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No reason not to go ahead with speculative building of logistics facilities

By Søren Skovbjerg, Associate, Colliers International Denmark

Occupational demand for industrial and logistics facilities is seemingly strong. Even so, Denmark has in the past only rarely seen developers take on speculative building in this segment. More than anything, uncertainty about the actual strength and depth of market demand appears to make them hold back.

Based on our knowledge of the market and actual tenant demand, we believe, however, that given the right location, product and timing, it is in today’s market possible to construct storage and logistics facilities on speculation, for instance in Greater Copenhagen, along the motorway corridor bisecting Funen and in the Triangle Region. The market is mature, and quick delivery is a competitive parameter for developers: the faster they can build good-quality premises, the better.

Vacant lease premises in short supply
Irrespective of continued spare capacity in the industrial sector, the Greater Copenhagen industrial and logistics vacancy rate dropped from 3.1% to 2.7% in the course of 2018. At start-Q2 2019, it had edged back up to 2.9%. Current vacancies are mainly old and functionally obsolete, not in tune with today’s user requirements in terms of location, ceiling height, turning space, number of ramps, etc.

In Denmark, developments in the market for industrial and logistics facilities have historically been strongly correlated with general economic trends. Favourable economic trends therefore feed through to this particular segment quicker than to other segments of the property market.

The currently low vacancy rate is driven largely by a generally strong demand for goods and, by extension, higher activity on account of recent years’ growth momentum in Danish economy. This is confirmed also by a sustained increase in the production index, with a 27% increase in 2019 to date.

Another driver of the strong demand for especially storage and distribution facilities is growth in Danish consumer spending, translating into higher online sales as well. In 2018, online sales hit an unprecedented high of DKK 129.3 billion in total, up by 13% on 2017.


A 181% surge in online sales between 2011 and 2018 clearly highlights a change in consumer patterns. The increase in online sales has made quick delivery an even weightier key requirement, naturally spurring the demand for logistics facilities in particular but also smaller, so-called last mile distribution facilities that meet tenant demands in terms of location, layout, etc.

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Quick delivery a key parameter
On the supply side, developers in the industrial and logistics segment claim to have a strong pipeline of new facilities that potentially meet the demands of today’s tenants. In other words, many of the most attractive development sites have been snapped up. In view of the currently low vacancy rate and strong demand, it seems surprising that lease agreements are not already in place and construction started.

However, the crux of the matter and a paradox in this connection is that tenants are often unable to wait the 12-24 months it normally takes to construct such new facilities, while many developers are averse to starting speculative building without signed pre-let agreements.

Indeed, tenants’ demand for space on demand is a phenomenon that developer Nordic Real Estate Partners (NREP) fully recognises. Last year, as one of very few developers in Denmark, NREP ventured into the speculative building of logistics facilities.

“We often see companies winning large contracts at few months’ notice, virtually from one day to the other making it necessary for them to rent more space. Speculative building enables us to accommodate just such needs”, says Mads Fjeldhoff, Transaction Associate, who is involved mainly with NREP’s acquisition and development of logistics facilities in Denmark.

Uncertainty about market strength and depth
We believe that there are several explanations for the general aversion against speculative industrial and logistics developments. Firstly, it is still uncertain whether a facility in a somewhat secondary location on completion is able to achieve a capitalised market value which, based on a calculation of market-conforming net operating income and yield requirements, exceeds the costs of new construction.

Production facilities are typically built-to-suit, tailored to the industry-specific requirements of businesses. As such, they are obviously not ideally suited for speculative building as developers fear that it is difficult to predict the specific fitting-up requirements that many tenants of e.g. storage and logistics facilities may have.

In addition, developers are concerned that prospective tenants will only be prepared to enter into relatively short-term lease agreements as the industrial and logistics sector is highly susceptible to changing market conditions. Businesses typically operate without long-term fixed contracts with clients further down the value chain as they need to be agile and quick to adjust, which also impacts on their willingness to commit to long-term leases.

Furthermore, developers consider it a very serious element of risk that the actual strength of the demand is subject to uncertainty. This is even more true for market depth. Among other things, this uncertainty is fraught with concerns of how a possible economic recession will impact the demand for industrial and logistics facilities. Finally, some developers fear that a possible wave of speculative building will cause an oversupply, making it difficult to find users for the new space.

