The logistics real estate sector, once the darling of institutional investors due to its resilience during the e-commerce boom and the pandemic, is now undergoing a period of recalibration. Yields, which had remained low during the sector’s expansion phase, are now seeing a steady rise, primarily due to macroeconomic factors such as rising interest rates and inflationary pressures.
Yield increases and market dynamics
As of mid-2024, prime yields for logistics assets in Europe have climbed to an average of 5.08%, marking a notable increase from the 4.93% seen in early 2023. This reflects a broader trend across Europe, where yields have risen by approximately 95 basis points over the past year. This rise is indicative of the sector’s adjustment to higher borrowing costs, as central banks continue tightening monetary policies to combat inflation. While yields are increasing, they remain below pre-pandemic levels, with current yields still 22 basis points lower than the average from 2017 to 2019.
Several key markets have seen more pronounced shifts. In regions such as Warsaw, Stockholm, and Berlin, yields have increased by up to 50 basis points, reflecting the heightened risks and costs associated with these markets. Conversely, in Greece, yields have slightly tightened, making it an exception to the broader European trend.
Comparing to the precedent set by Retail
This rise in logistics yields echoes the trajectory seen in the retail real estate sector during its peak years in the early 2000s. Like logistics real estate today, retail once enjoyed a surge of investor interest due to its perceived stability and growth potential. However, as the sector matured and macroeconomic factors shifted, yields began to rise, and the sector eventually experienced a correction.
The logistics sector, with its strong foundation in e-commerce demand and supply chain restructuring, remains attractive to investors. However, with yields rising, the days of ultra-low returns and soaring asset values may be behind us. This mirrors the trajectory retail assets followed, where after years of yield compression, the market adjusted as economic factors evolved.
Long-Term outlook
Despite these changes, logistics real estate remains a key focus for many investors. The demand for warehouse and distribution spaces continues to grow, driven by the needs of e-commerce and reshoring initiatives. However, the current yield adjustments suggest that the market is moving into a new phase—one where returns will normalize, and investors will need to be more selective about the assets they target.
Rising interest rates and inflation will continue to shape the investment landscape in the coming quarters. While demand remains robust, particularly for prime assets, the cost of capital is now a much more significant factor in investment decisions. As a result, logistics real estate may follow a similar pattern to retail, where the sector remains crucial but sees a more tempered growth trajectory in terms of yields.
In conclusion, while logistics real estate is still a fundamentally strong investment, the current trend in rising yields reflects a maturing market adjusting to new economic realities. Investors will need to adapt, just as they did in the retail sector, by focusing on core markets and maintaining flexibility as the market continues to evolve.
