GARBE Impact Map
Stalling at Full Throttle: COVID-19 Reveals Globalisation’s Weaknesses
Memories of 2020 will stay with people worldwide for a long time to come. Far from being just a health issue, the coronavirus pandemic has had massive consequences for global economic flows and thus for the way we live. It put the ways in which we source our goods to the test along with the ways in which products are manufactured and hauled. The sudden stall of the global economy, even if time and intensity differed from one region to the next, and the upheavals it caused revealed one thing above all: The present structures of our thoroughly globalised world are relatively vulnerable and much less resilient than previously assumed. The coronavirus pandemic has built up fresh pressure to act. It is too early to tell at this point what the approaches and solutions chosen will look like in detail. But one thing is for sure – the post-pandemic world will differ in a lot of aspects. The downstream effects are likely to be just as heterogeneous across the globe as the course of the pandemic and the fight against it – but they will always also affect Germany.
Subtle but Far-Reaching: Mega-Trends and Drivers Increasingly Shift the Parameters
As grave as the impact of the pandemic may be – various mega trends have acted as societal, industrial and economic drivers for some time now. Not always disruptive, these tend to evolve over extended periods of time. Demographic change, for instance, is a factor of rather long-term effect that has been known for decades. Which is precisely the reason why it tends to be overlooked or neglected. But once the baby boomers (born between 1955 and 1969) start entering retirement age in 2020, the labour market will lose around one million workers per year. The labour market will undergo the most radical changes as the mega trend hits home. Other drivers, such as additive manufacturing technologies (laser sintering, 3D printing, et al.) have enormous impact on production. However, the development cycles involved, from prototypes of a 3D printer all the way to a widespread industrial application, are quite lengthy and leave plenty of time to adapt, assuming the market operators are sufficiently sensitised to it.
But demographic change and additive manufacturing represent only two examples, and even these have not been fully fleshed out. They are complemented by a plethora of other mega trends and drivers that ultimately influence the logistics real estate economy as well. These mega trends and drivers impact logistics real estate from various vectors and at different speeds.
Which mega trends have particularly acute consequences for logistics real estate? And which forms can the mega trends be expected to take? Although they will not be able to cover all of the aspects in full detail, the pages below will outline the pressure to act that is building up as a result. Afterwards, we will take a look at adaptation strategies on the various management levels of logistics real estate.
Shifting Market Environment
In the past, logistics operators often occupied logistics properties they owned, whereas now they increasingly prefer to rent their facilities rather than investing in their own right. The rise of e-commerce and other drivers have also helped to fuel the surge in demand. The increase in demand coincides with a market environment that is in the process of realigning. In the wake of the financial crisis, international market players noticeably stepped up their real estate acquisitions in Germany. Portfolio transactions have been the go-to approach for many because they accomplish a quick market entry and a sizeable footprint in that market at the same time. The background to the phenomenon is also the unending low-interest cycle which has rendered many classic investment options unattractive. The consequences and backgrounds are detailed in the “Drivers” section, where a few particularly defining drivers are selected and profiled.
Negative-/low-interest cycle
Due to the changed interest rate structures and the accommodative monetary policy the European Central Bank (ECB) has pursued in response to the financial crisis (exacerbated by the ongoing COVID-19 pandemic), investors are looking for investment opportunities with higher returns. Real estate in Germany and elsewhere in Europe has attracted growing amounts of investor capital as a result. Germany’s logistics real estate segment has gained drastically in investment appeal and lately taken the place of office, retail and hotel real estate, even if the fact is not fully reflected in the actually traded volumes. The reason for this is that there are not enough investment opportunities in the logistics sector on the market yet.
Yield compression
As with any other asset class, the surging interest in logistics real estate resulted in yield compression as cap rates for this type of asset hardened rapidly in recent years. Inversely, capital values and selling prices have soared.
Rising construction costs and requirements
In response to grown demand for real estate among both occupiers and investors, construction costs have gone up considerably. Another factor that simultaneously fuelled the rise in construction costs is the steady tightening of regulatory requirements for construction as such. Just like any other building activity, the development of logistics real estate keeps getting more expensive.
Land shortage
Both the German Government and the EU Commission have adopted the goal of minimising further soil sealing. In Germany, the consumption of land is to be capped at 30 hectares a day by 2030. Going a step further, the EU seeks to achieve a “net zero” balance by 2050. These objectives, however, coincide with a fast-rising demand for land – particularly land zoned for logistics real estate.
Pent-up demand
While building activity in the logistics real estate sector has increased, it has failed to keep up with demand. Going forward, drivers like e-commerce and Industry 4.0, among others, will boost demand even further. This has resulted in a permanently pent-up demand whose volume differs from one region to the next. It is in any case reasonable to assume that demand will exceed supply for a long time to come.