Focus on the right product and the right timing
Given today’s market, in particular current occupational demand, we are confident that there is a potential for speculative building of storage and logistics facilities. Occupational demand is today considered to be both stronger and deeper than many developers are inclined to think. Similarly, possible tenant demands for special fittings, etc. need not discourage developers from speculative building as a great many users are believed to have no significant demands for special fittings.

This assessment is supported, among other things, by a case study involving Interdan’s relocation to Greve Distribution Center, GDC (see case study box elsewhere) as well as the general feedback we receive from prospective tenants in the market. In the same case, it was for instance expected that the GDC facilities would appeal mainly to businesses with an online platform, but they have turned out to have a much broader appeal as illustrated by the fact that we are in touch with businesses in both the pharmaceutical and transport industries as well as wholesalers.

Demand in today’s market is further underpinned by the limited number of development sites available in prime locations. This means that users previously looking to build facilities for owner-occupation are no longer able to do so. All other things being equal, this serves to exacerbate demand pressure.

In addition, there is the hidden demand from businesses that have recently entered into lease agreements on premises in old-stock buildings to satisfy an acute shortage of space but would most likely have opted for more up-to-date facilities had they been available.

Finally, we believe that speculative building has the advantage of offering on-demand delivery of space, especially given the current modest supply of speculative development schemes.

In this context, it is important to emphasise that our assessment of the potential for speculative building is of course made on the assumption that the facilities in question meet today’s user requirements in terms of location, layout, etc.

Overall, we therefore believe that in the current market it makes good sense to build relatively standard-type facilities with motorway proximity, for instance in the south corridor stretching from Høje-Taastrup to Køge in Greater Copenhagen, with high ceiling height and room for automated sorting systems, self-drive robots, etc. to support the continued technological advances in this field. This notion is supported by e.g. NREP, which in connection with its partly speculative development scheme at Ishøj recently erected such generic buildings in a move to reduce the re-letting risk that developers may potentially face if they become too restricted by individual tenants’ special fittings.

Case study: Interdan relocates to Greve Distribution Center
In January this year, it was announced that car import business Interdan was the first tenant to sign a lease at Greve Distribution Center (GDC), a 100,000 sq m storage and logistics centre developed by European MG Real Estate. Colliers and CBRE act as joint letting agents for GDC. The first stage of the development (20,000 sq m) was completed in February, and Interdan was therefore the very first tenant, taking a lease of 14,120 sq m.

What makes this case so special is the fact that GDC was built on speculation. Although many other developers would probably have feared that it could prove difficult to let units in step with project completion, MG Real Estate in fact appears to have experienced no such problems.

Interdan, which before the relocation rented storage space at Hedehusene, cites the location near the motorway at Greve as a key determinant for choosing GDC.

“The location at Greve is strategically ideal. With suppliers in mainly Germany and France as well as the possibility of quick delivery in both the Copenhagen area and in Denmark in general, the location could not be better”, says Jesper Rasmussen, Chief Executive Officer with Interdan’s subsidiary, K.W. Bruun Logistik A/S, the actual occupier of the new lease.

Among other decisive factors that made the business opt for GDC, Jesper Rasmussen makes a special mention of the 12.20-metre ceiling height and the flexible space layout, facilitating Interdan’s optimum space utilisation:

“As such, we don’t really have any large-scale or special demands of the building. The advantage of a new building, however, is that a simple, high-ceilinged square or rectangular building makes it easier to envision the possibilities of, say, upper-floor expansion, whereas it may prove more difficult to gauge the utilisation ratio of an old-stock logistics facility where the ceiling height may vary and where you have to consider for instance special load-bearing columns in some parts of the building.”

Finally, Jesper Rasmussen explains that it was of vital importance that the developer, MG Real Estate, was able to deliver the required space relatively quickly as Interdan had just taken over another business and needed to act instantly.


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Søren Skovbjerg

Senior Associate, Capital Markets


Søren’s primary tasks are to prepare detailed market analyses and valuations of commercial and investment properties as well as advise clients on strategic investment decisions.

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