which is becoming increasingly redundant, operationally more inefficient and expensive to run is the next major challenge for the property industry to address.
In addition, emerging economies such as Russia present further challenges. In Moscow the vacancy rate is less than one percent. Writing in the Moscow Times, Lance Pilant, CBRE estimates that Russia will comfortably absorb 500,000 square meters of space per annum from 2012 to 2016. However, this highly challenging and unorthodox market lacks transparency, suffers from land ownership problems, poor infrastructure, bureaucratic planning legislation, unreliable construction contractors, as well as bribery and corruption. This environment has proved a barrier to entry for the established international developers and investors with no signs of improvement in the short term.
DHL has focussed heavily on the operational performance and true life running costs of both its new and existing stock. Through the company’s GoGreen initiative, the group is now the market leader in the installation of Intelligent Lighting systems, which both minimize energy consumption and work towards mitigating the group’s carbon emission targets. “We now seek to install Intelligent Lighting as standard in all new facilities and have a program to retrofit this technology in existing sites where appropriate”, says John Hodgins, Vice President of Corporate Real Estate, Construction, EMEA at DHL. “We have monitored performance and the savings and benefits are substantial.”
In response to the fundamental changes in the real estate markets, DHL has invested in new builds. Recent successful schemes include the development and external funding of a new strategic logistics hub at Leipzig to complement the Express and Air hubs, as well as a major new built-to-suit distribution center to support the strategic growth of Primark in Europe. “If the market can’t respond in the way we need it to, we will undertake more of our own development. It makes good business sense and our customers appreciate this approach”, says Graham. “Whilst real estate is not our core business it is core to our business.”
Martin White, Primark Supply Chain Director comments, “It was critical to the project that DHL’s Corporate Real Estate and Supply Chain teams worked in true partnership with Primark, in order to deliver an integrated operational/real estate solution that closely matched our business needs and reflected the shared values of both parties.”
Graham expects to see fundamental structural changes in the region’s real estate markets as economies evolve through this period of financial fragility and a new generation of warehouses, with enhanced performance and higher sustainability standards, will become the industry norm. At the moment the overriding concern is lack of good quality supply and the ability of the markets to deliver and finance new stock. “We need a mature debate between all the players including the logistics providers, developers and funding institutions to ensure the effective delivery of the next generation of distribution facilities,” says Graham.