Globalisation/ deglobalisation
Recent decades have been defined by a globalisation process pervading all walks of life. Not least, flows of goods and supply chains extended to the four corners of the earth, splitting into ever smaller sub-flows. Interdependency of the world’s regions intensified dramatically. On the whole, the development created the economic/production system we have grown used to. However, the recent past has seen the emergence of a deglobalisation trend that is attributable mainly to the nationalist tendencies of certain countries and on the ongoing pandemic. The New Cold War between the United States and China/Russia would be a case in point, and so would Brexit. It is quite impossible to gauge how wide the impact of these phenomena will spread in the years ahead. But it is generally assumed that local demand for logistics real estate will increase.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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Sustainability
Sustainability is one of the main mega trends of recent years. At its heart is the idea to make all facets of the value chain as sustainable as possible. The concept is expressly not limited to economic sustainability but integrates a growing number of environmental and social aspects. Diverse drivers and instruments have emerged lately to flesh out this objective with structures and to make it quantifiable.
Soil sealing
Logistics properties often require larger pieces of land. With this in mind, and considering the increase in building activity, there is a growing effort to limit additional soil sealing, e. g. in the case of greenfield developments. For the same reason, a dedicated effort is made to recycle industrial brownfield land or other types of sealed land and to put such plots to alternative use.
CSR/ESG
The term Corporate Social Responsibility (CSR) refers to a code of ethics that defines entrepreneurial principles along the lines of sustainability aspects, and supplements the goal of economic profitability with a commitment to a socially responsible conduct. Environmental, Social and Corporate Governance (ESG) redefines the CSR principle and pinpoints the areas where corporate responsibility comes into play: the ecological, social and entrepreneurial conduct of a given company. The significance of adopting a responsible and sustainable conduct is also growing in the real estate industry – and therefore becoming increasingly relevant for logistics real estate as well.
Renewable energies
The German Government has committed itself to the use of renewable energies, such as photovoltaics, by deciding to phase out coal and nuclear energy. Because of their vast roof surfaces, suitable for solar panels, logistics properties can act as a key component in the effort to accomplish the energy policy shift.
Environmental footprint
Whenever the need for logistics facilities arises, alternatives to a new-build unit should always be considered. After all, even the construction of a new building generates large quantities of CO2 (e. g. in cement production). Accordingly, it can by all means make more sense to use the full life cycle of standing properties because their long-term environmental footprint is much smaller than that of a new building. The focus is therefore shifting more and more toward existing buildings.
EU Taxonomy
The EU’s Regulation 2020/852 contains specifications/definitions for sustainable investments. They make it possible to measure the degree to which a given business activity qualifies as sustainable. Serving as legal guidance, the Regulation is supposed to promote sustainable projects and to help implement the EU’s “green deal.” Providers of sustainable financial products, such as investment funds, are subject now to environmental reporting requirements that are meant to prevent so-called “green-washing.” This is principally true for logistics property funds, too, which are becoming increasingly important as investment solutions to address the demand for logistics accommodation.
Environmental transparency
Data transparency, even and especially in the environmental area, is the basic prerequisite for the downstream development of improvement measures. On an international level, the GRESB rating (Global Real Estate Sustainability Benchmark) is becoming established as ESG benchmarking standard. Investors use the ESG data and the analytic instruments of GRESB to appraise their investments as to whether they will contribute to a more sustainable and more resilient real estate economy. Systems like this one (or comparable ones) are becoming ever more important for logistics facilities because public awareness of their environmental performance is particularly keen.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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Digitisation
Digital possibilities are proliferating, not least because computers keep getting smaller and faster. Even the costs of mass storage are steadily declining while local data storage itself is losing in relevance. In combination with high-speed data connections and mobile applications, the digitisation options are multiplying for the real estate industry, too, while the actual transition to a digital economy has not even happened yet.
Big data
Properties generate more and more data throughout their life cycles. Be it for project planning and development (e. g. digital market and location analysis, building information modelling) or for the eventual operation of a given building. The spectrum extends from the simple digitisation of tenant records all the way to the smart metering of operating costs. The data volumes generated on any level can be enormous. Meaningful analysis of them requires “big data” mining technologies, and this is all the more true whenever large real estate holdings combine with large data volumes.
Blockchain
The blockchain, understood as information element in decentralised storage systems, is considered a falsification-/manipulation-proof database alternative. The blockchain can have a disruptive effect on payment processes in particular. In the context of the real estate industry, a potential application for it would be the transaction process. In addition to payment processing, the blockchain not only permits digital mapping of the process, but also lets you reorganise it in an entirely new way.
Cloud computing
To ensure fail-safe storage, the ever-growing data volumes are increasingly stored in decentralised data centre clouds. In addition to virtually unlimited and scalable storage capacity, this option also lets you scale the computing power, depending on the application scenario. Peak loads do not necessarily have to be met by upgrading the local hardware but can be handled by purchasing computing power as a temporary add-on service. The provider will guarantee your data integrity and access at all times through planned redundancy and security protocols. Like any other kind of real estate, the management of logistics properties calls for such technologies. Data centres are becoming increasing important for any built environment. Since broadband cables are laid along motorways, which is where logistics sites tend to be located, it could make sense to combine data centres and logistics centres. Even now, e-fulfilment centres often include small-scale data centres. The energy they need could be supplied by on-site photovoltaics.
