Retailers and ecommerce operators continue to drive the logistics market which is booming across Europe. Clearly higher take-up levels, falling vacancy rates, and accelerating rental growth have been observed in 2021. According to Savills European Research European logistics investment reached a record €22.5bn during H1 2021, a 60% increase on the H1 five-year average, and already 64% of the record full year 2020. The rapid yield compression seen over the last 24 months will continue. The drivers of low supply and high demand in the occupational market show no sign of changing in the medium term, which in turn attracts investors.
Online retail levels jumped accelerated by the pandemic and we have seen five or more years of growth condensed into 18 months. Forrester are currently forecasting that by 2025, online retail will average 25% of all retail sales across Europe, meaning an extra €342bn will be spent online within the next four and a half years. Prologis which states that for each additional €1bn spent online an additional 77,000 sq m of warehouse space is required. It is also likely that European manufacturing companies need more warehouse space if they start to bring manufacturing processes closer to home to mitigate for delays and securing the supply of components.
European logistics take up reached 18.7 million sq m in H1 2021, 63% above the half year average. The average vacancy rate in Europe has fallen by 80bps in the last 12 months to 4.6%, which is structurally low by historical standards. The Czech Republic (2.4%), Denmark (2.6%), Barcelona (3.3%), Oslo (3.8%) and Helsinki (4.3%) remain the most undersupplied markets. Development activity is not keeping up with demand, constrained by access to labour, rising material costs and supply chain challenges impacting speed of delivery.
As a result, prime rents have risen by an average of 2% over the past 12 months. Savills anticipate rental growth to accelerate again over the next 12-18 months, particularly in core markets, driven by undersupply of existing and future stock. Many rental growth forecasts are underestimating the localized market conditions which ultimately drive rental growth.
Although logistics has traditionally only accounted for 10-12% of the investment market, the weight of capital targeting the sector has accounted for 21% of total investment so far this year. Savills analysis of new capital raised by funds indicates that 39% of the volume of new funds raised in 2021 has been allocated towards the logistics sector, more than any other sector. Prime European logistics yields have compressed by an average of 40bps to 4.40% over the past 12 months. Yields continue to compress further into the 3-4% range across most core European markets.
Development appetite remains positive across all locations. The premises should meet the requirements of the occupiers. Occupiers, particularly retailers, are now more focused on the levels of carbon emissions and are adjusting their supply chains to meet targets. However rising development costs are likely to temper appetite for development and further support yield compression for standing stock.
More in detail information: SAVILLS Spotlight European Logistics Outlook, September 2021
Irma Jokinen, researcher