Full repricing for logistics too
Most winds have blown the right way for logistics property in recent times. This segment has delivered a higher return than others over several years, but little suggests it is now shielded from the present downturn. However, parts of the rental market exhibit a high level of activity and solid growth in rent levels.
The recurring theme in the USA, Europe and Norway has been that logistics showed the biggest value growth during the pandemic – driven particularly by strong yield compression. That picture has now reversed:
data from MSCI indicate that the logistics segment is experiencing the biggest downturn in Europe, particularly in the UK
data from Green Street indicate that logistics is performing a little more weakly than the US market average, with a 15 per cent decline from peak value (unleveraged)
the stock market price of international logistics players Prologis, Segro and Tritax Big Box has declined by 43 per cent on average from the peak (equity) – roughly on a par with other property companies.
Norway is unlikely to be an exception, and almost certainly also faces a substantial repricing of logistics property. Unfortunately, we lack good reference points for the way yield has developed since the cost of capital has shot up.
On the basis of indirect references, we estimate prime yield for logistics properties to be 4.80 per cent – a rise of 90 basis points from the low point at 1 January 2022. But considerable uncertainty still prevails about the actual size of the yield increase. Regardless, we believe yields in this segment, as with offices, have not peaked but will rise further.
Logistics yields showed the biggest falls in the hectic transaction market which prevailed in 2021, and the spread compared with the best office buildings has narrowed sharply in recent years. In our view, we are now entering a period where the spread is set to widen again – but factors also exist which suggest that it will not necessarily return to former levels:
the logistics segment has been substantially professionalised in recent decades
the supply side is tighter than before, particularly in the most central locations
demand is strong for modern, centrally located logistics spaces.
Mixed developments in rental market
Solid rent rises being achieved in parts of the warehousing and logistics market are moderating the downturn. Meanwhile, other parts of the market are experiencing weak rent growth and thereby seeing a bigger drop in asset value.
We see clear signs that the threefold division of the rental which we have described on several earlier occasions is continuing:
Within Oslo’s city limits, rents have made a leap – including in the form of increased real rent. Warehousing and mixed-use properties in Groruddalen are being leased in many cases for well over NOK 1 500/m². We have seen recent leases in this district with rents above the average for offices in the same area.1
Substantial movement can also be seen in rent levels for the most centrally located logistics areas outside the city limits.
Moving further out, however, we see that rents are struggling to keep pace with inflation, despite both construction costs and yields having increased.
Earlier, we have observed that attractive tenants are moving further out towards Gardermoen and Drøbak. The trend towards the biggest leases being awarded longer away from the city centre continued during the last quarter:
OneMed Services is to lease 19 800 m² in a new building at Oslo Logistikkpark Gardermoen, scheduled for completion in mid-2024. This will supplement today’s operations at Berger.
Holship is to lease 19 500 m² in Dyrskueveien 44 at Kløfta from a Catella-fund.
Norsk Bibliotektransport (NBT) is to lease 14 500 m² in Dyrskueveien 13 at Kløfta from Pareto Eiendomsfelleskap.
Villa Seafood and Domstein Sjømat are to lease 8 500 m² in Brennaveien 20 at Nittedal from Furuholmen Eiendomsutvikling and Led Eiendom.
Vacancy for logistics buildings is generally low, which probably helps to push tenants further out from the city centre. That could in turn drive up rents in several locations. On the other hand, many places still have a big development potential. Oslo Logistikkpark Drøbak (190 000 m²) and Oslo Airport City (600 000 m²) alone offer about 800 000 m² for possible construction.
Some 800 000 m² of new space was added to the market in 2015-22, with developments south and north of Oslo accounting for about 80 per cent of this. Around 260 000 m² is confirmed for 2023-25 and will be added to the market. Further construction will primarily occur along the north and south axes, with development of the business parks in Vestby and Drammen accounting for approximately 40 per cent of the new space. Warehousing for Ikea and Alligo in Vestby alone is responsible for 67 500 m².
In other words, the market has delivered a great deal of new logistics space over the past year, and the signs are that it can continue to do so if and when required.
What about demand?
On the demand side, two important drivers are both likely to weaken in the time to come.
Consumption of goods in general. Private consumption remained surprisingly buoyant last year, probably because many people have drawn on their savings. Consumer confidence surveys show that households have never been more pessimistic about their own financial position, and we can read daily stories in the press about retail players reporting weaker development. This trend is likely to strengthen during 2023, with many retailers holding excessive stocks and needing to work on reducing these.
E-commerce in particular. The pandemic witnessed an explosion in turnover for online shopping. Had the pre-Covid growth rate for such sales been maintained, it would have taken another two years to reach current levels. Now that consumers have greater freedom of choice and reduced purchasing power, we see that this rise has halted. All the indications are that growth impulses from e-commerce will be weaker in the time to come, precisely because much of the increase has already occurred.
Great uncertainty prevails about value-chain developments. In both Europe and Norway, disruptions to these chains and a dependence on authoritarian regimes have put security of supply on the agenda – a shift from just-in-time to just-in-case. Prologis maintains that the disruptions have incentivised companies to simplify supply chains through increased logistics space closer to the major consumer markets, in parallel with proximity to key European ports.
This outcome is by no means given. First, aggregated figures show that world trade is still running in top gear. Commodity imports by industrial countries in October 2022 were up by 12 per cent from December 2019, while Asian exports rose over the same period.2
Moreover, what form a possible onshoring would take for the property market looks very uncertain. Even if a larger share of production, perhaps particularly for critical technology, were to be moved to Europe or Norway, it is not certain Norwegian retailers would hold bigger stocks.
Globally, large players are experiencing headwinds. Amazon doubled its warehouse capacity from 2020 to 2021, but has now shut down 44 of these facilities and put on hold the opening of 25 which are under construction. Factors underlying this decision include reduced consumer demand as a result of weaker purchasing power, and physical shops handling a larger share of retail sales.
We expect that the general cooling of the economy and normalisation of physical and online retailing will also reduce demand for storage space in Greater Oslo during 2023.
2 CPB World Trade Monitor.