The appeal of the logistics market has been well publicised as the post-pandemic shift in supply chains has boosted the rental growth on offer in the sector. While this growth has eased as the supply-demand dynamic has rebalanced, there’s still a compelling story of long-term returns in the market.

Technological advancements have seen a revolution in warehouse design and operations in recent years. AI-controlled systems allow companies to pack products more efficiently, horizontal or vertical carousels create high-density storage solutions, and giant robotic picking arms mean items can be selected quickly and accurately. 

But in all of the warehouses I’ve visited in the past few months, the most consistent addition I’ve noticed is a poster that outlines how the tenant company aims to reach its net zero goals. These may be only small pieces of paper - one of many which along with the range of health and safety notices are dotted around any industrial workspace - but they’re indicative of a dramatic shift in the sector. As sustainability has become more important for companies, the carbon footprint of their real estate facilities have naturally come to the fore. Ensuring that their buildings are future proofed to meet upcoming ESG regulation is now among the most important considerations for any warehouse tenant.

Logistics occupiers are catching up fast with other real estate clients when it comes to sustainability. In 2022, 78 per cent of tenants surveyed reported that they have net zero targets. Tthat figure shot up to 90 per cent in 2023. Of these occupiers, around 64 per cent plan to be net zero across their property portfolio before or during 2030. Only 12 per cent have no net zero targets at all.¹

For many logistics firms, transport and real estate account for a large proportion of their carbon footprints, so minimising the environmental impact of the spaces they use is particularly important. 

Such is the new focus on sustainability, occupiers now expect to pay less for facilities that do not meet their net zero goals: the percentage of logistics tenants that would seek a discount for non-compliant buildings increased from 15 per cent in 2023 to 26 per cent in 2024.² Furthermore, over 35 per cent of tenants are willing to pay a rental premium equal to the total operating cost savings if green sources of energy are available on site, up from 30 per cent in 2023. This is of particular note given cost-conscious tenants say that rising rental prices are the biggest issue facing their logistic property operations. 

A little patch of ground

Occupiers’ new focus on net zero-friendly warehouses presents other challenges beyond their bottom lines. A majority of tenants report their European real estate stock needs upgrading to turn their brown sites green and avoid obsolescence. 

And it’s not just in terms of sustainability that the European logistics market is struggling. There is an acute shortage of warehouse space in general across the region, with around 1.1 square metres of logistics assets available per household in Europe compared to 8.3 sq m per household on offer in the US.³

Addressing that imbalance is no easy matter. Permitting remains a pinch-point for European logistics, and many regional planners are cautious about opening up more areas to build new warehouses. These sites can be noisy if there are close residential neighbours, with lorries servicing the warehouses putting some pressure on local traffic. Given such infrastructure does not always generate the same number of jobs that a new retail or office park offers, zoning sites near populated areas can be tricky for planners. 

Conversely, asset owners may look to ease disruption by building sites on the very edges of urban areas or just beyond city boundaries. These can be great locations for accessing transport networks, but there can be delays in establishing connections to the electricity grid because of a lack of capacity. Many warehouses are no longer the basic, cavernous sheds simply used to stack goods: those automated storage systems and AI-backed robot arms that are growing in popularity mean the power requirements for these sites are becoming more complex. Network congestion issues, in particular in countries such as the Netherlands, can make connections more difficult. 

It’s an issue already feeding through to tenants. As Chart 2 shows, some 24 per cent are worried about the availability of power at their facilities. The same proportion of tenants are concerned about finding labour to work in their warehouses, suggesting a further drive towards automation, which in turn pushes up the need for energy just as it becomes a more expensive and more difficult resource to access.

All of this will radically change what constitutes a desirable warehouse for tenants in the coming years. Occupiers want buildings that are set up to operate at net zero and as efficiently as possible to save on running costs and to meet their own sustainability goals.

And not only are tenants looking for facilities that are suitable for automated processes - ceilings high enough and floors strong enough to cater to the large-scale equipment needed - but they’re also increasingly interested in having on-site power generation such as solar panels or wind turbines to reduce the amount of energy that needs to be drawn from the grid. 

Given it’s not possible to create all of these purpose-built facilities in brand new locations in a region as space-starved as western Europe, a programme of upgrading the warehouses that are already available is essential. 

Returns remain strong

The restricted supply of such ideal logistics assets in Europe is likely to support a continuation of a trend that has dominated this segment of the real estate market over the past few years: logistics vacancy levels - already close to record lows - will fall further.

Since the pandemic and the domination of onshoring and reshoring trends in supply chains, the lack of available warehouse space has pushed rental returns ever higher. Even though the economic slowdown may have slightly weakened new demand, annual rental growth rates still stood around 5 per cent in the first half of 2024.

This rental growth and the yields on offer are what have brought investors flocking to logistics in recent years, helping to make warehouses one of the asset types that has emerged as a winner in the bifurcated fortunes of the real estate market. It’s a story that has been well publicised in the post-pandemic supply-chain shift, but alongside this narrative there is clearly another, more substantive one underway. 

The shift in demand towards more efficient and more sustainable logistics assets will mean a lack of supply of suitable buildings for years to come. Not only could this continue to drive rental growth, but the potential to transform existing buildings from brown to green suggests there’s still plenty of value to be found. 

¹ CBRE European Logistics Occupier Survey 2022, 2023, and 2024 

² CBRE European Logistics Occupier Survey 2024

³ JLL, Eurostat, Federal Bureau of Statistics, June 2022

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