It continues to be prime-time for prime logistics real estate, nearly anywhere in the world.
Big-money institutional investors are chasing logistics real estate assets across the globe, compressing capitalization (cap) rates – the ratio of a property’s value relative to the net operating income it produces – to levels at or near-record lows. The lower the capitalization rate, which is also known as “yield,” the higher the price an asset will command.
According to a report published in late March by real estate and logistics services firm CBRE Services, Inc., 47 of 63 global markets recorded lower yields in 2018 than in 2017. Hong Kong, a prototype prime logistics market because of scarce land and strong demand, had the lowest cap rate of any global market at 3.4 percent. It was followed by Vancouver, British Columbia at 3.75 percent, and Tokyo at 3.9 percent. Of the next six markets, all of which recorded cap rates of 4 percent, four were in the U.S. (the other two were in London and the combined “German Hubs” of Berlin, Munich and Frankfurt). Toronto rounded out the top 10 at 4.25 percent.
In the Americas, yields on logistics properties in so-called Tier I and II hub markets fell 24 basis points year-over-year to 5.47 percent. Excluding Latin America, the average yield was 4.7 percent. Industrial rents grew by 7.4 percent in the U.S. and 10.8 percent in Canada, according to the report.
Europe, the Middle East and Africa (EMEA) reported the lowest yield at 5.41 percent, as well as the steepest decline in cap rate at 35 basis points. The Asia-Pacific region, considered the relative laggard of the three major regions because of keen competition with other real estate types like residential and commercial office, reported a yield of 5.97 percent, a 16 basis point year-over-year decline.
Global investment in logistics real estate totalled $153.6 billion in 2018, a 5.3 percent year-on-year gain, according to data from Real Capital Analytics cited in the CBRE report.
The CBRE report focused exclusively on logistics real estate trends, not manufacturing. It also analyzed trends in top-tier markets, which have different characteristics than mid- or lower-tier regions because of the leading markets’ geographic and population advantages.
Prime yields in 2019 are expected to hold steady in the three big regions as continued growth of e-commerce fulfillment needs fuels on-going demand by property occupiers, CBRE said. The Asia-Pacific region, though, holds significant opportunity because of an acute shortage of top-grade logistics property; logistics accounts for only 10 percent of all property inventory in the region, CBRE said.
The U.S. market is in “late-cycle, but it’s not as late as many think,” said Matthew Walaszek, associate director of CBRE’s industrial and logistics research unit and the report’s author. The bull market in logistics real estate began in 2010 following the Great Recession, but it didn’t take off until around the 2012-2013 period when e-commerce entered the mainstream in earnest,Walaszek said. Viewed through that prism and relative to the 10-year recovery period of the broader U.S. economy, the current cycle isn’t that profoundly long in the tooth, he said.
What the report demonstrates is that institutional demand for logistics real estate is not limited to the U.S. market. Canada, Europe and, to a lesser extent, Asia-Pacific are benefitting from rapid e-commerce growth, an abundance of global capital and a push toward asset modernization with investments in robotics and other technologies that boost property values and the efficiency of shipment throughput.
The global logistics automation market, valued at $36 billion in 2017, is expected to grow at a 12.5 percent compounded annual rate through 2023 as businesses look to automation to reduce their logistics costs and improve their margins. At that annualized rate, the logistics automation market will hit $72.3 billion in market size by 2022, according to a report from Irish research firm Research & Markets.com.
Yet the primary driver is the seemingly insatiable demand for bigger facilities to accommodate global e-commerce growth that shows no sign of abating. “E-commerce operators require up to three times more space than traditional warehouse users due to a greater diversity in products handled and the need to have them immediately accessible. Global investors have caught on and are keen on adding industrial assets to their portfolios,” said Jack Fraker, CBRE’s global head of industrial and logistics, capital markets.
From an asset owner’s perspective, the logistics real estate market has faced obstacles in recent months. Geopolitical uncertainties have curbed sentiment. Higher interest rates have been a factor, though demand has powered ahead despite increased borrowing costs. Then there is the law of supply and demand as more capacity enters the market, especially in the U.S. This has spawned what some experts contend is a much-needed balance in the market after seven years of briskly higher rents and tightening capacity, much of which coincided with e-commerce’s mainstream acceptance. Still, vacancy rates remain low and asking rents, though moderating in their upward pace, are hardly going down.
Walaszek said higher rents aren’t likely to blunt the appetites of leading occupiers for top-flight properties. Besides the fact that they can’t do without it, prime occupiers spend a relatively small portion of their total budgets on occupancy costs, Walaszek said. Occupancy accounts for 3 to 6 percent of a typical large corporation’s annual budget, he estimated. Transportation, by contrast, accounts for 50 percent, and labor accounts for 20.5 percent, he said. The implication is that corporations can tilt more of their budgets to logistics real estate without breaking the proverbial bank.