Business intelligence
The larger the data volumes generated by a given business activity, the more important it becomes to have the capacity on hand to analyse them. More and more often, business intelligence applications are introduced for the systematic analysis of in-house data and processes, in order to gather, aggregate, analyse and visualise the company’s own data. The underlying idea is to gain extra insights that put strategic management decisions on a superior data basis. It helps to minimise costs and risks as well as to optimise the value-creation process.
Artificial intelligence
There is also the option to integrate algorithm-based machine learning or artificial intelligence (AI) into decision-making processes. Yet compared to other industries, this kind of technology is still rarely used in the real estate sector. That being said, hands-on application scenarios have started to crystallise, such as the prediction of capital expenditures or smart building control to manage heating and lighting, etc. according to probabilities, and to exploit savings potentials. But using AI is expensive, with no guarantee of its effectiveness. Which is why the use of AI in the real estate industry will come relatively late and on a lower scale when compared to other technologies.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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Structural Change of the Industrial Sector
Digitisation and technological advances are making their mark in the light industrial sector, too. Innovative (additive) manufacturing processes like 3D printing or selective laser sintering are less disruptive than previous changes, representing an evolutionary next step instead. Nonetheless, Industry 4.0 is changing the nature of manufacturing. Not incidentally, the digitisation of production has been self-confidently labelled the “fourth industrial revolution.” Digitisation is used for networking production and products, equipment and buildings, vehicles and people. At the centre of it is the idea of a fully customisable mass production, which could ultimately mean a completely rationalised production down to batch size 1. The only way to accomplish this ambitious goal is through advanced innovative strength in manufacturing and logistics.
Industry 4.0
Unlike Industry 3.0 (computer-controlled manufacturing processes), the fourth industrial paradigm concentrates on the networking of humans, machines and products. The Internet of things and the Internet of services are two major core elements of the new production paradigm. In future, products will use interactive networks to connect to all systems and players involved in the manufacturing process and across the entire life cycle and value chain. The scope will range from the sourcing of commodities, to production, distribution, operation, and all the way to the eventual disposal. This means that products will be “smart” and capable of triggering or executing processes on their own. To exploit the full potential of the new paradigm, building shells and energy grids need to “smarten up.”
Urban production
Manufacturing has in many ways become greener in terms of emissions. Manufacturing in an urban context has therefore become an option again. But it requires intelligent manufacturing approaches. These in turn require multifunctional and flexible buildings. Technical upstream and downstream services blend with certain logistics aspects and even integrate operating activities such as research, sales and customer service. Locations have to satisfy higher requirements and need access to high-spec data, energy and transport networks. Technological progress also has enormous influence on logistics processes. While a number of low-skilled jobs will become redundant, the need for technological job skills will increase. When choosing locations for new operating bases, logistics companies will have to factor in the regional availability of professional skills.
Resilience
The resilience of value chains is a key component of a globally organised industry marked by the division of labour. If even one piece of the mosaic goes missing during delivery, the entire manufacturing process could stall. Trade tariffs and dependence on individual supplies are increasingly scrutinised as a result. Especially against the background of the ongoing pandemic, the subject of resilience has gained in significance. New strategies and approaches are discussed that could either increase resilience or minimise the risk potential.
Shortage of skilled labour
The employment level in Germany has developed so briskly over the past decade that it is becoming increasingly difficult to fill open positions. The subject of skilled-labour shortages therefore affects all vocations, and even jobs requiring low skills remain vacant more and more often. The skill shortages have also impacted the logistics sector. It is taking newly established e-fulfilment centres in e-commerce longer and longer to fill all positions. Even a more attractive wage structure has barely alleviated the situation. It is the reason why operators gravitate increasingly to locations outside the absolute hot spots. Locations like Erfurt, Magdeburg or Koblenz keep gaining in appeal whereas cities like Munich are less and less attractive for e-commerce operators. In short, it has become ever more difficult to cope with the growth in consumer demand and the growing need for labour at the same time.
Robotisation/automation
Robotisation and automation in the logistics sector are the result of technological progress and of several parallel processes. The e-commerce boom generates an inflow of parcels that logistics centres can barely handle anymore. The re-densification of logistics networks has eased the strain, but it keeps getting more difficult to find new plots. Recruiting the enormous number of workers to staff these centres is also becoming harder and harder. These predicaments coincide with a high margin pressure, especially because the returns logistics are costly and time-consuming. The response has been to speed up automation and to deploy smart robots and/or drones. The use of these technologies in automated system can potentially deliver serious space savings while boosting the efficiency of logistics processing. Of course, it is not to be assumed that all work streams will be automated any time soon. But job profiles are sure to change, transitioning from “picking and packing” to “programming and process controlling.”
