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Five reasons to engage in speculative industrial/logistics building

Industrial property

A cocktail of historically low vacancy and accelerated demand is currently providing a favourable basis for speculative building of storage and logistics facilities. 

 
If you are in search of an economic bellwether of the commercial property market, you would do well to take a look at industrial and logistics facilities. Both in Denmark and abroad, the market for this property type has traditionally been quick to reflect general economic trends. 

The market currently powers ahead on the back of the coronavirus outbreak, which provides a particularly favourable basis for speculative building. Among the trends currently driving the market, mainly two stand out. 

Mounting e-commerce drives demand 

On a global scale, consumers have shopped more online in recent years, with multiple studies in fact ranking Denmark among the countries with the highest online sales. In 2010, e-commerce accounted for only 5% of aggregate Danish consumer spending. In 2020, the share had grown to 15% according to Statistics Denmark and FDIH (The Association of Danish Internet Trading). 

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Due to the repeated lockdowns of most physical shops, except for grocery shops, Danes have increasingly chosen to do their shopping from home. Habitual digital consumers have purchased more online than before, also buying a wider range of goods than before. In addition, e-commerce has accelerated because new user groups, including the elderly, have started to shop online.   

Moreover, the stronger demand has literally reshaped the industrial/logistics landscape: Due to e-commerce growth, the configuration standards required of storage and logistics facilities have become higher, a trend set to continue. The higher the flow of goods, the more important is it to have state-of-the-art facilities, including automated systems, efficient high-ceilinged premises and ramps to facilitate access for trucks.  

Stricter supply chain control 

In addition, the pandemic has revealed how vulnerable global supply chains are and how much they depend on open borders, efficient means of transport and well-functioning production chains. Limited air traffic, port closures, insufficient manpower, stricter border control and redirection of routes have seriously impinged on the transportation of goods, forcing businesses to rethink how to secure their future supply chains.  

We believe that increased diversification of the supplier network as well as increased domestic production and storage are some of the solutions that will be implemented in the short to medium term. More than anything, increased domestic production and storage are expected to spur demand for industrial/logistics properties. 

Shortage of premises stunts growth 

During COVID-19, many businesses with an online platform have in a matter of months experienced growth on a scale you would normally see over a number of years. This has also affected the logistics market, where we currently see intense competition for efficient and up-to-date lease premises in attractive geographical locations.

Although an analysis of vacancy levels across Denmark seems to indicate a vacancy level that has remained largely unchanged in recent years, this is not entirely true. A large portion of vacancies are found in outdated premises that fail to meet today’s tenant demands. 

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The low vacancy has affected the trend in rental prices, too. Although climbing rent levels may be a positive sign, indicating stronger market activity, the development in rents is driven largely by the combination of a shortage of lease opportunities and strong competition. 

Fig3_PULS_2021_Q2_art2_UK

 
Pipeline of newbuilding in Copenhagen, but subject to letting 

An analysis of future supply outside Copenhagen, along the E20 corridor stretching from Høje-Taastrup down to Køge, the so-called “south corridor”, currently indicates a pipeline of some 230,000 sq m new industrial/logistics space for completion in the years ahead, mainly next year. 

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This may well increase supply, but a large portion of the premises have already been pre-let. As a result, market dynamics will remain largely the same, with the new space being earmarked mainly for the expansion of existing lease premises as opposed to relocations.

In addition, the south corridor potentially harbours a development pipeline of just shy of 500,000 sq m, albeit subject to pre-letting before construction start. As the delivery period is rarely less than 12 months, however, newbuilding is often not an option for many businesses in urgent need of space.  

This is why speculative building may be lucrative 

We have on previous occasions ventured the assertion that multiple market drivers indicate that now is the time to engage in speculative building, in particular of logistics facilities. We see no indications of the demand for logistics premises tapering off any time soon, and even if speculative construction is associated with higher risk than pre-let building, we believe that this added risk is at a 10-year low. 

At the same time, recent years have seen logistics property prices rally due to the competition in the occupational and investment market alike, a trend that has continued in 2021. Despite increasing construction costs, we therefore now see that the capitalised market values of existing properties greatly exceed construction costs, rendering speculative building less susceptible to market fluctuations. 

It is always wise to exercise prudence when drawing up and executing a business plan for speculative building, but in view of the existing substantial demand for new and up-to-date logistics premises, along with the massive investor demand for this property type, we believe that investors should now consider moving further out the risk curve by investing in speculative construction in this segment as it may very well prove exceptionally lucrative.  

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Click on the picture to enlarge it. 

 


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Peter Lassen

Senior Director | Partner

Copenhagen

Peter’s primary tasks are management of Colliers’ Danish user segments and mid-market investment properties in Copenhagen. Peter is a real estate agent and primarily facilitates transactions and provides investment advice in addition to assisting with city development projects, lettings and valuations.

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