Logistics went from an unfashionable corner of the market to one of its most contested sectors in about a decade, driven by the growth of online retail and the reorganisation of supply chains. That repricing is largely done, which makes the question of what actually drives value in a logistics asset more important than it was when the tide was lifting everything.
Location means access, not address
In logistics, location is a function of the road network, proximity to population and to ports, and the availability of labour. A building thirty minutes from a major motorway junction in a region with a shortage of warehouse workers is a different asset from one at the junction in a region with available labour, whatever the map suggests. Labour availability in particular has moved from a footnote to a primary consideration for occupiers, and therefore for investors.
Specification decides who can occupy it
Clear internal height, floor loading, the number and type of loading doors, yard depth, power supply and floor flatness together determine which occupiers can use the building at all. A warehouse with insufficient height or inadequate power is not a cheaper version of a modern one; it is a building that a substantial part of the market cannot use. Investors buying older stock on the basis of a yield gap should establish precisely which occupiers that stock excludes.
In logistics, the discount on an older building is not always a bargain. Sometimes it is the market pricing the tenants who cannot use it.
The covenant carries the value
Logistics assets are typically single-let on long leases, which means the value is unusually concentrated in one tenant’s ability to pay. A fifteen-year lease to a weak covenant is not obviously better than a seven-year lease to a strong one, and the yield should reflect that. The lease structure, indexation, break rights, repairing obligations, tenant fit-out, is where much of the negotiation and much of the risk sits.
Obsolescence and the energy transition
European buildings face tightening energy performance requirements, and logistics is not exempt. A building that cannot meet the standard that will apply during the hold period carries a capital expenditure liability that belongs in the underwriting. The upside is that logistics roofs are unusually well suited to solar generation, and the treatment of that income and of the associated structures is its own analysis, connected to our note on structuring renewable energy platforms.
Where the sector meets the supply chain
Logistics real estate is the physical expression of a supply chain decision, and supply chains are being restructured for resilience rather than only for cost. That reorganisation, and where goods are contracted, held and distributed, drives which locations gain and which lose, and it is a genuine advantage for an investor to understand the commercial logic behind the occupier’s decision. We deal with that logic in our note on Asia-Europe supply chain restructuring, and with the Canary Islands variant in our note on logistics and trading operations in the ZEC.
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