Typical Ramifications for Logistics Real Estate and Logistics Locations
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Mobility
The number of lorries and delivery vehicles that courier, express and parcel services put on the road is rising steadily. From a sustainability angle, a new approach has long been overdue because pollution and traffic congestions are becoming more and more of an issue. Alternative drives, most notably electrical ones, are becoming more common. But hydrogen-powered drives and even combustion engines (possibly burning synthetic fuels) could remain in use for a long time yet. While the technical systems are largely in place, certain implementation and popularisation obstacles have yet to be overcome.
E-mobility
Electric vehicles are the wave of the future, even if the utility infrastructure remains inadequate for the time being. Even heavy goods vehicles of 40 tons could soon be electrically powered. There are even testbeds consisting of catenary-equipped sections of motorway. Forklift trucks in the logistics warehouses are increasingly electrically powered. In short: Electric drives are here to stay. Then again: Electrical engines are a much simpler construction of much fewer parts. Much more important is the battery as core element. This means that automotive and mechanical engineering industries are heading for a paradigmatic shift.
Autonomous driving
Technological advances have now made self-driving cars feasible and their introduction a matter of time. It is hoped that they will improve the traffic flow and reduce the frequency of operational disruptions. Driver shortages and mandatory rest periods will cease to be issues. Long-term, this may pave the way for an entirely new transport and distribution concept.
Modal split
There is nothing new about the demand to keep the flow of goods off Germany’s road network. Long-distance pipelines have limits as far as the goods they can transport are concerned, leaving inland waterway and rail transport as viable alternatives, apart from air cargo. Market evidence shows, however, that the modal split has barely changed over the years. The share of rail transportation has increased but marginally, while inland waterway transport has actually lost in market share. The background to this is the swiftness and the flexibility with which road transports can be organised. This is not about to change, not even in the longer term, and the volume of road haulage will keep going up. Rail transport would have to be much more flexibly organised to generate more demand.
Sharing community
The sharing community concept is readily embraced in the transport and logistics sector, and mainly takes the form of online freight exchanges, which broker available freight capacities and thereby lower the number of empty runs. In addition to its environmental benefits, the model can quickly drive up margins because it improves both the balance of rest periods and administrative aspects. A growing number of product areas are also emerging in the warehousing sector whenever logistics space is turned into “warehouse as a service” (WaaS) in analogy to data warehousing. Under this concept, operators temporarily rent vacant capacities in a given warehouse to accommodate peak production output or to meet short-term storage needs. The entire process involved in the service is fully digitised. Then again, vacancy reserves keep contracting, and not every facility is suitable for “warehousing as a service.” For safety reasons, using residual floor areas in a logistics centre is not always an option.
Platooning
Platooning is supposed to revolutionise freight transport on motorways by grouping HGVs into autonomously or semi-automatically driving convoys. The platoon is controlled by a single driver. Platooned vehicles continuously exchange data and are guided by the lead vehicle. The constant exchange and reconciliation of data generates large data volumes. For the time being, the concept is still in the trial phase. In addition to technological aspects, there are regulatory hurdles to be overcome yet. The main benefits expected from the system include the need for fewer drivers, shorter commutes, less space on the road taken up and a better fuel economy combined with lower emissions.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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Demographics
As a mega trend, demographic change is anything but a recent phenomenon. The German society is getting older, more diversified, and will contract in the long term. In recent years, the population total experienced positive growth once more through incoming migration and got younger too: With 83 million residents, Germany is home to more people today than ever before. In the longer term, however, it is safe to expect a lower population figure and regional re-distribution. For one thing, the concentration in the metropolises will accelerate. Other regions will depopulate, by contrast.
Demographic change
Urbanisation and de-urbanisation have traded places repeatedly as dominant trends over the past decades. In recent years, a growing number of people have moved to the cities, especially younger age groups. The trend poses a challenge for cities because they have been unable to adapt their residential structures in sync with the inflow, so that rents and prices for housing, but also for offices, rose quickly.
Urbanisation/de-urbanisation
The pandemic could potentially reactivate a parallel trend toward de-urbanisation. For the time of the lockdown, urban dwellers were strictly confined to their homes, with few options to venture out of doors. The situation inspired the idea in many to move to the periphery while remaining within reach of the core city. If the trend persists past the end of the pandemic, it will accelerate suburban growth, albeit without threatening to depopulate the cities. It will also add to the strained situation of suburban real estate markets.
Metropolisation
Demographic change and urbanisation have caused Germany’s population to cluster successively around the leading core cities or conurbations. The result is a creeping metropolisation effect gravitating toward major growth poles. Site decisions therefore increasingly favour sustainable regions with stable demographics. On the one hand, these are home to important market outlets and transshipment centres. On the other hand, they offer the human resources that are needed in logistics and production.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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E-Commerce
Online distance selling is rapidly gaining in importance. While it is more relevant for certain segments (e. g. textiles, electronics) than for others (e. g. food), its growth continues unchecked. Even before the onset of COVID-19, e-commerce boasted a share or 20 % of total retail revenues. The pandemic has further accelerated the transformation. While this trend is causing more and more distress for the physical retail sector, it is also driving up demand for logistics capacities and facilities.
