Article

Can real estate’s hottest sector stand the heat in 2022?

After a record-setting year, logistics is facing a growing set of challenges

January 05, 2022

The bar has been permanently raised on global logistics real estate.

The sector made up nearly a quarter of all commercial real estate investment globally in 2021, according to JLL. Prime yields compressed to 4.4 percent. Demand is at a record high, with net absorption reaching as high as 183 percent in Asia Pacific.

Now the questions are turning to whether such a fierce pace can continue. Developers are struggling to keep up with record demand from e-commerce and logistics firms, while investors are finding it difficult to find investible assets, hindering their allocation targets.

“It was such a phenomenal last year, although I don’t think it was entirely unexpected,” says Nick Jones, pan EMEA Logistics & Industrial investment director JLL.

“The pressure on the sector is really due to permanent structural change of supply chains and more goods coming through the consumer front door via e-commerce.”

Demand for land

Shifts in consumer behavior are a major driver behind the sector’s growth story.

Given online shopping is set to keep growing, so too demand for logistics space is seen as increasing at least five percent in the next three years, according to 75 percent of respondents to JLL’s 2021 survey of 720 of logistics experts. Some 28 percent of those surveyed expect growth in demand of more than 20 percent.

But with growth in occupiers’ net absorption of space high, the number one constraint is a lack of land. Developers are struggling to secure suitable development land and planning permission.

It’s why the coming years will see more developers look to multi-storey schemes, particularly in land constrained, urban areas, says Rich Thompson, Global Leader of Supply Chain & Logistics Solutions at JLL.

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“A limited amount of industrial zoned land is driving a need for a whole new vertical building design,” Thompson says. “Multi-storey has been around for some time, but in the U.S., it’s a relatively new trend. We’re seeing more and more opportunities emerge as land prices rise and as the need to be closer to consumers becomes ever more critical.

“Distribution which was once a ‘necessary evil’ focused only on cost, is now considered a strategic priority by corporate occupiers.”

With demand from investors showing no signs of abating, 2022 may also mean more partnerships emerge as a feasible and viable route into the sector, as M&A activity rises across the wider real estate industry.

The green challenge

The supply chain is also facing a challenge to improve both its sustainability credentials, with 73 percent of respondents to JLL’s survey mention energy efficiency as a high priority.

The next decade is set to see more fleets go electric, particularly for the last mile section of the delivery journey. The UK’s Royal Mail has added an additional 3,000 low-emission delivery vans to its fleet. Logistics firm DB Schenker recently ordered 1,470 fully electric vans from Volta.

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“Pressures are mounting on the supply chain to deliver decarbonized solutions, from modern, resilient buildings to new transportation modes,” says Patrick Remords, head of supply chain and logistics services at JLL France.

As the sector continues to grow, pressures will continue to mount. In the U.S., where vacancy levels in large, entry point, coastal markets are below one percent, there’s a “huge challenge” looming for mid-2022 due to the inability of developers to deliver buildings in time and keep up with leasing demand, explains Craig Meyer, America chair of Industrial & Logistics at JLL.

“With pressure sustained from all sides, the sector will require innovative and fresh thinking – from sustainability solutions to smarter more efficient use of space by occupiers, developers and owners – both in 2022 and beyond,” he concludes.