E-fulfilment (EFC)
The growth of e-commerce retailing would be quite impossible without a logistics industry optimised to meet its needs. For this reason, major market players in this segment are developing new networks of e-fulfilment centres (EFC). EFCs handle virtually all logistics processes that e-commerce involves. A purchase order placed in the online shop of the respective retailer marks the start of the process chain. Depending on the retailer’s market size, EFCs may even operate their own data centres and photo studios for the product images in their online shops. The handling of the actual order (picking, packaging, shipping) and the processing of returns is ideally fully automated. In addition to comprehensive automation, the intralogistics are supported by optimised algorithms and artificial intelligence.
Same-day/same-hour delivery
For many customers, one drawback of e-commerce used to be the lengthy time until delivery, which contrasts with the instant availability of the goods purchased in a physical store. Online retailers are therefore trying to develop ways to deliver online orders before the end of the day (“same-day delivery, SDD) or even within the hour (“same-hour delivery, SHD). In addition to the comprehensive optimisation of algorithms and processes, the location of a given logistics property plays a key role. In order to reach many consumers within a short period of time, a logistics centre should be as close to the end consumer as possible. In the best case, this would mean a location directly in the city (“urban hub”). New location patterns are therefore successively emerging in or near the core cities that did not use to play a significant role in past decades. The situation is made more complex yet by the need for new logistics property types that satisfy the special requirements in the core cities.
First and last mile
In a first step, the market players spent the past few years building up a comprehensive network of EFCs for last mile deliveries. These networks keep being densified and supplemented even now. The last mile preceding the handover of the parcel to the end customer is to be covered by the final development stage of the logistics network and is supposed to facilitate the handling of SDD/SHD orders. It requires a network of distribution properties within the urban environment. These urban hubs, located either within the city limits or just beyond them, sometimes have to be supplemented by so-called micro hubs for the final leg of the distribution network. Shortage of space or the competition of the few available spaces have so far prevented the development of dense micro-hub networks. It has been argued that an entirely new type of logistics real estate might be required. Many market participants see serious potential in the recycling of properties that are becoming obsolete. Examples include disused department stores, multi-storey car parks or similar buildings. New-build facilities optimised for the purpose would have to be a new type of mixed-use real estate. But no such type is yet available on the German real estate market.
E-food
So far, grocery shopping on the Internet has not met with broad-based acceptance in Germany, even if various market operators launched a number of formats to change that. Other countries in Europe are more evolved in this regard. COVID-19 is forcing manufacturers and retail companies to act and has already acted as a trigger: Online food sales are considerable higher than they were before the outbreak of the pandemic. The years ahead will show whether or not this is a sustained development. In any case, however, it is safe to say that the infrastructure required for a sustainably efficient e-food network has yet to be optimised in terms of distribution sites.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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One-off Impact of COVID-19
With the introduction of vaccines in 2021, the pandemic will probably become manageable and therefore cease to be a long-term phenomenon, unlike the mega-trends. However, it does have the potential to change certain economic sectors permanently – logistics being one of them.
Economic slump
As a first effect, the lockdowns enacted everywhere caused economies worldwide to slump. Since the containment measures differ in timing and strictness, the ramifications are hard to foretell. Generally speaking, however, the pandemic has had a lasting effect on production, distribution and consumption. On the one hand, this could cause excess capacities to build up in logistics, and warehouses to become obsolete. Judging by the current state of affairs, however, this appears to be the case in marginal segments and for a few industries only. The economy as a whole shows a demonstrable increase in warehousing needs, so that the shortage of space is likely to grow, if anything.
Essential industry
The lockdowns have sharpened public awareness of the need for productive and well-functioning logistics sector as an essential industry. The general perception and acceptance of logistics activities has become more favourable as a result. This could conceivably encourage the zoning of more development land and speed up approval processes going forward.
Increased warehousing
“Just-in-time” or “just-in-sequence” deliveries were the paradigms of the globally distributed production chains of the past few decades. The pandemic has demonstrated that the resilience of these chains is much lower than assumed. The ideal pursued by manufacturers and suppliers, which is to minimise warehousing, has been subject to growing scrutiny. At least in some industries (food, healthcare), it now seems sensible to keep a minimum reserve on hand. Such a shift in approach would (again) require more warehousing space.
Re-/near-shoring
The vulnerability of the value chain has also prompted the realisation that certain production capacities should probably be locally preserved. An often-cited case in point is the pharmaceuticals sectors, some of whose important basic materials are produced exclusively in Asia. Any disruption of imports will impact the production back home. The situation has triggered a debate whether to bring essential manufacturing processes back to Germany or at least to nearby countries. At the same time, the volumes of storage space needed (for anything from commodities to finished products) are increasing once more.
E-commerce boom
The pandemic has spurred the trend toward online shopping. There is reason to assume that consumers will keep following the trend even after the end of the pandemic. Processing the growing number of online purchases will require additional logistics facilities.
Growing space requirements
Taken together, the drivers outlined above suggest that the pandemic will prompt both a temporary and longer-term increase in demand for logistics accommodation.
Typical Ramifications for Logistics Real Estate and Logistics Locations
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Tasks and Strategy of Property Management
Mega trends and drivers generate considerable pressure to adapt for the management of logistics real estate. In what ways will the strategies pursued so far have to be adapted to make the logistics sector fit for the future?
Set-up of the Property Management
Real estate management is the generic term for the implementation of all strategic and operative measures on the property, portfolio and company level for the purpose of a yield and risk-optimised control of all properties under management and across their entire life cycles.
It acts as interface between investors, tenants and other stakeholders, and develops solutions that give equal consideration to the interests of all parties involved.
Strategies and directives should be organised along the life cycle, and should be periodically reviewed in accordance with an economically sustainable approach, i. e. for the purpose of value retention and appreciation. But the focus of any given approach is bound to vary from one management level to the next: The property level, for instance, is likely to focus on the tasks of facility management or CAPEX/construction measures to be executed. The more macroscopic the focus, the more strategic and the more removed from the property level the tasks and fields of action will be. While the property remains the nucleus of value-creation even on the level of portfolio management, day-to-day business has more to do with the financial market.
The main challenge in real estate management is the extremely heterogeneous range of functions, which requires a plethora of diverse competencies. Daunted by this sort of complexity, many companies concentrate on selected tasks of real estate management only. For instance, quite a number of companies specialise in property management.
Of course, there are also companies that integrate all management levels. But fully integrated platforms go one step further by including an in-house property development on top of everything else. Most of these platforms offer additional staff functions that, while not absolutely necessary for the core business, can be booked as an add-on option. When integrated into the company structure, they will often boost the efficiency and productivity of the core business while opening up opportunities that would have been inconceivable without this unit.
Real Estate Management from a Holistic Angle (Platform Approach)
Under a holistic philosophy along the life cycle of a property, modern and sustainable approaches do not limit themselves to the tasks of actual real estate management, but integrate property development and investment/portfolio management.
- Property Development (PD): Property development concentrates on the provision and creation of new logistics facilities on behalf of a client or else on speculation. It is not a classic management level.
- Real Estate Management (AM/PM): The core functions of real estate management consist of the tenant- and asset-based management of all properties held in a given portfolio. Real estate management divides into the sub-areas of technical and commercial asset management (AM) and of property management (PM). The facility management (FM) is often outsourced and, if so, essentially requires controlling and monitoring only. It will therefore not be discussed here.
- Investment-/Portfolio Management (IPM): The IPM defines the portfolio strategies and launches vehicles that match these. It acquires properties from PD or on the open market, and adds them to a portfolio whose investment strategy they match.
Adaption of building strategies
The mega trends and drivers outlined above reflect the ways in which the changed parameters impact logistics real estate. Which strategies are required to ensure that the development of logistics real estate projects is able to cope with the challenges involved? The section below outlines a selection of important adaptation strategies.
Sustainability by choice
Going forward, sustainability aspects will become a central theme in the development of logistics real estate. This means buildings are certified or are constructed to be certifiable. This is done not only to optimise the investor engagement, but also because occupiers and developers are committed to the idea. In other words, it is a conscious decision rather than an attempt at “green washing.” This sort of commitment extends through the entire life cycle of a property, e. g. in the form of “cradle-to-cradle” approaches.
Recycling over new-build construction
It has become standard procedure to respond to inquiries by checking whether the space requirements of the client can perhaps be met by a standing property. If so, it is always more beneficial, from the perspective of the environmental life cycle assessment, to keep using standing properties – especially if additional optimisation potential remains available. Even from a strategic point of view, a pinpoint search for standing properties can make sense: The quality of location is often marked by centrality and therefore optimal for last-mile logistics, an aspect hard to replicate by a new-build property.
Standardisation vs. diversification
In recent years, standard layouts of modular design have become quite common in an effort to optimise the suitability for alternative use. These are well-suited to engage a maximum number of prospective tenants because they are capable of accommodating the most diverse types of intralogistics architecture. At the same time, the degree of specialisation (e. g. into e-fulfilment centres or urban hubs) has also increased. Property developers are therefore well advised to cover all sorts of variations in their range of products if they wish to stand their ground in the increasingly globalised market of property developers.
Urban logistics
As e-commerce intensifies, the logistics networks it relies on have penetrated yet deeper into the urban structures. But there is currently no property type that has been optimised for the use on the last and final mile of delivery. The mounting demand pressure will cause such an asset to be designed eventually. Yet the competition with other types of use, such as residential or office, for available space is fierce. Then again, the pioneering spirit could pay off if a realistic hands-on model could be offered as serialised structure. The risk is admittedly so formidable that few providers will bother to develop a concrete product. The “bread and butter business” of developing standard properties outside the city simply remains too big and too attractive still.
Multi-storey structure
The basic concept of a logistics warehouse has not changed in decades: Keep floor plans as simple as possible and limit yourself to one storey. Any formal deviation is discouraged lest the efficiency of the flow of goods within the warehouse be compromised. Given the growing scarcity of land, however, it is also becoming clear that the traditional approach will get harder and harder to implement. The industry has responded by experimenting – e. g. with multi-storey warehouses. For the time being, wariness of these approaches prevails because of their drawbacks, such as denser grids of columns and lower ceilings on the upper floors in combination with elevated construction costs and less flexible use options. This is not least explained by the fact that brownfield developments still provide sufficient development land for conventionally constructed facilities. Then again: Brownfield sites are not available in every region, and are also a finite resource.
Hands-on Examples
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Application Areas for a Digital Strategy
In a perfect workflow, the transitions from one management level to the next are fluid. What links all of these levels with each other are interdependent processes and data above all. An optimal process flow calls for innovative and intelligent data management. Once in place, it will help to establish swift and result-driven working methods across all management levels. The data management is in constant exchange with all other units. Any kind of real estate management requires a digital strategy to implement the defined objectives.
Proprietary data strategy
The term “proprietary data” is used for information that is unique to a company’s business and therefore has the potential to create a competitive advantage. It can refer to a company’s own data, whose value may not be fully appreciated and exploited. Or it can refer to data that were curated and/or combined with external data, and that are available as such to no other company. Accordingly, such data cannot simply be replicated by third parties, which makes them a powerful tool for generating offensive value from data management. So far, however, it has more or less remained a tool either neglected or used ineffectively. Whenever new technologies, such as artificial intelligence, are used, they often take the form of standard modules. But if you combine them with external data, they will produce results that can be replicated – even in regard to the competition. Combining them with external data is therefore what makes a company’s proprietary data truly valuable. So, companies need to define an adequate strategy that lets them capitalise on their proprietary data.
Research 4.0
In its classic role, research is normally used to supply all corporate units with the information they need for a smooth, value-oriented and efficient running of the core processes. Beyond this classic role, tools are needed to collect, store, aggregate and ultimately visualise the information. These include reporting and controlling tools as well as market and location analyses, pre-acquisition audits, and many others. The larger the number of markets, locations and properties analysed, and the larger the number of management levels that need to be supplied, the more sophisticated and innovative the research needs to be. The same is true whenever competitive advantages are to be exploited through innovative approaches. It is against this background that Research 4.0 interacts seamlessly with a coordinated data strategy.
Core applications
The core business is based on the error-free processing of a wide variety of data, processes, reconciliations, among other things. Especially in a fully integrated platform, the most diverse tasks emerge in the management levels that need to be taken care of as swiftly as possible. System breaks, convoluted (possibly semi-manual) procedures, etc. will slow the company down in the process. This makes it important to define which core business applications are essential to fulfil the core business purposes at all times and to optimise them for maximum efficiency. To this end, the company needs to define what an optimal architecture would look like, and ultimately has to pick a strategy that will accomplish these objectives. Since data structures and IT systems keep evolving, the framework architecture should be flexibly scalable and adaptable.
Data Warehouse/Single Point of Truth
In information systems, the term “single point of truth” (SPOT), sometimes also called “single source of truth” (SSOT), signifies the fundamental principle that all data elements are mastered in one place only. It refers to a central data platform accessed to reference the current master data. This way, the system prevents outdated datasets dispersed in individual files, and ensures a universally valid state of the dataset in uniformly high data quality and reliability – and this applies even to redundant data storage. Data warehouses are defined as places for data storage and consolidated access. They are fed from multiple data sources, and the data stored is refined through cleansing, transformation, etc. Various application may access the integrated dataset and use the data to compile reports, analyses or evaluations. This prevents the occurrence of obsolete and/or conflicting results.
Cloud readiness
Using cloud storage makes sense for a variety of reasons. Once a company has resolved to take advantage of the option, a “cloud readiness” evaluation should be conducted to ensure an optimal implementation. It is a good way to prepare the company for the migration. This makes it necessary to determine the objectives of the various corporate units and to harmonise them. Doing so will prevent the emergence of stand-alone solutions. The general goal is often to improve business processes in such a way that process flows become faster and more flexible to implement. Other common requests include the introduction of new processes and the option for users to have mobile access to data and corporate applications. This assessment dovetails with needs identified for the previously discussed application areas.
Real-Life Ramifications
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Responses to Market Shifts
Ten years ago, logistics real estate did not have the prominence in the investment sector that it has today. At the time, logistics real estate claimed merely around 3 % of the real estate investment total. New-build logistics facilities were developed at an annual rate of just over 2 million sqm. In recent years, by contrast, the investment share has been anywhere between 8 % and 12 %, and roughly 5 million sqm of new-build units are completed annually. Both figures are subject to an upward trend. The demand surge comes as no surprise. On the one hand, there is a growing demand for logistics facilities (driven e. g. by e-commerce) while, on the other hand, certain manufacturing steps are outsourced to logistics service provider. This trend coincides with a tendency among occupiers to rent their premises rather than constructing them in their own right. A simultaneous surge in investment demand has triggered a rapid yield compression for logistics assets as for many other real estate types. What are the options in this context to adjust to the new market conditions?
Diversified target markets
Logistics real estate in Germany has become rather expensive lately. This is explained by the strong appeal of the country as location, among other factors. The World Bank’s Logistics Performance Index rates Germany as the best logistics location in the world, not least because its industrial and consumer sectors are well developed. But in order to remain sustainably positioned, the geographic investment focus should be widened. Focusing on a national typology of cities, a single country or a specific property type falls short of the mark because it limits your room to manoeuvre, given the large number of players working the same market. Target markets should therefore be redefined and diversified: Even locations away from the absolute hotspots (e. g. Magdeburg) or other countries could be permanently attractive and enlarge the investment spectrum. Commitments in markets like Eastern Europe (Poland, Czech Republic, etc.) or Northern Europe can be very lucrative. But they presuppose in-depth market know-how and ideally a presence on the ground.
Diversified risk strategies
Core properties are low in risk and easy to manage. Accordingly, they are found on virtually every investor’s shopping list. This makes the successful and economically sustainable placement of capital increasingly difficult. The chosen product spectrum should therefore add some riskier strategies to the mix. Whether the strategy includes “core+,” “value-add” or “opportunistic” investments depends on the company’s structure. The most important thing is to be able to assess the risk accurately. It calls for in-depth knowledge of the market, efficient management structures, and a broad spectrum of deliverables. Assuming these are available, it can in many cases be rewarding to convert a former high-risk property successfully into a core property by taking the “manage-to-core” approach.
Environmental transparency
Environmental sustainability has long ceased to be purely a marketing term. On the contrary: Regulatory standards and transparent benchmarking systems have established themselves that verifiably document for investors whether a given investment products is indeed environmentally sustainable. Moreover, the determination to invest capital in environmentally sound ways is growing. For companies that launch new investment products, it is therefore becoming increasingly important to lay the foundation for a transparent environmental valuation. This will always require details about the properties, products and processes. Here, as elsewhere, you therefore need a well-coordinated digital strategy to ensure a smooth flow of information. Investors who appreciate this effort are growing in number.
Avoiding cluster risks
Parameters are subject to change even if they were stable over years and even decades. A prominent example would be the automotive industry. The transition from combustion engines to electric motors marks a turning point. Motor engineering skills are taking the back seat to competence in batteries and software. The number of engine components is a fraction of what it used to be, and the supply of spare parts will also have to be reorganised from scratch. A case in point: Sites for 3D printing close to the production plant will become more important than having decentralised spare parts warehouses in the geographic heartland of Germany. Few if any people foresaw such a development. The fact that the automotive segment used to be seen as a very crisis-resistant industry explains why it figures prominently in so many portfolios. In asset management, it will become increasingly important to avoid certain sector-specific (as well as geographic and typological) clusters.
Diversified investment vehicles
In order to steer clear of the above targets or else to fully exploit the creative freedom permitted to investment vehicles, the spectrum of offered variants should be expanded. While the majority of properties were placed in open-ended or closed-end funds as recently as ten years ago, the product spectrum today is marked by diversity. The market for real estate investment vehicles continues to evolve in an effort to offer investors flexible and innovative real estate investment products. Most vehicles today represent institutional funds, but real estate investment trusts (REITs) have not lost their appeal. Equally attractive are Luxembourg or Irish vehicles, either regulated or unregulated. The choice of a real estate vehicle depends on the intended financing type, the contemplated investor base, the type of investments, and the respective tax implications. A wide-spread range of products can, aside from the value maximisation, help to intensify and widen the investor engagement.
Hands-on Examples
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Outlook
Regulatory standards will keep changing in the future, too, as technology continues to evolve and the parameters remain subject to change. Even without external shock events such as the pandemic, the real estate management of logistics assets, as well as of any other asset class, will have to keep adapting. It is undergoing an evolution that is much more likely to proceed in increments than in disruptive changes. What matters therefore is to remain sensitive to future developments and to initiate changes before the pressure to act becomes overwhelming. The specific challenge for the real estate industry is that it works with an extremely durable, labour-intensive, costly and, above all, stationary product.
To make it a success means:
- continuously re-evaluating and, where necessary, adapting structures in order to ensure that processes remain efficient
- consistently investing in staff training and continued professional development to familiarise employees with the latest standards, types of construction or technologies
- maintaining a sustainable digital strategy because this kind of strategy represents a continuous rather than a one-off process
- integrating economic, environmental and social sustainability into the company’s intrinsic nature
- developing the workforce as one of the company’s most important resources, because no technology can take the place of a well-rehearsed and coordinated team
Meeting all of these requirements will seriously help to ensure that logistics real estate management is successfully transformed – and stays that way.